Capitala Group
Annual Report 2016

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K xx Annual Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934For the Fiscal Year Ended December 31, 2016 oo Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934 CommissionFile Number Exact name of registrant as specified in its charter, address of principal executiveoffice, telephone number and state or other jurisdiction of incorporation or organization I.R.S. EmployerIdentification Number814-01022 Capitala Finance Corp.4201 Congress St., Suite 360Charlotte, North Carolina, 28209Telephone: (704) 376-5502State of Incorporation: Maryland 90-0945675 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which RegisteredCommon Stock, par value $0.01 per share7.125% Notes due 2021 The NASDAQ Global Select MarketThe New York Stock ExchangeSecurities 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 of 1933. Yes o No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of1934. Yes o No xIndicate 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 of1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days. Yes x No oIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). Yes o No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,to the best of the 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. o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(check one): Large accelerated filer o Accelerated filer xNon-accelerated filer o Smaller reporting company oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No xThe aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $202.8 million based on the number ofshares held by non-affiliates of the registrant as of June 30, 2016, which was the last business day of the registrant’s most recently completed secondfiscal quarter. For the purposes of calculating this amount only, all directors and executive officers of the registrant have been treated as affiliates.The number of shares of Capitala Finance Corp.’s common stock, $0.01 par value, outstanding as of March 6, 2017 was 15,878,544.Documents Incorporated by ReferencePortions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A relatingto the registrant’s 2017 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the endof the Company’s fiscal year, are incorporated by reference in Part III of this Annual Report on Form 10-K as indicated herein.  TABLE OF CONTENTSTABLE OF CONTENTS PAGEPART I Item 1.Business 1 Item 1A.Risk Factors 31 Item 1B.Unresolved Staff Comments 62 Item 2.Properties 62 Item 3.Legal Proceedings 62 Item 4.Mine Safety Disclosures 62 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities 63 Item 6.Selected Consolidated Financial Data 66 Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations 68 Item 7A.Quantitative and Qualitative Disclosures about Market Risk 95 Item 8.Consolidated Financial Statements and Supplementary Data 96 Item 9.Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure 97 Item 9A.Controls and Procedures 97 Item 9B.Other Information 97 PART III Item 10.Directors, Executive Officers and Corporate Governance 98 Item 11.Executive Compensation 98 Item 12.Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters 98 Item 13.Certain Relationships and Related Transactions, and Director Independence 98 Item 14.Principal Accountant Fees and Services 98 PART IV Item 15.Exhibits and Consolidated Financial Statement Schedules 99 Item 16.Form 10-K Summary 101 Signatures 102 i  TABLE OF CONTENTSPART IIn this Annual Report on Form 10-K, except as otherwise indicated, the terms:•“we,” “us,” “our,” “Capitala Finance” and the “Company” refer to Capitala Finance Corp., together with itsconsolidated subsidiaries;•The “Investment Advisor” and “Capitala Investment Advisors” refer to Capitala Investment Advisors, LLC, our investmentadviser; and•The “Administrator” refers to Capitala Advisors Corp., our administrator.ITEM 1. BUSINESSFORMATION OF OUR COMPANYWe are an externally managed non-diversified closed-end management investment company incorporated in Maryland thathas elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended(the “1940 Act”). We are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act of 2012(the “JOBS Act”), and as such are subject to reduced public company reporting requirements. We commenced operations on May24, 2013 and completed our initial public offering (“IPO”) on September 30, 2013. We are managed by the Investment Advisor, aninvestment adviser that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the“Advisers Act”), and the Administrator provides the administrative services necessary for us to operate. For United States (“U.S.”)federal income tax purposes, we have elected to be treated, and we intend to comply with the requirements to continue to qualifyannually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the“Code”).We were formed for the purpose of (i) acquiring, through a series of transactions, an investment portfolio from the followingentities: CapitalSouth Partners Fund I Limited Partnership (“Fund I”); CapitalSouth Partners Fund II Limited Partnership (“FundII”); CapitalSouth Partners Fund III, L.P. (“Fund III Parent”); CapitalSouth Partners SBIC Fund III, L.P. (“Fund III”) andCapitalSouth Partners Florida Sidecar Fund I, L.P. (“Florida Sidecar” and, collectively with Fund I, Fund II, Fund III and Fund IIIParent, the “Legacy Funds”); (ii) raising capital in the IPO and (iii) continuing and expanding the business of the Legacy Funds bymaking additional debt and equity investments in lower middle-market and traditional middle-market companies.Our investment objective is to generate both current income and capital appreciation through debt and equity investments.Both directly and through our subsidiaries that are licensed by the U.S. Small Business Administration (“SBA”) under the SmallBusiness Investment Company (“SBIC”) Act, we offer customized financing to business owners, management teams and financialsponsors for change of ownership transactions, recapitalizations, strategic acquisitions, business expansion and other growthinitiatives. We invest in first lien, second lien and subordinated loans, and, to a lesser extent, equity securities issued by lowermiddle-market companies and traditional middle-market companies.On September 24, 2013, we acquired 100% of the limited partnership interests in Fund II, Fund III and Florida Sidecar andeach of their respective general partners, as well as certain assets from Fund I and Fund III Parent, in exchange for an aggregate of8,974,420 shares of our common stock (the “Formation Transactions”). Fund II, Fund III and Florida Sidecar became our whollyowned subsidiaries. Fund II and Fund III retained their SBIC licenses, continued to hold their existing investments and continue tomake new investments. The IPO consisted of the sale of 4,000,000 shares of our common stock at a price of $20.00 per shareresulting in net proceeds to us of $74.25 million, after deducting underwriting fees and commissions totaling $4.0 million andoffering expenses totaling $1.75 million. The other costs of the IPO were borne by the limited partners of the Legacy Funds.OUR INVESTMENT STRATEGYOur investment objective is to generate both current income and capital appreciation through debt and equity investments. Weexpect the companies in which we invest will generally have between $4.5 million and $30 million in trailing twelve monthearnings before interest, tax, depreciation and amortization1  TABLE OF CONTENTS(“EBITDA”). We believe our focus on direct lending to private companies enables us to receive higher interest rates and moresubstantial equity participation. As part of that strategy, we may invest in first lien loans, which have a first priority securityinterest in all or some of the borrower’s assets. In addition, our first lien loans may include positions in “stretch” senior securedloans, also referred to as “unitranche” loans, which combine characteristics of traditional first lien senior secured loans and secondlien loans, providing us with greater influence and security in the primary collateral of a borrower and potentially mitigating lossof principal should a borrower default. We also may invest in second lien loans, which have a second priority security interest inall or substantially all of the borrower’s assets. In addition to first and second lien loans, we invest in subordinated loans, whichmay include mezzanine and other types of junior debt investments. Like second lien loans, our subordinated loans typically havea second lien on all or substantially all of the borrower’s assets; however, the principal difference between subordinated loans andsecond lien loans is that in a subordinated loan, we may be subject to the interruption of cash interest payments, at the discretionof the first lien lender, upon certain events of default. In addition to debt securities, we may acquire equity or detachable equity-related interests (including warrants) from a borrower. Typically, the debt in which we invest is not initially rated by any ratingagency; however, we believe that if such investments were rated, they would be rated below investment grade. Below investmentgrade securities, which are often referred to as “high yield” or “junk,” have predominantly speculative characteristics with respectto the issuer’s capacity to pay interest and repay principal. We intend to target investments that mature in four to six years fromour investment.We typically will not limit the size of our loan commitments to a specific percentage of a borrower’s assets that serve ascollateral for our loan, although we attempt to protect against risk of loss on our debt investments by structuring, underwriting andpricing loans based on anticipated cash flows of our borrowers. As of December 31, 2016, our Investment Advisor underwroteinvestments in 121 lower middle-market and traditional middle-market companies totaling more than $1.1 billion of investedcapital since 2000, and we believe that a continuation of this strategy allows us to make structured investments with moreattractive pricing and greater opportunities for meaningful equity participation than traditional asset-based, senior secured loans.Further, we believe that we benefit from our Investment Advisor’s long-standing relationships with many private equity fundsponsors, whose participation in portfolio companies, we believe, makes repayment from refinancing, asset sales and/or sales ofthe borrowers themselves more likely than a strategy whereby we consider investments only in founder-owned or non-sponsoredborrowers.OUR INVESTMENT ADVISORWe are managed by the Investment Advisor, whose investment team members have significant and diverse experiencefinancing, advising, operating and investing in lower middle-market and middle-market companies. Moreover, our InvestmentAdvisor’s investment team has refined its investment strategy by sourcing, reviewing, acquiring and monitoring 121 portfoliocompanies totaling more than $1.1 billion of invested capital from 2000 through December 31, 2016. The Investment Advisor’sinvestment team also manages CapitalSouth Partners SBIC Fund IV, L.P. (“Fund IV”), a private investment limited partnershipproviding financing solutions to smaller and lower middle-market companies. Fund IV had its first closing in March 2013 andobtained SBA approval for its SBIC license in April 2013. In addition to Fund IV, affiliates of the Investment Advisor may manageseveral affiliated funds whereby institutional limited partners in Fund IV have the opportunity to co-invest with Fund IV inportfolio investments. An affiliate of the Investment Advisor also manages Capitala Private Credit Fund V, L.P. (“Fund V”); aprivate investment limited partnership providing financing solutions to the lower middle-market and traditional middle-market.The Investment Advisor and its affiliates may also manage other funds in the future that may have investment mandates that aresimilar, in whole and in part, with ours. To the extent permitted by the 1940 Act and interpretation of the SEC staff, the InvestmentAdvisor and its affiliates may determine that an investment is appropriate for us and for one or more of those other funds. In suchevent, depending on the availability of such investment and other appropriate factors, the Investment Advisor or its affiliates maydetermine that we should invest side-by-side with one or more other funds. Any such investments will be made only to the extentpermitted by applicable law and interpretive positions of the SEC and its staff, and consistent with the Investment Advisor’sallocation procedures. We do not expect to make co-investments, or otherwise compete2  TABLE OF CONTENTSfor investment opportunities, with Fund IV because its focus and investment strategy differs from our own. However, we do expectto make, and have made, co-investments with Fund V given its similar investment strategy.On September 10, 2015, we, Fund II, Fund III, Fund V, and the Investment Advisor filed an application for exemptive reliefwith the SEC to permit an investment fund and one or more affiliated investment funds, including future affiliated investmentfunds, to participate in the same investment opportunities through a proposed co-investment program where such participationwould otherwise be prohibited under the 1940 Act. On June 1, 2016, the SEC issued an order permitting this relief. This exemptiverelief is subject to certain conditions designed to ensure that the participation by one investment fund in a co-investmenttransaction would not be on a basis different from or less advantageous than that of other affiliated investment funds.Our Investment Advisor is led by Joseph B. Alala, III, our chief executive officer, chairman of our Board of Directors (the“Board”), and the managing partner and chief investment officer of our Investment Advisor, Hunt Broyhill, a member of the Boardand a partner of our Investment Advisor, Stephen A. Arnall, our chief financial officer, and John F. McGlinn, our chief operatingofficer, secretary and treasurer, and a director of our Investment Advisor. Messrs. Alala, Broyhill and McGlinn serve as ourInvestment Advisor’s investment committee. They are assisted by Christopher B. Norton, who serves as the chief risk officer and adirector of our Investment Advisor, Michael S. Marr, Richard Wheelahan, Adam Richeson, and Davis Hutchens who each serve asdirectors of our Investment Advisor, as well as eleven other investment professionals.Our Investment Advisor’s investment committee, as well as certain key investment team members that are involved inscreening and underwriting portfolio transactions, have worked together for more than ten years. These investment professionalshave an average of over 20 years of experience in various finance-related fields, including operations, corporate finance,investment banking, business law and merchant banking, and have collectively developed a broad network of contacts that canoffer us investment opportunities. Much of our Investment Advisor’s investment team has worked together screeningopportunities, underwriting new investments and managing a portfolio of investments in lower middle-market and traditionalmiddle-market companies through two recessions, a credit crunch, the dot-com boom and bust and a historic, leverage-fueled assetvaluation bubble.INVESTMENTSWe will engage in various investment strategies from time to time in order to achieve our overall lending and investmentobjectives. Our strategies will generally require current cash yields and sensible leverage and fixed charge coverage ratios andeither a first or second lien position (subject to limited instances in which we will not obtain security) in the collateral of theportfolio company. The strategy we select will depend upon, among other things, market opportunities, the skills and experienceof our Investment Advisor’s investment team, the result of our financial, operational and strategic evaluation of the opportunity,and our overall portfolio composition. Most of our existing debt investments offer, and we expect most of our future debtinvestments will offer, the opportunity to participate in a borrower’s equity performance through warrant participation, directequity ownership or otherwise, and many notes that we purchase will require the borrower to pay an early termination fee.Collectively, these attributes have been, and are expected to be, important contributors to the returns generated by our InvestmentAdvisor’s investment team.The Investment Advisor’s investment team uses a disciplined investment portfolio monitoring and risk management processthat emphasizes strict underwriting standards and guidelines, strong due diligence investigation, regular portfolio review, analysisand performance-guided responses, and proper investment diversification. We allocate capital among different industries,geographies and private equity sponsors on the basis of relative risk/reward profiles as a function of their associated downside risk,volatility, perceived fundamental risk and our ability to obtain favorable investment protection terms.Types of InvestmentsWe will target debt investments that yield meaningful current income and, in many cases, provide the opportunity for capitalappreciation through equity securities. In each case, the following criteria and guidelines are applied to the review of a potentialinvestment; however, not all criteria are met in every single investment in our portfolio, nor do we guarantee that all criteria willbe met in the investments we will make in the future.3  TABLE OF CONTENTS•Established Companies With Positive Cash Flow. We seek to invest in established companies with a history ofgenerating revenues and positive cash flows. We intend to focus on companies with a history of profitability and minimumtrailing twelve-month EBITDA of $4.5 million. We do not intend to invest in start-up companies, distressed or “turn-around” situations or companies with business plans that we do not understand.•Experienced Management Teams with Meaningful Investment. We seek to invest in companies in which senior or keymanagers have significant company or industry-level experience and have significant equity ownership. It has been ourexperience that these management teams are more committed to the company’s success and more likely to manage thecompany in a manner that protects our debt and equity investments.•Significant Invested Capital. We believe that the existence of an appropriate amount of equity beneath our debt capitalprovides valuable support for our investment. In addition, the degree to which the particular investment is a meaningfulone for the portfolio company’s financial sponsor, and the financial sponsor’s ability and willingness to invest additionalequity capital as and to the extent necessary, are also important considerations.•Appropriate Capital Structures. We seek to invest in companies that are appropriately capitalized. First, we examine theamount of equity that is being invested by the company’s private equity sponsor to determine whether there is a sufficientcapital cushion beneath our invested capital. We also analyze the amount of leverage and the characteristics of senior debtwith lien priority over our investment.•Strong Competitive Position. We intend to invest in companies that have developed strong, defensible product or serviceofferings within their respective market segments. These companies should be well positioned to capitalize on organic andstrategic growth opportunities, and should compete in industries with strong fundamentals and meaningful barriers toentry. We further analyze prospective portfolio investments in order to identify competitive advantages within theirrespective industries, which may result in superior operating margins or industry-leading growth.•Customer and Supplier Diversification. We expect to invest in companies with sufficiently diverse customer and supplierbases. We believe these companies will be better able to endure industry consolidation, economic contraction andincreased competition than those that are not sufficiently diversified. However, we also recognize that from time to time,an attractive investment opportunity with some concentration among its customer base or supply chain will present itself.We believe that concentration issues can be evaluated and, in some instances (whether due to supplier or customer productor platform diversification, the existence and quality of long-term agreements with such customers or suppliers or otherselect factors), mitigated, thus presenting a superior risk-adjusted pricing scenario.Debt InvestmentsThe Investment Advisor’s investment team tailors the terms of each debt investment to the facts and circumstances of thetransaction, the needs of the prospective portfolio company and, as applicable, its financial sponsor, negotiating a structure thatseeks to protect our rights and manage our risk while creating incentives for the portfolio company to achieve its business plan. Asof December 31, 2016, 50.5% of our debt investments were secured by a first lien on the assets of the portfolio company, 46.2% ofour debt investments were secured by a second lien on the assets of the portfolio company and 3.3% of our debt investments wereunsecured. We expect our primary source of return to be the monthly cash interest we will collect on our debt investments. We alsotypically seek board observation rights with each portfolio company and we offer (and have historically provided) managerial andstrategic assistance to these companies. We seek to further protect invested principal by negotiating appropriate affirmative,negative and financial covenants in our debt documents that are conservative enough to represent a prudent cushion at closing orto budgeted projections, but that are flexible enough to afford our portfolio companies and their financial sponsors sufficientlatitude to allow them to grow their businesses. Typical covenants include default triggers and remedies (including penalties), lienprotection, leverage and fixed charge coverage ratios, change of control4  TABLE OF CONTENTSprovisions and put rights. Most of our loans feature call protection to enhance our total return on debt investments that are repaidprior to maturity.Most of our debt investments are structured as first lien loans, and as of December 31, 2016, 50.5% of the fair value of our debtinvestments consisted of such investments. First lien loans may contain some minimum amount of principal amortization, excesscash flow sweep feature, prepayment penalties, or any combination of the foregoing. First lien loans are secured by a first prioritylien in existing and future assets of the borrower and may take the form of term loans or delayed draw facilities. In some cases, firstlien loans may be subordinated, solely with respect to the payment of cash interest, to an asset based revolving credit facility. Aform of first lien loan, unitranche debt financing typically involves issuing one debt security that blends the risk and returnprofiles of both senior secured and subordinated debt in one debt security. We believe that unitranche debt can be attractive formany lower middle-market and traditional middle-market businesses, given the reduced structural complexity, single lenderinterface and elimination of intercreditor or potential agency conflicts among lenders.We may also invest in debt instruments structured as second lien loans. On a fair market value basis, 16.0% of our debtinvestments consisted of second lien loans as of December 31, 2016. Second lien loans are loans which have a second prioritysecurity interest in all or substantially all of the borrower’s assets, and which are not subject to the blockage of cash interestpayments to us at the first lien lender’s discretion.In addition to first and second lien loans, we may also invest in subordinated loans. On a fair market value basis, 33.5% of ourdebt investments consisted of subordinated loans as of December 31, 2016. Subordinated loans typically have second lien loanson all or substantially all of the borrower’s assets, and unlike second lien loans, may be subject to the interruption of cash interestpayments upon certain events of default, at the discretion of the first lien lender. Our subordinated loans are typically issued withfive to six year terms.Some of our debt investments have payment-in-kind (“PIK”) interest, which is a form of interest that is not paid currently incash, but is accrued and added to the loan balance until paid at the end of the term. While we generally seek to minimize thepercentage of our fixed return that is in the form of PIK interest, we sometimes receive PIK interest due to prevailing marketconditions that do not support the overall blended interest yield on our debt investments being paid in all-cash interest. As ofDecember 31, 2016, our weighted average PIK yield, exclusive of the impact on non-accrual debt investments, is 1.5%. In additionto yield in the form of current cash and PIK interest, some of our debt investments include an equity component, such as a warrantto purchase a common equity interest in the borrower for a nominal price. As of December 31, 2016, the weighted averageannualized yield on our debt portfolio was 13.2%, exclusive of the impact of non-accrual debt investments.Equity InvestmentsWhen we make a debt investment, we may be granted equity participation in the form of detachable warrants to purchasecommon equity in the company in the same class of security that the owners or equity sponsors receive upon funding. In addition,we may make non-control equity co-investments in conjunction with a loan transaction with a borrower. The Investment Advisor’sinvestment team generally seeks to structure our equity investments, such as direct equity co-investments, to provide us withminority rights provisions and, to the extent available, event-driven put rights. They also seek to obtain limited registration rightsin connection with these investments, which may include “piggyback” registration rights. In addition to warrants and equity co-investments, our debt investments in the future may contain a synthetic equity position.INVESTMENT PROCESSOur Investment Advisor’s investment team is led by its investment committee and is responsible for all aspects of ourinvestment process. The current members of the investment committee are Joseph B. Alala, III, our chief executive officer,chairman of our Board and the managing partner and chief investment officer of our Investment Advisor, Hunt Broyhill, a partnerof our Investment Advisor, and John F. McGlinn, our chief operating officer, secretary and treasurer, and a director of ourInvestment Advisor. Christopher B. Norton serves as chief risk officer and a director of our Investment Advisor. RichardWheelahan, our chief compliance officer, Michael S. Marr, Randall Fontes, Adam Richeson, Mario Shaffer, and Davis Hutchens,serve as5  TABLE OF CONTENTSdirectors of our Investment Advisor, and Casey Swercheck, Eric Althofer, Christian MacCarron, and Jack Vander Leeuw each serveas vice presidents of our Investment Advisor. While the investment strategy involves a team approach, whereby potentialtransactions are screened by various members of the investment team, Mr. Alala and one other member of the investmentcommittee of the Investment Advisor must approve investments in order for them to proceed. Messrs. Alala and McGlinn meetweekly and, together with Mr. Broyhill, on an as needed basis, depending on the nature and volume of investment opportunities.The Investment Advisor’s investment committee has worked together for over ten years. The stages of our investment selectionprocess are as follows:Deal Generation/OriginationDeal generation and origination is maximized through long-standing and extensive relationships with industry contacts,brokers, commercial and investment bankers, entrepreneurs, service providers (such as lawyers and accountants), as well as currentand former clients, portfolio companies and investors. Our Investment Advisor’s investment team supplements these leadgenerators by also utilizing broader marketing efforts, such as attendance at prospective borrower industry conventions, an activecalling effort to investment banking boutiques, private equity firms and independent sponsors that are also investing in highquality lower middle-market and traditional middle-market companies, and, most importantly, based on our Investment Advisor’strack record as a responsive, flexible, value-add lender and co-investor, as demonstrated by 121 investments in lower middle-market and traditional middle-market businesses and equity co-investments with reputed private equity firms since 2000. Webelieve we have developed a reputation as a knowledgeable and reliable source of capital, providing value-added industry adviceand financing assistance to borrowers’ businesses and in executing financial sponsors’ growth strategies. Furthermore, with officesthroughout the United States, we have the ability to cover a large geographical area and to market to unique groups from eachoffice. Specifically, our Charlotte, Raleigh, Fort Lauderdale, Atlanta, Washington D.C., and Los Angeles offices cover significantterritory that is traditionally underserved, allowing us to source a high volume of direct deal flow.ScreeningAll potential investments that are received are screened for suitability and consistency with our investment criteria (see“— Due Diligence and Underwriting,” below). In screening potential investments, our Investment Advisor’s investment teamutilizes the same value-oriented investment philosophy they employed in their work with the Legacy Funds and commitsresources to managing downside exposure. If a potential investment meets our basic investment criteria, a deal team is assigned toperform preliminary due diligence. In doing so, we consider some or all of the following factors:•A comprehensive financial model that we prepare based on quantitative analysis of historical financial performance,financial projections made by management or the financial sponsor, and pro forma financial ratios assuming an investmentconsistent with possible structures. In analyzing our model, we test various investment structures, pricing options,downside scenarios and other sensitivities in order to better understand potential risks and possible financial covenantratios;•The competitive landscape and industry dynamics impacting the potential portfolio company;•Strengths and weaknesses of the potential investment’s business strategy and industry outlook; and•Results of a broad qualitative analysis of the company’s products or services, market position and outlook, customers,suppliers and quality of management.If the results of this preliminary due diligence are satisfactory, the deal team prepares an executive summary that is presentedto our Investment Advisor’s investment committee in a meeting that includes all members of the portfolio and investment teams.This executive summary includes the following areas:•Company history and summary of product(s) and/or service(s);•An overview of investors, anticipated capital sources and transaction timing;•Investment structure and expected returns, including initial projected financial ratios;•Analysis of historical financial results and key assumptions;6  TABLE OF CONTENTS•Analysis of the company’s business strategy;•Analysis of the financial sponsor’s relevant experience or expected strategy;•Investment strengths, weaknesses and priority issues to be addressed in due diligence; and•Pro forma capitalization and ownership.If our investment committee recommends moving forward, we will issue a non-binding term sheet or indication of interest tothe potential portfolio company and, when applicable, its financial sponsor. If a term sheet is successfully negotiated, we willbegin more formal due diligence and underwriting as we progress towards the ultimate investment approval and closing.Due Diligence and UnderwritingThe completion of due diligence deliverables is led by at least two investment professionals. However, all investment andportfolio team members are regularly updated with due diligence progress, especially any issues that emerge. The two investmentprofessionals leading the due diligence efforts are typically assigned to the original deal team that worked on the executivesummary. However, post-term sheet deal teams sometimes contain one or more additional investment professionals and mayinclude other professionals from business development, portfolio or other areas if a particular skill or experience set would beespecially valuable in the due diligence process. The members of the underwriting team complete due diligence and analyze therelationships among the prospective portfolio company’s business plan, operations and expected financial performance. Duediligence consists of some or all of the following:•On-site visits with management and relevant key employees;•In-depth review of historical and projected financial statements, including covenant calculation work sheets;•Interviews with customers and suppliers;•Management background checks;•Review of reports by third-party accountants, outside counsel and other industry, operational or financial experts, whetherretained by us or the financial sponsor;•Review of material contracts; and•Review of financial sponsor’s due diligence package and internal executive summaries.Typically, we utilize outside experts to analyze the legal affairs, accounting systems and financial results and, whereappropriate, we engage specialists to investigate certain issues. During the underwriting process, significant, ongoing attention isdevoted to sensitivity analyses regarding whether a company might bear a significant “downside” case and remain profitable andin compliance with assumed financial covenants. These “downside” scenarios typically involve assumptions regarding the loss ofkey customers and/or suppliers, an economic downturn, adverse regulatory changes and other relevant stressors that we attempt tosimulate in our quantitative and qualitative analyses. Further, we continually examine the effect of these scenarios on financialratios and other metrics.During the underwriting process, the executive summary that was completed for the initial investment committee presentationis updated and changes are presented at subsequent, weekly meetings of the investment committee for continued discussion and,to the extent applicable, the investment committee issues new instructions to the underwriting team from the investmentcommittee.Approval, Documentation and ClosingThe underwriting team for the proposed investment presents the updated executive summary and key findings from duediligence to the investment committee on an ongoing, weekly basis. Prior to the commencement of documentation, approval fromthe investment committee is sought and, if approved, the underwriting professionals heretofore involved proceed todocumentation.7  TABLE OF CONTENTSAt all times during the documentation process, the underwriting professionals who conducted the due diligence remaininvolved; likewise, all extensively negotiated documentation decisions are made by the lead underwriting team member, inaccordance with input from at least one investment committee member and guidance from outside counsel. As and to the extentnecessary, key documentation challenges are brought before the investment committee for prompt discussion and resolution.Upon the completion of satisfactory documentation and the satisfaction of closing conditions, final approval is sought from theinvestment committee before closing and funding.ONGOING RELATIONSHIPS WITH PORTFOLIO COMPANIESMonitoringOur Investment Advisor monitors our portfolio companies on an ongoing basis. It monitors the financial trends of eachportfolio company to determine if it is meeting its business plan and to assess the appropriate course of action for each company.We generally require our portfolio companies to provide annual audited financial statements and quarterly unaudited financialstatements, in each case, with management discussion and analysis and covenant compliance certificates, and monthly unauditedfinancial statements. Using the monthly financial statements, we calculate and evaluate all financial covenants and additionalfinancial coverage ratios that might not be part of our covenant package in the loan documents. For purposes of analyzing aportfolio company’s financial performance, we may adjust their financial statements to reflect pro forma results in the event of arecent change of control, sale, acquisition or anticipated cost savings.Our Investment Advisor has several methods of evaluating and monitoring the performance and fair value of our investments,including the following:•Assessment of success in adhering to each portfolio company’s business plan and compliance with covenants;•Periodic and regular contact with portfolio company management and, if appropriate, the financial or strategic sponsor, todiscuss financial position, requirements and accomplishments;•Comparisons to our other portfolio companies in the industry, if any;•Attendance at and participation in the board meetings; and•Review of monthly and quarterly financial statements and financial projections for portfolio companies.In addition to various risk management and monitoring tools, our Investment Advisor also uses an investment rating system tocharacterize and monitor our expected level of return on each investment in our portfolio.As part of our valuation procedures, we risk rate all of our investments. In general, our investment rating system uses a scale of1 to 5, with 1 being the lowest probability of default and principal loss. Our internal rating is not an exact system, but is usedinternally to estimate the probability of: (i) default on our debt securities and (ii) loss of our debt principal, in the event of adefault. In general, our internal rating system may also assist our valuation team in its determination of the estimated fair value ofequity securities or equity-like securities. Our internal risk rating system generally encompasses both qualitative and quantitativeaspects of our portfolio companies.8  TABLE OF CONTENTSOur internal investment rating system incorporates the following five categories: InvestmentRating Summary Description1 In general, the investment may be performing above our internal expectations. Fullreturn of principal and interest is expected. Capital gain is expected.2 In general, the investment may be performing within our internal expectations, andpotential risks to the applicable investment are considered to be neutral or favorablecompared to any potential risks at the time of the original investment. All newinvestments are initially given this rating.3 In general, the investment may be performing below our internal expectations andtherefore, investments in this category may require closer internal monitoring;however, the valuation team believes that no loss of investment return (interest and/ordividends) or principal is expected. The investment also may be out of compliancewith certain debt financial covenants.4 In general, the investment may be performing below internal expectations andquantitative or qualitative risks may have increased substantially since the originalinvestment. Loss of some or all principal is expected.5 In general, the investment may be performing substantially below our internalexpectations and a number of quantitative or qualitative risks may have increasedsubstantially since the original investment. Loss of some or all principal is expected.Our Investment Advisor will monitor and, when appropriate, change the investment ratings assigned to each investment in ourportfolio. In connection with our valuation process, our Investment Advisor will review these investment ratings on a quarterlybasis, and our Board will affirm such ratings. The investment rating of a particular investment should not, however, be deemed tobe a guarantee of the investment’s future performance.The following table shows the distribution of our investments on the 1 to 5 investment performance rating scale at fair value asof December 31, 2016 and December 31, 2015 (dollars in thousands): Investment Performance Rating As ofDecember 31, 2016 As ofDecember 31, 2015 Investmentsat FairValue Percentageof TotalInvestments Investmentsat FairValue Percentageof TotalInvestments1 $183,826 33.9% $191,894 32.4% 2 215,058 39.7 335,388 56.6 3 125,381 23.2 37,164 6.3 4 17,374 3.2 28,010 4.7 5 — — — — Total $541,639 100.0% $592,456 100.0% 9  TABLE OF CONTENTSAGREEMENTSInvestment Advisory AgreementOur Investment Advisor is registered as an investment adviser under the Advisers Act. Subject to the overall supervision of ourBoard, our Investment Advisor manages our day-to-day operations, and provides investment advisory and management services tous. Under the terms of our Investment Advisory Agreement, the Investment Advisor:•determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner ofimplementing such changes;•identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on ourprospective portfolio companies);•closes and monitors the investments we make; and•provides us with other investment advisory, research and related services as we may from time to time require.The Investment Advisor’s services under the Investment Advisory Agreement are not exclusive, and it is free to furnish similarservices to other entities so long as its services to us are not impaired.Management FeePursuant to the Investment Advisory Agreement, we have agreed to pay the Investment Advisor a fee for investment advisoryand management services consisting of two components — a base management fee and an incentive fee.The base management fee is calculated at an annual rate of 1.75% of our gross assets, which is our total assets as reflected onour consolidated statements of assets and liabilities and includes any borrowings for investment purposes. Although we do notanticipate making significant investments in derivative financial instruments, the fair value of any such investments, which willnot necessarily equal their notional value, will be included in our calculation of gross assets. For services rendered under theInvestment Advisory Agreement, the base management fee is payable quarterly in arrears. The base management fee was initiallycalculated based on the value of our gross assets at the end of the first calendar quarter subsequent to our IPO, and thereafter basedon the average value of our gross assets at the end of the two most recently completed calendar quarters, and appropriatelyadjusted for any share issuances or repurchases during the current calendar quarter. For the first twelve months following our IPO,the Investment Advisor waived the portion of the base management fee payable on cash and cash equivalents held at the CapitalaFinance level, excluding cash and cash equivalents held by the Legacy Funds that were acquired by Capitala Finance inconnection with the Formation Transactions.The incentive fee consists of the following two parts:The first part of the incentive fee is calculated and payable quarterly in arrears based on our pre-incentive fee net investmentincome for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interestincome, dividend income and any other income (including any other fees (other than fees for providing managerial assistance),such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies)accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expensespayable under the Administration Agreement to our administrator, and any interest expense and dividends paid on any issued andoutstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case ofinvestments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero couponsecurities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include anyrealized capital gains, computed net of all realized capital losses or unrealized capital appreciation or depreciation. Pre-incentivefee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately precedingcalendar quarter, is compared to a hurdle of 2.0% per quarter (8.0% annualized). Our net investment income used to calculate thispart of the incentive fee is also included in the amount of our10  TABLE OF CONTENTSgross assets used to calculate the 1.75% base management fee. We pay the Investment Advisor an incentive fee with respect to ourpre-incentive fee net investment income in each calendar quarter as follows:•no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdleof 2.0%;•100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investmentincome, if any, that exceeds the hurdle but is less than 2.5% in any calendar quarter (10.0% annualized). We refer to thisportion of our pre-incentive fee net investment income (which exceeds the hurdle but is less than 2.5%) as the “catch-up.”The “catch-up” is meant to provide our Investment Advisor with 20% of our pre-incentive fee net investment income as ifa hurdle did not apply if this net investment income exceeds 2.5% in any calendar quarter; and•20% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.5% in any calendar quarter(10.0% annualized) is payable to the Investment Advisor (once the hurdle is reached and the catch-up is achieved, 20% ofall pre-incentive fee investment income thereafter is allocated to the Investment Advisor).As announced on January 4, 2016, the Investment Advisor has voluntarily agreed to waive all or such portion of the quarterlyincentive fees earned by the Investment Advisor that would otherwise cause our quarterly net investment income to be less thanthe distribution payments declared by our Board. Quarterly incentive fees are earned by the Investment Adviser pursuant to theInvestment Advisory Agreement. Incentive fees subject to the waiver cannot exceed the amount of incentive fees earned duringthe period, as calculated on a quarterly basis. The Investment Advisor will not be entitled to recoup any amount of incentive feesthat it waives. The waiver was effective in the fourth quarter of 2015 and will continue unless otherwise publicly disclosed by theCompany.The following is a graphical representation of the calculation of the income-related portion of the incentive fee:Quarterly Incentive Fee Based on Net Investment IncomePre-incentive fee net investment income(expressed as a percentage of the value of net assets)Percentage of pre-incentive fee net investment income allocated to the Capitala Investment AdvisorsThese calculations are appropriately pro-rated for any period of less than three months and adjusted for any share issuances orrepurchases during the relevant quarter. You should be aware that a rise in the general level of interest rates can be expected tolead to higher interest rates applicable to our debt investments. Accordingly, an increase in interest rates would make it easier forus to meet or exceed the incentive fee hurdle rate and may result in a substantial increase of the amount of incentive fees payableto our Investment Advisor with respect to pre-incentive fee net investment income.The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upontermination of the Investment Advisory Agreement, as of the termination date), and will equal 20% of our realized capital gains, ifany, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses andunrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive feeswith respect to each of the investments in our portfolio.We will defer cash payment of the portion of any incentive fee otherwise earned by our Investment Advisor that would, whentaken together with all other incentive fees paid to our Investment Advisor during the most recent 12 full calendar month periodending on or prior to the date such payment is to be made, exceed 20% of the sum of (a) our pre-incentive fee net investmentincome during such period, (b) our net unrealized appreciation or depreciation during such period and (c) our net realized capitalgains or losses11  TABLE OF CONTENTSduring such period. Any deferred incentive fees will be carried over for payment in subsequent calculation periods to the extentsuch payment is payable under the Investment Advisory Agreement.Examples of Quarterly Incentive Fee CalculationExample 1: Income Related Portion of Incentive Fee*Alternative 1:AssumptionsInvestment income (including interest, dividends, fees, etc.) = 1.25%Hurdle rate(1) = 2.0%Management fee(2) = 0.50%Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%Pre-incentive fee net investment income(investment income – (management fee + other expenses)) = 0.55%Pre-incentive net investment income does not exceed hurdle rate, therefore there is no incentive fee.Alternative 2:AssumptionsInvestment income (including interest, dividends, fees, etc.) = 2.9%Hurdle rate(1) = 2.0%Management fee(2) = 0.50%Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%Pre-incentive fee net investment income(investment income – (management fee + other expenses)) = 2.2%Incentive fee = 100% × pre-incentive fee net investment income, subject to the “catch-up”(4) = 100% × (2.2% – 2.0%) = 0.20%Pre-incentive fee net investment income exceeds the hurdle rate, but does not fully satisfy the “catch-up” provision, thereforethe income related portion of the incentive fee is 0.20%.*The hypothetical amount of pre-incentive fee net investment income shown is based on a percentage of total net assets.(1)Represents 8.0% annualized hurdle rate.(2)Represents 2.00% annualized management fee.(3)Excludes organizational and offering expenses.Alternative 3:AssumptionsInvestment income (including interest, dividends, fees, etc.) = 3.50%Hurdle rate(1) = 2.0%Management fee(2) = 0.50%Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%Pre-incentive fee net investment income(investment income – (management fee + other expenses)) = 2.80%Incentive fee = 20% × pre-incentive fee net investment income, subject to “catch-up”(4)Incentive fee = 100% × “catch-up” + (20% × (pre-incentive fee net investment income – 2.5%))Catch-up = 2.5% – 2.0% = 0.5%12  TABLE OF CONTENTSIncentive fee = (100% × 0.5%) + (20% × (2.80% – 2.5%)) = 0.5% + (20%× 0.3%) = 0.5% + 0.06% = 0.56%Pre-incentive fee net investment income exceeds the hurdle rate, and fully satisfies the “catch-up” provision, therefore theincome related portion of the incentive fee is 0.56%.Example 2: Capital Gains Portion of Incentive FeeAlternative 1:Assumptions•Year 1: $20 million investment made in Company A (“Investment A”), and $30 million investment made in Company B(“Investment B”)•Year 2: Investment A sold for $50 million and fair market value (“FMV”) of Investment B determined to be $32 million•Year 3: FMV of Investment B determined to be $25 million•Year 4: Investment B sold for $31 millionThe capital gains portion of the incentive fee would be:•Year 1: None•Year 2: Capital gains incentive fee of $6 million ($30 million realized capital gains on sale of Investment A multiplied by20%)•Year 3: None$5 million (20% multiplied by ($30 million cumulative capital gains less $5 million cumulative capital depreciation)) less $6million (previous capital gains fee paid in Year 2).•Year 4: Capital gains incentive fee of $200,000$6.2 million ($31 million cumulative realized capital gains multiplied by 20%) less $6 million (capital gains fee taken in Year2).Alternative 2:Assumptions•Year 1: $20 million investment made in Company A (“Investment A”), $30 million investment made in Company B(“Investment B”) and $25 million investment made in Company C (“Investment C”)•Year 2: Investment A sold for $50 million, FMV of Investment B determined to be $25 million and FMV of Investment Cdetermined to be $25 million•Year 3: FMV of Investment B determined to be $27 million and Investment C sold for $30 million•Year 4: FMV of Investment B determined to be $24 million•Year 5: Investment B sold for $20 million(1)Represents 8.0% annualized hurdle rate.(2)Represents 2.00% annualized management fee.(3)Excludes organizational and offering expenses.(4)The “catch-up” provision is intended to provide the Adviser with an incentive fee of 20% on all of Capitala Finance’s pre-incentive fee net investment income as if a hurdle rate did not apply when its net investment income exceeds 2.5% in anycalendar quarter.13  TABLE OF CONTENTSThe capital gains incentive fee, if any, would be:•Year 1: None•Year 2: $5 million capital gains incentive fee20% multiplied by $25 million ($30 million realized capital gains on Investment A less unrealized capital depreciation onInvestment B).•Year 3: $1.4 million capital gains incentive fee(1)$6.4 million (20% multiplied by $32 million ($35 million cumulative realized capital gains less $3 million unrealized capitaldepreciation)) less $5 million capital gains fee received in Year 2.•Year 4: None•Year 5: None$5 million (20% multiplied by $25 million (cumulative realized capital gains of $35 million less realized capital losses of $10million)) less $6.4 million cumulative capital gains fee paid in Year 2 and Year 3.Example 3: Application of the Incentive Fee Deferral MechanismAssumptions•In each of Years 1 through 4 in this example pre-incentive fee net investment income equals $40.0 million per year, whichwe recognized evenly in each quarter of each year and paid quarterly. This amount exceeds the hurdle rate and therequirement of the “catch-up” provision in each quarter of such year. As a result, the annual income related portion of theincentive fee, before the application of the deferral mechanism in any year is $8.0 million ($40.0 million multiplied by20%). All income-related incentive fees were paid quarterly in arrears.•In each year preceding Year 1, we did not generate realized or unrealized capital gains or losses, no capital gain-relatedincentive fee was paid and there was no deferral of incentive fees.•Year 1: We did not generate realized or unrealized capital gains or losses.•Year 2: We realized a $30.0 million capital gain and did not otherwise generate realized or unrealized capital gains orlosses.•Year 3: We recognized $5.0 million of unrealized capital depreciation and did not otherwise generate realized orunrealized capital gains or losses.•Year 4: We realized a $6.0 million capital gain and did not otherwise generate realized or unrealized capital gains orlosses.(1)As illustrated in Year 3 of Alternative 1 above, if the Company were to be wound up on a date other than December 31 of anyyear, the Company may have paid aggregate capital gain incentive fees that are more than the amount of such fees that wouldbe payable if the Company had been wound up on December 31 of such year.14  TABLE OF CONTENTS Income RelatedIncentive FeeAccrued BeforeApplication of DeferralMechanism Capital Gains RelatedIncentive FeeAccrued BeforeApplication of DeferralMechanism Incentive FeeCalculations Incentive Fees Paid andDeferredYear 1 $8.0 million($40.0 millionmultiplied by 20%) None $8.0 million Incentive fees of$8.0 million paid; noincentive fees deferredYear 2 $8.0 million($40.0 millionmultiplied by 20%) $6.0 million (20% of$30.0 million) $14.0 million Incentive fees of$14.0 million paid; noincentive fees deferredYear 3 $8.0 million($40.0 millionmultiplied by 20%) None (20% ofcumulative net capitalgains of $25.0 million($30.0 million incumulative realizedgains less $5.0 millionin cumulativeunrealized capitaldepreciation) less$6.0 million of capitalgains fee paid in Year 2) $7.0 million (20% ofthe sum of (a) ourpre-incentive fee netinvestment income,(b) our net unrealizedappreciation ordepreciation duringsuch period and(c) our net realizedcapital gains or lossesduring Year 3) Incentive fees of$7.0 million paid;$8.0 million ofincentive fees accruedbut payment restrictedto $7.0 million;$1.0 million ofincentive fees deferredYear 4 $8.0 million($40.0 millionmultiplied by 20%) $0.2 million (20% ofcumulative net capitalgains of $31.0 million($36.0 millioncumulative realizedcapital gains less$5.0 millioncumulative unrealizedcapital depreciation)less $6.0 million ofcapital gains fee paidin Year 2) $8.2 million Incentive fees of$9.2 million paid($8.2 million ofincentive fees accruedin Year 4 plus$1.0 million of deferredincentive fees); noincentive fees deferredPayment of Our ExpensesThe investment team of our Investment Advisor and their respective staffs, when and to the extent engaged in providinginvestment advisory and management services, and the compensation and routine overhead expenses of such personnel allocableto such services, are provided and paid for by the Investment Advisor. We bear all other costs and expenses of our operations andtransactions, including (without limitation):•the cost of our organization;•the cost of calculating our net asset value, including the cost of any third-party valuation services;•the cost of effecting sales and repurchases of our shares and other securities;•interest payable on debt, if any, to finance our investments;•fees payable to third parties relating to, or associated with, making investments (such as legal, accounting and travelexpenses incurred in connection with making investments), including fees and expenses associated with performing duediligence reviews of prospective investments and advisory fees;15  TABLE OF CONTENTS•transfer agent and custodial fees;•fees and expenses associated with marketing efforts;•costs associated with our reporting and compliance obligations under the 1940 Act, the Securities Exchange Act of 1934,as amended, and other applicable federal and state securities laws, and ongoing stock exchange listing fees;•federal, state and local taxes;•independent directors’ fees and expenses;•brokerage commissions;•costs of proxy statements, stockholders’ reports and other communications with stockholders;•fidelity bond, directors’ and officers’ liability insurance, errors and omissions liability insurance and other insurancepremiums;•direct costs and expenses of administration, including printing, mailing, telephone and staff;•fees and expenses associated with independent audits and outside legal costs; and•all other expenses incurred by either our Administrator or us in connection with administering our business, includingpayments under the Administration Agreement that will be based upon our allocable portion of overhead and otherexpenses incurred by our Administrator in performing its obligations under the Administration Agreement, including rent,the fees and expenses associated with performing compliance functions, and our allocable portion of any costs ofcompensation and related expenses of our chief compliance officer and our chief financial officer and their respectiveadministrative support staff.Duration and TerminationThe Investment Advisory Agreement was initially approved by the Board on June 10, 2013 and signed on September 24,2013. The Investment Advisory Agreement was most recently re-approved by the Board, including by a majority of our non-interested directors, at an in-person meeting on August 4, 2016. Unless earlier terminated as described below, the InvestmentAdvisory Agreement will remain in effect from year to year if approved annually by our Board or by the affirmative vote of theholders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who arenot parties to such agreement or who are not “interested persons” of any such party, as such term is defined in Section 2(a)(19) ofthe 1940 Act. The Investment Advisory Agreement will automatically terminate in the event of its assignment. The InvestmentAdvisory Agreement may also be terminated by either party without penalty upon not less than 60 days’ written notice to theother party. See “Risk Factors — Risks Relating to Our Business and Structure — Our Investment Advisor will have the right toresign on 60 days’ notice.”IndemnificationThe Investment Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in theperformance of its duties or by reason of the reckless disregard of its duties and obligations, the Investment Advisor and itsofficers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it areentitled to indemnification from Capitala Finance for any damages, liabilities, costs and expenses (including reasonable attorneys’fees and amounts reasonably paid in settlement) arising from the rendering of the Investment Advisor’s services under theInvestment Advisory Agreement or otherwise as an investment adviser of Capitala Finance.Organization of the Investment AdvisorThe Investment Advisor is a Delaware limited liability company. The principal executive offices of the Investment Advisor arelocated at 4201 Congress Street, Suite 360, Charlotte, North Carolina 28209.16  TABLE OF CONTENTSAdministration AgreementCapitala Advisors Corp., a North Carolina corporation, serves as our administrator. The principal executive offices of ouradministrator are located at 4201 Congress Street, Suite 360, Charlotte, North Carolina 28209. Capitala Advisors Corp., pursuantto a sub-administration agreement, has engaged U.S. Bancorp Fund Services, LLC to act on behalf of the Administrator in itsperformance of certain administrative services for us. The principal office of U.S. Bancorp Fund Services, LLC is 777 EastWisconsin Avenue, Milwaukee, WI 53202. Pursuant to the Administration Agreement, our administrator furnishes us with officefacilities, equipment and clerical, bookkeeping and record keeping services at such facilities. Under the AdministrationAgreement, our administrator also performs, or oversees the performance of, our required administrative services, which include,among other things, being responsible for the financial records that we are required to maintain and preparing reports to ourstockholders. In addition, our administrator assists us in determining and publishing our net asset value, oversees the preparationand filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally oversees the paymentof our expenses and the performance of administrative and professional services rendered to us by others. Payments under theAdministration Agreement are equal to an amount based upon our allocable portion of our administrator’s overhead in performingits obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliancefunctions, and our allocable portion of the compensation of our chief financial officer, chief compliance officer and our allocableportion of the compensation of their respective administrative support staff. Under the Administration Agreement, ouradministrator will also provide on our behalf managerial assistance to those portfolio companies that request such assistance.Unless terminated earlier in accordance with its terms, the Administration Agreement will remain in effect if approved annually byour Board. On August 4, 2016, the Board approved the renewal of the Administration Agreement. The Administration Agreementmay be terminated by either party without penalty upon 60 days’ written notice to the other party. To the extent that ouradministrator outsources any of its functions, we will pay the fees associated with such functions on a direct basis without anyincremental profit to our administrator. Stockholder approval is not required to amend the Administration Agreement.Our administrator also provides administrative services to our Investment Advisor. As a result, the Investment Advisor will alsoreimburse our administrator for its allocable portion of our administrator’s overhead, including rent, the fees and expensesassociated with performing compliance functions for the Investment Advisor, and its allocable portion of the compensation of anyadministrative support staff.The Administration Agreement provides that, absent willful misfeasance, bad faith or negligence in the performance of itsduties or by reason of the reckless disregard of its duties and obligations, our administrator and its officers, managers, partners,agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnificationfrom Capitala Finance for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amountsreasonably paid in settlement) arising from the rendering of our administrator’s services under the Administration Agreement orotherwise as administrator for Capitala Finance.License AgreementWe have entered into a license agreement with the Investment Advisor pursuant to which the Investment Advisor has agreed togrant us a non-exclusive, royalty-free license to use the name “Capitala.” Under this agreement, we have a right to use the Capitalaname for so long as the Investment Advisory Agreement with the Investment Advisor is in effect. Other than with respect to thislimited license, we will have no legal right to the “Capitala” name.StaffingCapitala Finance has no employees. Mr. Alala, through his financial interests in the Investment Advisor, will be entitled to aportion of any investment advisory fees paid by Capitala Finance to the Investment Advisor. Our other executive officers areemployees of our administrator and perform their functions under the terms of our Administration Agreement.Our day-to-day investment operations are managed by the Investment Advisor. The Investment Advisor’s investment teamcurrently consists of the members of its investment committee, Messrs. Alala, McGlinn and17  TABLE OF CONTENTSBroyhill, and a team of fifteen additional investment professionals. The Investment Advisor may hire additional investmentprofessionals, based upon its needs, in the future. See “— Investment Advisory Agreement.”In addition, we reimburse our administrator for our allocable portion of overhead and other expenses incurred by it inperforming its obligations under the Administration Agreement, including rent, the fees and expenses associated with performingcompliance functions, and the compensation of our chief financial officer, chief compliance officer, and their respectiveadministrative support staff. See “— Administration Agreement.”VALUATION PROCESS AND DETERMINATION OF NET ASSET VALUEWe determine the net asset value of our investment portfolio each quarter by subtracting our total liabilities from the fair valueof our gross assets.We conduct the valuation of our assets, pursuant to which our net asset value shall be determined, at all times consistent withU.S. generally accepted accounting principles (“U.S. GAAP”) and the 1940 Act. Our valuation procedures are set forth in moredetail below:Securities for which market quotations are readily available on an exchange shall be valued at such price as of the closingprice on the day of valuation. We may also obtain quotes with respect to certain of our investments from pricing services orbrokers or dealers in order to value assets. When doing so, we determine whether the quote obtained is sufficient according to U.S.GAAP to determine the fair value of the security. If determined adequate, we use the quote obtained.Securities for which reliable market quotations are not readily available or for which the pricing source does not provide avaluation or methodology or provides a valuation or methodology that, in the judgment of our Investment Advisor or the Board,does not represent fair value, which we expect will represent a substantial majority of the investments in our portfolio, shall bevalued as follows: (i) each portfolio company or investment is initially valued by the investment professionals responsible for theportfolio investment; (ii) preliminary valuation conclusions are documented and discussed with our senior management; (iii)independent third-party valuation firms engaged by, or on behalf of, the Board will conduct independent appraisals, reviewmanagement’s preliminary valuations and prepare separate preliminary valuation conclusions on a selected basis such that eachportfolio investment shall be independently reviewed at least annually (investments will not be selected for such review, however,if they (a) have a value as of the previous quarter of less than 1.0% of our gross assets as of the previous quarter, or (b) have a valueas of the current quarter of less than 1.0% of our gross assets as of the previous quarter, after taking into account any repayment ofprincipal during the current quarter); and (iv) the Board will discuss valuations and determine the fair value of each investment inour portfolio in good faith based on the input of the Investment Advisor and, where appropriate, the respective third-partyvaluation firms.The recommendation of fair value will generally be based on the following factors, as relevant:•the nature and realizable value of any collateral;•the portfolio company’s ability to make payments;•the portfolio company’s earnings and discounted cash flow;•the markets in which the issuer does business; and•comparisons to publicly traded securities.Securities for which market quotations are not readily available or for which a pricing source is not sufficient may include, butare not limited to, the following:•private placements and restricted securities that do not have an active trading market;•securities whose trading has been suspended or for which market quotes are no longer available;•debt securities that have recently gone into default and for which there is no current market;•securities whose prices are stale;18  TABLE OF CONTENTS•securities affected by significant events; and•securities that the investment adviser believes were priced incorrectly.Determination of fair value involves subjective judgments and estimates not susceptible to substantiation by auditingprocedures. Accordingly, under current auditing standards, the notes to our financial statements will refer to the uncertainty withrespect to the possible effect of such valuations, and any change in such valuations, on our financial statements. In addition, theSBA has established certain valuation guidelines for SBICs to follow when valuing portfolio investments.In making the good faith determination of the value of these securities, we start with the cost basis of the security, whichincludes the amortized original issue discount and PIK interest or dividends, if any. We prepare the valuations of our investmentsin portfolio companies using the most recent portfolio company financial statements and forecasts. We also consult updates thatwe receive from senior management members at portfolio companies, whether solicited for valuation purposes, or received in theordinary course of our portfolio monitoring or due diligence process. These updates include information such as industry trends,new product development or service offerings and other operational or strategic issues.For debt securities that are not publicly traded or for which there is no market, we begin with our investment rating of thesecurity as described above. Using this investment rating, we seek to determine the value of the security as if we intended to sellthe security in a current sale. The factors that may be taken into account in arriving at fair value include the following, asapplicable: the portfolio company’s ability to service its interest and principal payment obligations, its estimated earnings andprojected discounted cash flows, the nature and realizable value of any collateral, the financial environment in which the portfoliocompany operates, comparisons to securities of similar publicly traded companies, statistical ratios compared to lending standardsand to other similarly situated securities, and other relevant factors.As part of the valuation process, the audit committee reviews the preliminary evaluations prepared by the independentvaluation firm engaged by the Board, as well as management’s valuation recommendations. Management and the independentvaluation firm respond to the preliminary evaluation to reflect comments provided by the audit committee. The audit committeereviews the final valuation report and management’s valuation recommendations and makes a recommendation to the Board basedon its analysis of the methodologies employed and the various weights that should be accorded to each portion of the valuation aswell as factors that the independent valuation firm and management may not have considered in their evaluation process. TheBoard then evaluates the audit committee recommendations and undertakes a similar analysis to determine the fair value of eachinvestment in the portfolio in good faith.Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value,the fair value of our investments may differ significantly from the values that would have been used had a ready market existed forsuch investments, and the differences could be material. Additionally, changes in the market environment and other events thatmay occur over the life of the investments may cause the gains or losses ultimately realized on these investments to differ from thevaluations assigned at any time. For a discussion of the risks inherent in determining the fair value of securities for which readilyavailable market values do not exist, see “Risk Factors.”Determinations in Connection with OfferingsIn connection with certain future offerings of shares of our common stock, our Board or an authorized committee thereof willbe required to make the determination that we are not selling shares of our common stock at a price below the then current netasset value of our common stock at the time at which the sale is made. Our Board or an authorized committee thereof will considerthe following factors, among others, in making such a determination:•the net asset value of our common stock disclosed in the most recent periodic report that we filed with the SEC;19  TABLE OF CONTENTS•our management’s assessment of whether any material change in the net asset value of our common stock has occurred(including through the realization of gains on the sale of our portfolio securities) during the period beginning on the dateof the most recently disclosed net asset value of our common stock and ending as of a time within 48 hours (excludingSundays and holidays) of the sale of our common stock; and•the magnitude of the difference between (i) a value that our Board or an authorized committee thereof has determinedreflects the current (as of a time within 48 hours, excluding Sundays and holidays) net asset value of our common stock,which is based upon the net asset value of our common stock disclosed in the most recent periodic report that we filed withthe SEC, as adjusted to reflect our management’s assessment of any material change in the net asset value of our commonstock since the date of the most recently disclosed net asset value of our common stock, and (ii) the offering price of theshares of our common stock in the proposed offering.Moreover, to the extent that there is even a remote possibility that we may (i) issue shares of our common stock at a price pershare below the then current net asset value per share of our common stock at the time at which the sale is made or (ii) trigger theundertaking (which we provide in certain registration statements we file with the SEC) to suspend the offering of shares of ourcommon stock if the net asset value per share of our common stock fluctuates by certain amounts in certain circumstances until theprospectus is amended, our Board will elect, in the case of clause (i) above, either to postpone the offering until such time thatthere is no longer the possibility of the occurrence of such event or to undertake to determine the net asset value per share of ourcommon stock within two days prior to any such sale to ensure that such sale will not be below our then current net asset value pershare and, in the case of clause (ii) above, to comply with such undertaking or to undertake to determine the net asset value pershare of our common stock to ensure that such undertaking has not been triggered.These processes and procedures are part of our compliance policies and procedures. Records will be made contemporaneouslywith all determinations described in this section and these records will be maintained with other records that we are required tomaintain under the 1940 Act.COMPETITIONWe compete for investments with other BDCs and investment funds (including private equity funds, private credit funds,mezzanine funds and other SBICs), as well as traditional financial services companies such as commercial banks and other sourcesof funding. Additionally, competition for investment opportunities has emerged among alternative investment vehicles, such ascollateralized loan obligations (“CLOs”) and other BDCs, some of which are sponsored by other alternative asset investors, asthese entities have begun to focus on making investments in lower middle-market and traditional middle-market companies. As aresult of these new entrants, competition for our investment opportunities may intensify. Many of these entities have greaterfinancial and managerial resources than we do. We believe we will be able to compete with these entities primarily on the basis ofour experience and reputation, our willingness to make smaller investments than other specialty finance companies, the contactsand relationships of our Investment Advisor, our responsive and efficient investment analysis and decision-making processes, andthe investment terms we offer.We believe that certain of our competitors may make first lien and second lien loans with interest rates and returns that will becomparable to or lower than the rates and returns that we will target. Therefore, we will not seek to compete solely on the interestrates and returns that we offer to potential portfolio companies. For additional information concerning the competitive risks weface, see “Risk Factors — Risks Relating to Our Business and Structure — We operate in a highly competitive market forinvestment opportunities, which could reduce returns and result in losses.”ELECTION TO BE TAXED AS A RICAs a BDC, the Company has elected to be treated, and intends to comply with the requirements to continue to qualifyannually, as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay corporate-level U.S. federalincome taxes on any income that we distribute to our stockholders as dividends. To qualify as a RIC, we must, among other things,meet certain source-of-income and asset diversification requirements (as described below). In addition, to qualify for RIC taxtreatment we must20  TABLE OF CONTENTSdistribute to our stockholders, for each taxable year, at least 90% of our “investment company taxable income,” which generally isour ordinary income plus the excess of our realized net short-term capital gains over our realized net long-term capital losses (the“Annual Distribution Requirement”).TAXATION AS A RICFor any taxable year in which we:•qualify as a RIC; and•satisfy the Annual Distribution Requirement,we generally will not be subject to U.S. federal income tax on the portion of our income we distribute to stockholders. We will besubject to U.S. federal income tax at the regular corporate rates on any income or capital gains not distributed to our stockholders.We will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless we distribute in atimely manner an amount at least equal to the sum of (1) 98% of our net ordinary income for each calendar year, (2) 98.2% of ourcapital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but notdistributed, in preceding years and on which we paid no corporate-level U.S. federal income tax (the “Excise Tax DistributionRequirement”).In order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things:•continue to qualify as a BDC under the 1940 Act at all times during each taxable year;•derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to loans ofcertain securities, gains from the sale or other disposition of stock, securities or foreign currencies, net income from certain“qualified publicly traded partnerships,” or other income derived with respect to our business of investing in such stock orsecurities (the “90% Income Test”); and•diversify our holdings so that at the end 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 otherRICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of ourassets or more than 10% of the outstanding voting securities of the issuer; and•no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities orsecurities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Coderules, by us and that are engaged in the same or similar or related trades or businesses or of certain “qualified publiclytraded partnerships” (the “Diversification Tests”).Qualified earnings may exclude such income as management fees received in connection with our SBIC subsidiaries or otherpotential outside managed funds and certain other fees.In accordance with certain applicable Treasury regulations and private letter rulings issued by the IRS, a RIC may treat adistribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entiredistribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to allstockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, eachstockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). Inno event will any stockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash. If these andcertain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal tothe amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares ofour stock in accordance with these Treasury regulations or private letter rulings.21  TABLE OF CONTENTSWe may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we holddebt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIKinterest or, in certain cases, increasing interest rates or issued with warrants), we must include in income each year a portion of theoriginal issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is receivedby us in the same taxable year. We may also have to include in income other amounts that we have not yet received in cash, suchas PIK interest, deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation suchas warrants or stock, or certain income with respect to equity investments in foreign corporations. Because any original issuediscount or other amounts accrued will be included in our investment company taxable income for the year of accrual, we may berequired to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement, even though we willnot have received any corresponding cash amount.Gain or loss realized by us from the sale or exchange of warrants acquired by us as well as any loss attributable to the lapse ofsuch warrants generally will be treated as capital gain or loss. Such gain or loss generally will be long-term or short-term,depending on how long we held a particular warrant.Although we do not presently expect to do so, we are authorized to borrow funds and to sell assets in order to satisfydistribution requirements. However, under the 1940 Act, we are not permitted to make distributions to our stockholders while ourdebt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. Moreover, our ability todispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) otherrequirements relating to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the AnnualDistribution Requirement or the Excise Tax Distribution Requirement, we may make such dispositions at times that, from aninvestment standpoint, are not advantageous. If we are prohibited from making distributions or are unable to obtain cash fromother sources to make the distributions, we may fail to qualify as a RIC, which would result in us becoming subject to corporate-level U.S. federal income tax.In addition, we will be partially dependent on our SBIC subsidiaries for cash distributions to enable us to meet the RICdistribution requirements. Our SBIC subsidiaries may be limited by the Small Business Investment Act of 1958, and SBAregulations governing SBICs, from making certain distributions to us that may be necessary to maintain our status as a RIC. Wemay have to request a waiver of the SBA’s restrictions for our SBIC subsidiaries to make certain distributions to maintain our RICstatus. We cannot assure you that the SBA will grant such waiver. If our SBIC subsidiaries are unable to obtain a waiver,compliance with the SBA regulations may cause us to fail to qualify as a RIC, which would result in us becoming subject tocorporate-level U.S. federal income tax.The remainder of this discussion assumes that we will qualify as a RIC and have satisfied the Annual DistributionRequirement.Any transactions in options, futures contracts, constructive sales, hedging, straddle, conversion or similar transactions, andforward contracts will be subject to special tax rules, the effect of which may be to accelerate income to us, defer losses, causeadjustments to the holding periods of our investments, convert long-term capital gains into short-term capital gains, convert short-term capital losses into long-term capital losses or have other tax consequences. These rules could affect the amount, timing andcharacter of distributions to stockholders. We do not currently intend to engage in these types of transactions.A RIC is limited in its ability to deduct expenses in excess of its “investment company taxable income” (which is, generally,ordinary income plus net realized short-term capital gains in excess of net realized long-term capital losses). If our expenses in agiven year exceed gross taxable income (e.g., as the result of large amounts of equity-based compensation), we would experience anet operating loss for that year. However, a RIC is not permitted to carry forward net operating losses to subsequent years. Inaddition, expenses can be used only to offset investment company taxable income, not net capital gain. Due to these limits on thedeductibility of expenses, we may for tax purposes have aggregate taxable income for several years that we are required todistribute and that is taxable to our stockholders even if such income is greater than the aggregate net income we actually earnedduring those years. Such required distributions may be made from our cash assets or by liquidation of investments, if necessary.We may realize gains or losses22  TABLE OF CONTENTSfrom such liquidations. In the event we realize net capital gains from such transactions, you may receive a larger capital gaindistribution than you would have received in the absence of such transactions.Investment income received from sources within foreign countries, or capital gains earned by investing in securities of foreignissuers, may be subject to foreign income taxes withheld at the source. In this regard, withholding tax rates in countries with whichthe United States does not have a tax treaty are often as high as 35% or more. The United States has entered into tax treaties withmany foreign countries that may entitle us to a reduced rate of tax or exemption from tax on this related income and gains. Theeffective rate of foreign tax cannot be determined at this time since the amount of our assets to be invested within variouscountries is not now known. We do not anticipate being eligible for the special election that allows a RIC to treat foreign incometaxes paid by such RIC as paid by its stockholders.If we acquire stock in certain foreign corporations that receive at least 75% of their annual gross income from passive sources(such as interest, dividends, rents, royalties or capital gain) or hold at least 50% of their total assets in investments producing suchpassive income (“passive foreign investment companies”), we could be subject to U.S. federal income tax and additional interestcharges on “excess distributions” received from such companies or gain from the sale of stock in such companies, even if allincome or gain actually received by us is timely distributed to our stockholders. We would not be able to pass through to ourstockholders any credit or deduction for such a tax. Certain elections may, if available, ameliorate these adverse tax consequences,but any such election requires us to recognize taxable income or gain without the concurrent receipt of cash. We intend to limitand/or manage our holdings in passive foreign investment companies to minimize our tax liability. In addition, under recentlyproposed regulations, income required to be included as a result of such an election would not be qualifying income for purposesof the 90% Income Test unless we receive a distribution of such income from the passive foreign investment company in the sametaxable year to which the inclusion relates.Foreign exchange gains and losses realized by us in connection with certain transactions involving non-dollar debt securities,certain foreign currency futures contracts, foreign currency option contracts, foreign currency forward contracts, foreign currencies,or payables or receivables denominated in a foreign currency are subject to Code provisions that generally treat such gains andlosses as ordinary income and losses and may affect the amount, timing and character of distributions to our stockholders. Anysuch transactions that are not directly related to our investment in securities (possibly including speculative currency positions orcurrency derivatives not used for hedging purposes) could, under future Treasury regulations, produce income not among thetypes of “qualifying income” from which a RIC must derive at least 90% of its annual gross income.ACQUISITION OF PORTFOLIO ASSETS OF THE LEGACY FUNDSWe believe that our acquisition of the Legacy Funds’ portfolio assets in exchange for shares of our common stock generallywas tax free to us and the Legacy Funds. As a result, our initial adjusted basis in the Legacy Funds’ portfolio assets was equal tothe Legacy Funds’ adjusted basis in such assets immediately prior to our acquisition of such assets increased by any gainrecognized by the Legacy Funds as a result of such transaction. Such adjusted basis will be used in determining the amount of ourtaxable gain or loss upon a sale or other disposition of such assets. To the extent that such assets had built-in gain (i.e., assetswhose fair market value exceeds our tax basis at the time we acquired them) on the date of acquisition, when such gain isrecognized by us upon a sale or other disposition such assets, we will be required to distribute such gain to our shareholders inorder to eliminate our liability for corporate-level U.S. federal income tax on such gain and possibly to maintain our qualificationas a RIC under the Code. Investors will be subject to tax on the distribution even though such gain accrued prior to ouracquisition of such assets and even though the distribution effectively represents a return of their investment.In addition, to the extent that any beneficial owner of interests in the Legacy Funds on the date of our acquisition of theLegacy Funds’ portfolio assets was a C corporation (a “corporate partner”), we will be required to pay a corporate-level U.S. federalincome tax on the net amount of any such built-in gains attributable to the corporate partners that we recognize during the ten-year period (or shorter applicable period) beginning on the date of acquisition. Alternatively, we may make a special election tocause the gain to be recognized at the time of the acquisition. In that event, the Legacy Funds would be required to23  TABLE OF CONTENTSrecognize such built-in gain as if a proportionate share of such Funds’ assets were sold at the time of the acquisition. We do notanticipate making this election at this time. Any corporate-level built-in gain tax is payable at the time the built-in gains arerecognized (which generally will be the years in which the built-in gain assets are sold in a taxable transaction). The amount ofthis tax will vary depending on the assets that are actually sold by us in this 10-year period (or shorter applicable period), theactual amount of net built-in gain or loss present in those assets as of the acquisition date and effective tax rates. The payment ofany such corporate-level U.S. federal income tax on built-in gains will be a company expense that will be borne by allshareholders (not just any former corporate partners) and will reduce the amount available for distribution to shareholders.FAILURE TO QUALIFY AS A RICIf we fail to satisfy the 90% Income Test or the Diversification Tests for any taxable year, we may nevertheless continue toqualify as a RIC for such year if certain relief provisions are applicable (which may, among other things, require us to pay certaincorporate-level U.S. federal income taxes or to dispose of certain assets).If we were unable to qualify for treatment as a RIC and the foregoing relief provisions are not applicable, we would be subjectto tax on all of our taxable income at regular corporate rates, regardless of whether we make any distributions to our stockholders.Distributions would not be required, and any distributions would be taxable to our stockholders as ordinary dividend income tothe extent of our current and accumulated earnings and profits and, subject to certain limitations, may be eligible for the 20%maximum rate for noncorporate taxpayers provided certain holding period and other requirements were met. Subject to certainlimitations under the Code, corporate distributees would be eligible for the dividends-received deduction. Distributions in excessof our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’stax basis, and any remaining distributions would be treated as a capital gain. To requalify as a RIC in a subsequent taxable year,we would be required to satisfy the RIC qualification requirements for that year and dispose of any earnings and profits from anyyear in which we failed to qualify as a RIC. Subject to a limited exception applicable to RICs that qualified as such under theCode for at least one year prior to disqualification and that requalify as a RIC no later than the second year following thenonqualifying year, we could be subject to tax on any unrealized net built-in gains in the assets held by us during the period inwhich we failed to qualify as a RIC that are recognized within the subsequent five years, unless we made a special election to paycorporate-level U.S. federal income tax on such built-in gain at the time of our requalification as a RIC.REGULATIONA BDC is regulated under the 1940 Act. A BDC must be organized in the U.S. for the purpose of investing in or lending toprimarily private companies and making significant managerial assistance available to them. A BDC may use capital provided bypublic stockholders and from other sources to make long-term, private investments in businesses. A BDC provides stockholdersthe ability to retain the liquidity of a publicly traded stock while sharing in the possible benefits, if any, of investing in primarilyprivately owned companies.We may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC unless authorized byvote of a majority of the outstanding voting securities, as required by the 1940 Act. A majority of the outstanding votingsecurities of a company is defined under the 1940 Act as the lesser of: (a) 67% or more of such company’s voting securities presentat a meeting if more than 50% of the outstanding voting securities of such company are present or represented by proxy, or (b)more than 50% of the outstanding voting securities of such company. We do not anticipate any substantial change in the nature ofour business.As with other companies regulated by the 1940 Act, a BDC must adhere to certain substantive regulatory requirements. Amajority of our directors must be persons who are not interested persons, as that term is defined in the 1940 Act. Additionally, wewill be required to provide and maintain a bond issued by a reputable fidelity insurance company to protect the BDC.Furthermore, as a BDC, we will be prohibited24  TABLE OF CONTENTSfrom protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith,gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.As a BDC, we are generally required to meet an asset coverage ratio, defined under the 1940 Act as the ratio of our gross assets(less all liabilities and indebtedness not represented by senior securities) to our outstanding senior securities, of at least 200% aftereach issuance of senior securities. We may also be prohibited under the 1940 Act from knowingly participating in certaintransactions with our affiliates without the prior approval of our directors who are not interested persons and, in some cases, priorapproval by the SEC. On June 1, 2016, the SEC issued an order permitting exemptive relief to us and certain of our affiliates topermit an investment fund and one or more other affiliated investment funds, including future affiliated investment funds, toparticipate in the same investment opportunities through a proposed co-investment program where such participation wouldotherwise be prohibited under the 1940 Act. This exemptive relief is subject to certain conditions designed to ensure that theparticipation by one investment fund in a co-investment transaction would not be on a basis different from or less advantageousthan that of other affiliated funds.We are generally not able to issue and sell our common stock at a price below net asset value per share. See “RiskFactors — Risks Relating to Our Business and Structure — Regulations governing our operation as a BDC affect our ability toraise additional capital and the way in which we do so. As a BDC, the necessity of raising additional capital may expose us torisks, including the typical risks associated with leverage” We may, however, sell our common stock, or warrants, options or rightsto acquire our common stock, at a price below the then-current net asset value of our common stock if our Board determines thatsuch sale is in our best interests and the best interests of our stockholders, and our stockholders approve our policy and practice ofmaking such sales. In any such case, under such circumstances, the price at which our common stock to be issued and sold may notbe less than a price which, in the determination of our Board, closely approximates the market value of such common stock. Inaddition, we may generally issue new shares of our common stock at a price below net asset value in rights offerings to existingstockholders, in payment of dividends and in certain other limited circumstances.As a BDC, we are generally limited in our ability to invest in any portfolio company in which our Investment Advisor or anyof its affiliates currently has an investment or to make any co-investments with our Investment Advisor or its affiliates without anexemptive order from the SEC, subject to certain exceptions. On September 10, 2015, we, Fund II, Fund III, Fund V, and theInvestment Advisor filed an application for exemptive relief with the SEC to permit an investment fund and one or more affiliatedinvestment funds, including future affiliated investment funds, to participate in the same investment opportunities through aproposed co-investment program where such participation would otherwise be prohibited under the 1940 Act. On June 1, 2016,the SEC issued an order permitting this relief. This exemptive relief is subject to certain conditions designed to ensure that theparticipation by one investment fund in a co-investment transaction would not be on a basis different from or less advantageousthan that of other affiliated investment funds.We will be periodically examined by the SEC for compliance with the 1940 Act.As a BDC, we are subject to certain risks and uncertainties. See “Risk Factors — Risks Relating to Our Business andStructure.”QUALIFYING ASSETSUnder the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act,which are referred to as qualifying assets, unless, immediately after such acquisition is made, qualifying assets represent at least70% of the BDC’s gross assets (the “70% Test”). The principal categories of qualifying assets relevant to our proposed businessare the following:•Securities purchased in transactions not involving any public offering, the issuer of which is an eligible portfoliocompany;•Securities received in exchange for or distributed with respect to securities described in the bullet above or pursuant to theexercise of options, warrants or rights relating to such securities; and25  TABLE OF CONTENTS•Cash, cash items, government securities or high quality debt securities (within the meaning of the 1940 Act), maturing inone year or less from the time of investment.An eligible portfolio company is generally a domestic company that is not an investment company (other than a SBIC whollyowned by a BDC) and that:•does not have a class of securities with respect to which a broker may extend margin credit at the time the acquisition ismade;•is controlled by the BDC and has an affiliate of the BDC on its Board;•does not have any class of securities listed on a national securities exchange;•is a public company that lists its securities on a national securities exchange with a market capitalization of less than $250million; or•meets such other criteria as may be established by the SEC.Control, as defined by the 1940 Act, is presumed to exist where a BDC beneficially owns more than 25% of the outstandingvoting securities of the portfolio company.In addition, a BDC must have been organized and have its principal place of business in the U.S. and must be operated for thepurpose of making investments in eligible portfolio companies, or in other securities that are consistent with its purpose as a BDC.SIGNIFICANT MANAGERIAL ASSISTANCE TO PORTFOLIO COMPANIESBDCs generally must offer to make available to the issuer of the securities significant managerial assistance, except incircumstances where either (i) the BDC controls such issuer of securities or (ii) the BDC purchases such securities in conjunctionwith one or more other persons acting together and one of the other persons in the group makes available such managerialassistance. Making available managerial assistance means, among other things, any arrangement whereby the BDC, through itsdirectors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerningthe management, operations or business objectives and policies of a portfolio company.TEMPORARY INVESTMENTSPending investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cashequivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment,which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we will investin U.S. Treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securitiesissued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of aspecified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price whichis greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on theproportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our gross assetsconstitute repurchase agreements from a single counterparty, we would not meet the diversification tests in order to qualify as aRIC under the Code. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit.Our Investment Advisor will monitor the creditworthiness of the counterparties with which we enter into repurchase agreementtransactions.SENIOR SECURITIESWe are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to ourcommon stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. OnJune 10, 2014, we received an exemptive order from the SEC granting relief from the asset coverage requirements for certainindebtedness issued by Fund II and Fund III as SBICs. In addition, while any senior securities remain outstanding, we must makeprovisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet theapplicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up26  TABLE OF CONTENTSto 5% of the value of our gross assets for temporary or emergency purposes without regard to asset coverage. For a discussion ofthe risks associated with leverage, see “Risk Factors — Risks Relating to Our Business and Structure.”CODE OF ETHICSWe and our Investment Advisor have adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act and Rule 204A-1under the Advisers Act that establishes procedures for personal investments and restricts certain transactions by our personnel. Ourcode of ethics generally does not permit investments by our employees in securities that may be purchased or held by us. You mayread and copy our code of ethics at the SEC’s Public Reference Room in Washington, D.C. You may obtain information on theoperation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also obtain copies of the code of ethics,after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov, or by writing the SEC’sPublic Reference Section, 100 F Street, N.E., Washington, D.C. 20549. Our code of ethics is also available on our website athttp://www.Capitalagroup.com.COMPLIANCE POLICIES AND PROCEDURESWe and our Investment Advisor have adopted and implemented written policies and procedures reasonably designed to detectand prevent violation of the federal securities laws and are required to review these compliance policies and procedures annuallyfor their adequacy and the effectiveness of their implementation and designate a chief compliance officer to be responsible foradministering the policies and procedures. Richard G. Wheelahan, III currently serves as our chief compliance officer.SARBANES-OXLEY ACT OF 2002The Sarbanes-Oxley Act of 2002 imposes a wide variety of regulatory requirements on publicly-held companies and theirinsiders. Many of these requirements affect us. For example:•pursuant to Rule 13a-14 of the Exchange Act, our chief executive officer and chief financial officer must certify theaccuracy of the financial statements contained in our periodic reports;•pursuant to Item 307 of Regulation S-K, our periodic reports must disclose our conclusions about the effectiveness of ourdisclosure controls and procedures;•pursuant to Rule 13a-15 of the Exchange Act, our management is required to prepare an annual report regarding itsassessment of our internal control over financial reporting. When we are no longer an emerging growth company under theJOBS Act, our independent registered public accounting firm will be required to audit our internal controls over financialreporting; and•pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the 1934 Act, our periodic reports must disclose whether therewere significant changes in our internal controls over financial reporting or in other factors that could significantly affectthese controls subsequent to the date of their evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.The Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether we comply with theSarbanes-Oxley Act and the regulations promulgated thereunder. We will continue to monitor our compliance with all regulationsthat are adopted under the Sarbanes-Oxley Act and will take actions necessary to ensure that we are in compliance therewith.PROXY VOTING POLICIES AND PROCEDURESWe have delegated our proxy voting responsibility to the Investment Advisor. The proxy voting policies and procedures ofthe Investment Advisor are set forth below. The guidelines will be reviewed periodically by the Investment Advisor and our non-interested directors, and, accordingly, are subject to change. For purposes of the proxy voting policies and procedures describedbelow, “we,” “our” and “us” refers to the Investment Advisor.IntroductionAn investment adviser registered under the Advisers Act has a fiduciary duty to act solely in the best interests of its clients. Aspart of this duty, we recognize that we must vote client securities in a timely manner free of conflicts of interest and in the bestinterests of our clients.27  TABLE OF CONTENTSThese policies and procedures for voting proxies for our Investment Advisory clients are intended to comply with Section 206of, and Rule 206(4)-6 under, the Advisers Act.Proxy PoliciesWe will vote proxies relating to our portfolio securities in what we perceive to be the best interest of our clients’ stockholders.We will review on a case-by-case basis each proposal submitted to a stockholder vote to determine its impact on the portfoliosecurities held by our clients. Although we will generally vote against proposals that may have a negative impact on our clients’portfolio securities, we may vote for such a proposal if there exist compelling long-term reasons to do so.Our proxy voting decisions will be made by the senior officers who are responsible for monitoring each of our clients’investments. To ensure that our vote is not the product of a conflict of interest, we will require that: (1) anyone involved in thedecision making process disclose to our managing member any potential conflict that he or she is aware of and any contact that heor she has had with any interested party regarding a proxy vote; and (2) employees involved in the decision making process orvote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any attempted influencefrom interested parties.Proxy Voting RecordsYou may obtain information about how we voted proxies by making a written request for proxy voting information to:Capitala Investment Advisors, LLC, 4201 Congress Street, Suite 360, Charlotte, North Carolina 28209.PRIVACY PRINCIPLESWe are committed to maintaining the privacy of our stockholders and to safeguarding their non-public personal information.The following information is provided to help you understand what personal information we collect, how we protect thatinformation and why, in certain cases, we may share information with select other parties.Generally, we do not receive any non-public personal information relating to our stockholders, although certain non-publicpersonal information of our stockholders may become available to us. We do not disclose any non-public personal informationabout our stockholders or former stockholders to anyone, except as permitted by law or as is necessary in order to servicestockholder accounts (for example, to a transfer agent or third-party administrator).We restrict access to non-public personal information about our stockholders to employees of our Investment Advisor and itsaffiliates with a legitimate business need for the information. We will maintain physical, electronic and procedural safeguardsdesigned to protect the non-public personal information of our stockholders.SMALL BUSINESS INVESTMENT COMPANY REGULATIONSFund II and Fund III, which are our wholly owned subsidiaries, are licensed to act as SBICs and are regulated by the SBA. As ofDecember 31, 2016, investments in Fund II and Fund III accounted for approximately 10.9% and 48.0%, respectively, of our totalportfolio. As of December 31, 2016 Fund II and Fund III had $20.7 million and $150.0 million, respectively, of SBA-guaranteeddebentures outstanding under the SBIC program. Fund II and Fund III are fully drawn and may not make borrowings in excess oftheir aggregate $170.7 million of SBA-guaranteed debentures outstanding as of December 31, 2016.The SBIC licenses allow our SBIC subsidiaries to borrow funds by issuing SBA-guaranteed debentures, subject to the issuanceof a capital commitment by the SBA and other customary procedures. The SBA regulations require, among other things, that alicensed SBIC be examined periodically and audited by an independent auditor to determine the SBIC’s compliance with therelevant SBA regulations. SBA-guaranteed debentures are non-recourse, interest-only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior tomaturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed at the time ofissuance at a market-driven spread over U.S. Treasury Notes with 10-year maturities.28  TABLE OF CONTENTSSBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under current SBA regulations,a licensed SBIC may provide capital to those entities that have a tangible net worth not exceeding $19.5 million and an averageannual net income after U.S. federal income taxes not exceeding $6.5 million for the two most recent fiscal years. In addition, alicensed SBIC must devote 25.0% of its investment activity to those entities that have a tangible net worth not exceeding $6.0million and an average annual net income after U.S. federal income taxes not exceeding $2.0 million for the two most recent fiscalyears. The SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry inwhich the business is engaged and are based on factors such as the number of employees and gross sales. The SBA regulationspermit licensed SBICs to make long-term loans to small businesses, invest in the equity securities of such businesses and providethem with consulting and advisory services. The SBA also places certain limitations on the financing terms of investments bySBICs in portfolio companies and prohibits SBICs from providing funds for certain purposes or to businesses in a few prohibitedindustries. Compliance with SBA requirements may cause Fund II and Fund III to forego attractive investment opportunities thatare not permitted under SBA regulations.Further, the SBA regulations require that a licensed SBIC be periodically examined and audited by the SBA to determine itscompliance with the relevant SBA regulations. The SBA prohibits, without prior SBA approval, a “change of control” of an SBICor transfers that would result in any person (or a group of persons acting in concert) owning 10.0% or more of a class of capitalstock of a licensed SBIC. If either Fund II or Fund III fails to comply with applicable SBA regulations, the SBA could, dependingon the severity of the violation, limit or prohibit Fund II’s and Fund III’s use of debentures, declare outstanding debenturesimmediately due and payable, and/or limit Fund II and Fund III from making new investments. Such actions by the SBA would, inturn, negatively affect us because Fund II and Fund III are our wholly owned subsidiaries. Fund II and Fund III were in compliancewith the terms of the SBA’s leverage as of December 31, 2016 as a result of having sufficient capital as defined under the SBAregulations.In December 2015, the 2016 omnibus spending bill approved by Congress and signed into law by the President increased theamount of SBA-guaranteed debentures that affiliated SBIC funds can have outstanding from $225.0 million to $350.0 million,subject to SBA approval. SBA regulations currently limit the amount that an SBIC subsidiary may borrow to a maximum of $150million when it has at least $75 million in regulatory capital. Affiliated SBICs are permitted to issue up to a combined maximumamount of $350 million when they have at least $175 million in regulatory capital. As of December 31, 2016, Fund II had $26.2million in regulatory capital and $20.7 million in SBA-guaranteed debentures outstanding and Fund III had $75.0 million inregulatory capital and $150.0 million in SBA-guaranteed debentures outstanding.On June 10, 2014, we received exemptive relief from the SEC to permit us to exclude the debt of our SBIC subsidiariesguaranteed by the SBA from the definition of senior securities in the 200% asset coverage test under the 1940 Act. This providesus with increased flexibility under the 200% asset coverage test by permitting us to borrow up to $170.7 million more than wewould otherwise be able to absent the receipt of this exemptive relief.Our SBIC subsidiaries are subject to regulation and oversight by the SBA, including requirements with respect to maintainingcertain minimum financial ratios and other covenants. Receipt of SBIC licenses does not assure that our SBIC subsidiaries willreceive SBA-guaranteed debenture funding, which is dependent upon our SBIC subsidiaries continuing to be in compliance withSBA regulations and policies. The SBA, as a creditor, will have a superior claim to our SBIC subsidiaries’ assets over ourstockholders in the event we liquidate our SBIC subsidiaries or the SBA exercises its remedies under the SBA-guaranteeddebentures issued by our SBIC subsidiaries upon an event of default.NASDAQ GLOBAL SELECT MARKET REQUIREMENTSWe have adopted certain policies and procedures intended to comply with the NASDAQ Global Select Market’s corporategovernance rules. We will continue to monitor our compliance with all future listing standards that are approved by the SEC andwill take actions necessary to ensure that we are in compliance therewith.29  TABLE OF CONTENTSAVAILABLE INFORMATIONOur executive offices are located at 4201 Congress Street, Suite 360, Charlotte, NC 28209. We maintain a website located atwww.Capitalagroup.com and our phone number is (704) 376-5502. We make available free of charge on our website our proxystatement, annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to thosereports as soon as reasonably practical after we file such material with, or furnish to, the U.S. Securities and Exchange Commission.Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K and you should notconsider information contained on our website to be part of this Annual Report on Form 10-K or any other report we file with theSEC.The SEC also maintains a website that contains reports, proxy and information statements and other information we file withthe SEC at www.sec.gov. Copies of these reports, proxy and information statements and other information may also be obtained,after paying a duplicating fee, by electronic request at publicinfo@sec.gov, or by writing to the SEC’s Public Reference Section,100 F Street, N.E., Washington, D.C. 20549-0102. Information on the operation of the Public Reference Room may be obtained bycalling the SEC at 1-800-SEC-0330.30  TABLE OF CONTENTSITEM 1A. RISK FACTORSBefore you invest in our common stock, you should be aware of various risks, including those described below. The risks setout below are not the only risks we face. If any of the following events occur, our business, financial condition and results ofoperations could be materially adversely affected. In such case, our net asset value could decline, and you may lose all or part ofyour investment.Risks Relating to Our Business and StructureWe have a limited operating history as a BDC.Capitala Finance was formed in February 2013 and has only operated as a BDC since September 2013. As a result, we aresubject to many of the business risks and uncertainties associated with recently formed businesses, including the risk that we willnot achieve our investment objective and that the value of your investment could decline substantially. As a BDC, we are subjectto the regulatory requirements of the SEC, in addition to the specific regulatory requirements applicable to BDCs under the 1940Act and RICs under the Code. Our management and that of the Investment Advisor did not have any prior experience operatingunder this regulatory framework, and we incur substantial costs, and expend significant time or other resources, to operate underthis regulatory framework. From time to time, the Investment Advisor may pursue investment opportunities in which it has morelimited experience. We may also be unable to replicate the historical performance of prior investment funds managed by ourmanagement team. In addition, we may be unable to generate sufficient revenue from our operations to make or sustaindistributions to our stockholders.Our investment portfolio is recorded at fair value, with our Board having final responsibility for overseeing, reviewing andapproving, in good faith, its estimate of fair value and, as a result, there may be uncertainty 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 readily availablemarket value, at fair value as determined by us, with our Board having final responsibility for overseeing, reviewing andapproving, in good faith, our estimate of fair value. Typically, there will not be a public market for the securities of the privatelyheld companies in which we invest. As a result, we value these securities quarterly at fair value based on input from management, athird-party independent valuation firm and our audit committee, and with the oversight, review and approval of our Board.The determination of fair value and, consequently, the amount of unrealized gains and losses in our portfolio, are to a certaindegree, subjective and dependent on a valuation process approved by our Board. Certain factors that may be considered indetermining the fair value of our investments include external events, such as private mergers, sales and acquisitions involvingcomparable companies. Because such valuations, and particularly valuations of private securities and private companies, areinherently uncertain, they may fluctuate over short periods of time and may be based on estimates. Our fair value determinationsmay differ materially from the values that would have been used if a ready market for these securities existed. Due to thisuncertainty, our fair value determinations may cause our net asset value on a given date to materially understate or overstate thevalue that we may ultimately realize on one or more of our investments. As a result, investors purchasing our common stock basedon an overstated net asset value would pay a higher price than the value of our investments might warrant. Conversely, investorsselling shares during a period in which the net asset value understates the value of our investments would receive a lower price fortheir shares than the value of our investments might warrant. In addition, we may not be able to realize the values on ourinvestments needed to pay interest on our borrowings.Our financial condition and results of operations depend on our ability to effectively manage and deploy capital.Our ability to achieve our investment objective depends on our ability to effectively manage and deploy capital, whichdepends, in turn, on our Investment Advisor’s ability to identify, evaluate and monitor, and our ability to finance and invest in,companies that meet our investment criteria.Accomplishing our investment objective on a cost-effective basis is largely a function of our Investment Advisor’s handling ofthe investment process, its ability to provide competent, attentive and efficient services31  TABLE OF CONTENTSand our access to investments offering acceptable terms. In addition to monitoring the performance of our existing investments,our Investment Advisor’s investment team may also be called upon, from time to time, to provide managerial assistance to some ofour portfolio companies as well as other funds that they manage. These demands on their time may distract them or slow our rate ofinvestment. See also “— There are significant potential conflicts of interest that could negatively affect our investment returns.”Even if we are able to grow and build upon our investment operations, any failure to manage our growth effectively couldhave a material adverse effect on our business, financial condition, results of operations and prospects. The results of ouroperations 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. Furthermore, if we cannot successfully operate ourbusiness or implement our investment policies and strategies, it could negatively impact our ability to make distributions.We depend upon Capitala Investment Advisors’ key personnel for our future success.We depend on the diligence, skill and network of business contacts of Joseph B. Alala, III, Hunt Broyhill and John F. McGlinn,who serve as the members of the investment committee of the Investment Advisor and lead the Investment Advisor’s investmentteam. Our success depends on the continued service of these individuals and the other senior investment professionals available tothe Investment Advisor. We cannot assure you that unforeseen business, medical, personal or other circumstances would not leadMessrs. Alala, Broyhill or McGlinn or any other such individual to terminate his relationship with us. Such a termination couldhave a material adverse effect on our ability to achieve our investment objective as well as on our financial condition and resultsof operations. In addition, we can offer no assurance that the Investment Advisor will continue indefinitely as our investmentadviser.The members of the Investment Advisor’s investment team are and may in the future become affiliated with entities engaged inbusiness activities similar to those intended to be conducted by us, and may have conflicts of interest in allocating their time. Forexample, an affiliate of the Investment Advisor also manages Fund V, a private investment limited partnership providingfinancing solutions to the lower middle-market and traditional middle-market. Mr. Alala dedicates a significant portion of his timeto the activities of Capitala Finance; however, he may become engaged in other business activities that could divert his time andattention in the future.We operate in a highly competitive market for investment opportunities, which could reduce returns and result in losses.We compete for investments with other BDCs with similar investment strategies, private equity funds with similar investmentstrategies, venture lending funds, finance companies with venture lending units and banks focused on venture lending. Many ofour potential competitors are substantially larger and have considerably greater financial, technical and marketing resources thanwe have. For example, some competitors may have a lower cost of capital and access to funding sources that are not available tous. In addition, some of our competitors have higher risk tolerances or different risk assessments than we have. Thesecharacteristics might allow our competitors to consider a wider variety of investments, establish more relationships or offer betterpricing and more flexible structuring than we are able to offer. We may lose investment opportunities if we do not match ourcompetitors’ pricing, terms or structure. If we are forced to match our competitors’ pricing, terms or structure, we may not be able toachieve acceptable returns on our investments or may bear substantial risk of capital loss. We believe a significant part of ourcompetitive advantage stems from the fact that the market for investments in lower and traditional middle-market companies isunderserved by traditional commercial banks and other financing sources. A significant increase in the number and/or the size ofour competitors in this target market could force us to accept less attractive investment terms. Furthermore, many of our potentialcompetitors have greater experience operating under, or will not be subject to, the regulatory restrictions that the 1940 Act imposeon us as a BDC.32  TABLE OF CONTENTSAny inability of our Capitala Investment Advisors to maintain or develop strong referral relationships, or the failure of theserelationships to generate investment opportunities, could adversely affect our business.We depend upon our Investment Advisor to maintain its relationships with venture capital and private equity firms, placementagents, investment banks, management groups and other financial institutions, and we expect to rely to a significant extent uponthese relationships to provide us with potential investment opportunities. If our Investment Advisor fails to maintain suchrelationships, or to develop new relationships with other sources of investment opportunities, we will not be able to grow ourinvestment portfolio. In addition, individuals with whom our Investment Advisor has relationships are not obligated to provide uswith investment opportunities, and we can offer no assurance that these relationships will generate investment opportunities for usin the future.Our success depends on the ability of Capitala Investment Advisors to attract and retain qualified personnel in a competitiveenvironment.Our growth requires that the Investment Advisor retain and attract new investment and administrative personnel in acompetitive market. Its ability to attract and retain personnel with the requisite credentials, experience and skills depends onseveral factors including, but not limited to, its ability to offer competitive wages, benefits and professional growth opportunities.Many of the entities with which the Investment Advisor competes for experienced personnel, including investment funds (such asprivate equity funds, credit funds and mezzanine funds) and traditional financial services companies, have greater resources thanthe Investment Advisor has.There are significant potential conflicts of interest that could negatively affect our investment returns.The members of the Investment Advisor’s investment team also monitor and service other affiliated investment funds. Inaddition, our executive officers and directors, as well as the current and future members of our Investment Advisor’s investmentteam may serve as officers, directors or principals of other entities that operate in the same or a related line of business as we do.Accordingly, they may have obligations to investors in those entities, the fulfillment of which obligations may not be in the bestinterests of us or our stockholders. However, the Investment Advisor’s investment team does not intend to sponsor or manageanother BDC with an investment strategy that is substantially similar to our investment strategy.In the course of our investing activities, we pay management and incentive fees to the Investment Advisor and reimburse theInvestment Advisor for certain expenses it incurs. As a result, investors in our common stock invest on a “gross” basis and receivedistributions on a “net” basis after expenses, resulting in a lower rate of return than an investor might achieve through directinvestments. Accordingly, there may be times when the management team of the Investment Advisor will have interests that differfrom those of our stockholders, giving rise to a conflict. The Investment Advisor will not be reimbursed for any performance-related compensation for its employees. We have entered into a royalty-free license agreement with our Investment Advisor,pursuant to which the Investment Advisor grants us a non-exclusive royalty-free license to use the name “Capitala.” Under thelicense agreement, we have the right to use the “Capitala” name for so long as the Investment Advisor or one of its affiliatesremains our Investment Advisor. In addition, we pay our Administrator our allocable portion of overhead and other expensesincurred by our Administrator in performing its obligations under the Administration Agreement, including rent, the fees andexpenses associated with performing compliance functions, and our allocable portion of the compensation of our chief financialofficer, chief compliance officer and their respective administrative support staff. These arrangements create conflicts of interestthat our Board must monitor.In addition, an affiliate of the Investment Advisor also manages Fund IV, a private investment limited partnership providingfinancing solutions to smaller and lower middle-market companies that had its first closing in March 2013 and obtained SBAapproval for its SBIC license in April 2013. In addition to Fund IV, affiliates of the Investment Advisor may manage severalaffiliated funds whereby institutional limited partners in Fund IV have the opportunity to co-invest with Fund IV in portfolioinvestments. An affiliate of the Investment Advisor also manages Fund V, a private investment limited partnership providingfinancing solutions to the lower middle-market and traditional middle-market. The Investment Advisor and its affiliates may alsomanage other funds in the future that may have investment mandates that are similar, in whole or in33  TABLE OF CONTENTSpart to ours. To the extent permitted by the 1940 Act and interpretation of the SEC staff, the Investment Advisor and its affiliatesmay determine that an investment is appropriate for us and for one or more of those other funds. In such event, depending on theavailability of such investment and other appropriate factors, the Investment Advisor or its affiliates may determine that we shouldinvest side-by-side with one or more other funds. Any such investments will be made only to the extent permitted by applicablelaw and interpretive positions of the SEC and its staff, and consistent with the Investment Advisor’s allocation procedures. We donot expect to make co-investments, or otherwise compete for investment opportunities, with Fund IV because its focus andinvestment strategy differ from our own. However, we do expect to make co-investments with Fund V given its similar investmentstrategy.As a BDC, we are substantially limited in our ability to co-invest in privately negotiated transactions with affiliated fundsunless we obtain an exemptive order from the SEC. On September 10, 2015, we, Fund II, Fund III, Fund V, and the InvestmentAdvisor filed an application for exemptive relief with the SEC to permit an investment fund and one or more other affiliatedinvestment funds, including future affiliated investment funds, to participate in the same investment opportunities through aproposed co-investment program where such participation would otherwise be prohibited under the 1940 Act. On June 1, 2016,the SEC issued an order permitting this relief. This exemptive relief is subject to certain conditions designed to ensure that theparticipation by one investment fund in a co-investment transaction would not be on a basis different from or less advantageousthan that of other affiliated investment funds.In the ordinary course of business, we may enter into transactions with portfolio companies that may be considered relatedparty transactions. In order to ensure that we do not engage in any prohibited transactions with any persons affiliated with us, wehave implemented certain written policies and procedures whereby our executive officers screen each of our transactions for anypossible affiliations between the proposed portfolio investment and us, companies controlled by us or our executive officers anddirectors. We will not enter into any agreements unless and until we are satisfied that doing so will not raise concerns under the1940 Act or, if such concerns exist, we have taken appropriate actions to seek review and approval by our Board or exemptiverelief for such transaction. Our Board will review these procedures on an annual basis.The investment committee and other investment professionals of Capitala Investment Advisors may, from time to time, possessmaterial non-public information about or related to our portfolio companies, limiting our investment discretion.Members of our Investment Advisor’s investment committee and other investment professionals of the Investment Advisormay serve as directors of, or in a similar capacity to, portfolio companies in which we invest. In the event that material nonpublicinformation is obtained with respect to such companies, or we become subject to trading restrictions under the internal tradingpolicies of those companies or as a result of applicable law or regulations, we could be prohibited for a period of time frompurchasing or selling the securities of such companies, and this prohibition may have an adverse effect on us.The involvement of our interested directors in the valuation process may create conflicts of interest.We make many of our portfolio investments in the form of loans and securities that are not publicly traded and for which nomarket-based price quotation is available. As a result, our Board determines the fair value of these loans and securities in goodfaith as described in the section titled “Valuation of Investments” in Note 2 to our Consolidated Financial Statements. Inconnection with that determination, investment professionals from the Investment Advisor may provide our Board with valuationsbased upon the most recent portfolio company financial statements available and projected financial results of each portfoliocompany. While the valuation for certain portfolio investments is reviewed by an independent valuation firm quarterly, theultimate determination of fair value is made by our Board, including our interested directors, and not by such third-party valuationfirm. The participation of the Investment Advisor’s investment professionals in our valuation process could result in conflicts ofinterest as the Investment Advisor’s management fee is based, in part, on the value of our gross assets, and its incentive fees will bebased, in part, on realized gains and realized and unrealized losses.34  TABLE OF CONTENTSThe terms of the Investment Advisory Agreement with Capitala Investment Advisors and the Administration Agreement with ourAdministrator were not negotiated on an arm’s length basis and may not be as favorable to us as if they had been negotiatedwith an unaffiliated third-party, including an incentive fee structure that may induce Capitala Investment Advisors to pursuespeculative investments, and to use leverage when it may be unwise to do so.The Investment Advisory Agreement and the Administration Agreement were negotiated between related parties.Consequently, their terms, including fees payable to the Investment Advisor and the Administrator, may not be as favorable to usas if they had been negotiated with an unaffiliated third-party.The incentive fee payable by us to the Investment Advisor may create an incentive for the Investment Advisor to pursueinvestments on our behalf that are riskier or more speculative than would be the case in the absence of such compensationarrangement. The incentive fee payable to our Investment Advisor is calculated based on a percentage of our return on investedcapital. This may encourage our Investment Advisor to use leverage to increase the return on our investments. Under certaincircumstances, the use of leverage may increase the likelihood of default, which would impair the value of our common stock. Inaddition, our Investment Advisor receives the incentive fee based, in part, upon net capital gains realized on our investments.Unlike that portion of the incentive fee based on income, there is no hurdle rate applicable to the portion of the incentive feebased on net capital gains. As a result, the Investment Advisor may have a tendency to invest more capital in investments that arelikely to result in capital gains as compared to income-producing securities. Such a practice could result in our investing in morespeculative securities than would otherwise be the case, which could result in higher investment losses, particularly duringeconomic downturns.Although we currently do not anticipate doing so, we may invest, to the extent permitted by law, in the securities andinstruments of other investment companies, including private funds, and, to the extent we so invest, will bear our ratable share ofany such investment company’s expenses, including management and performance fees. We also remain obligated to paymanagement and incentive fees to our Investment Advisor with respect to the assets invested in the securities and instruments ofother investment companies. With respect to each of these investments, each of our stockholders will bear his or her share of themanagement and our Investment Advisor’s incentive fee as well as indirectly bearing the management and performance fees andother expenses of any investment companies in which we invest.Capitala Investment Advisors’ liability is limited under the Investment Advisory Agreement, and we have agreed to indemnifyCapitala Investment Advisors against certain liabilities, which may lead Capitala Investment Advisors to act in a riskiermanner on our behalf than it would when acting for its own account.Under the Investment Advisory Agreement, the Investment Advisor has not assumed any responsibility to us other than torender the services called for under that agreement. It is not responsible for any action of our Board in following or declining tofollow the Investment Advisor’s advice or recommendations. Under the Investment Advisory Agreement, the Investment Advisor,its officers, members and personnel, and any person controlling or controlled by the Investment Advisor are not liable to us, anysubsidiary of ours, our directors, our stockholders or any subsidiary’s stockholders or partners for acts or omissions performed inaccordance with and pursuant to the Investment Advisory Agreement, except those resulting from acts constituting grossnegligence, willful misfeasance, bad faith or reckless disregard of the duties that the Investment Advisor owes to us under theInvestment Advisory Agreement. In addition, as part of the Investment Advisory Agreement, we have agreed to indemnify theInvestment Advisor and each of its officers, directors, members, managers and employees from and against any claims or liabilities,including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our business andoperations or any action taken or omitted on our behalf pursuant to authority granted by the Investment Advisory Agreement,except where attributable to gross negligence, willful misfeasance, bad faith or reckless disregard of such person’s duties under theInvestment Advisory Agreement. These protections may lead the Investment Advisor to act in a riskier manner when acting on ourbehalf than it would when acting for its own account.35  TABLE OF CONTENTSA general increase in interest rates will likely have the effect of making it easier for our Investment Advisor to receive incentivefees, without necessarily resulting in an increase in our net earnings.Under the structure of our Investment Advisory Agreement with our Investment Advisor, any general increase in interest rateswill likely have the effect of making it easier for our Investment Advisor to meet the quarterly hurdle rate for payment of incomeincentive fees under the Investment Advisory Agreement without any additional increase in relative performance on the part ofour Investment Advisor. In addition, in view of the catch-up provision applicable to income incentive fees under the InvestmentAdvisory Agreement, our Investment Advisor could potentially receive a significant portion of the increase in our investmentincome attributable to such a general increase in interest rates. If that were to occur, our increase in net earnings, if any, wouldlikely be significantly smaller than the relative increase in our Investment Advisor’s income incentive fee resulting from such ageneral increase in interest rates.PIK interest payments we receive will increase our assets under management and, as a result, will increase the amount of basemanagement fees and incentive fees payable by us to Capitala Investment Advisors.Certain of our debt investments contain provisions providing for the payment of contractual PIK interest. Because PIK interestresults in an increase in the size of the loan balance of the underlying loan, the receipt by us of PIK interest will have the effect ofincreasing our assets under management. As a result, because the base management fee that we pay to the Investment Advisor isbased on the value of our gross assets, the receipt by us of PIK interest will result in an increase in the amount of the basemanagement fee payable by us. In addition, any such increase in a loan balance due to the receipt of PIK interest will cause suchloan to accrue interest on the higher loan balance, which will result in an increase in our pre-incentive fee net investment incomeand, as a result, an increase in incentive fees that are payable by us to the Investment Advisor.Capitala Investment Advisors has the right to resign on 60 days’ notice, and we may not be able to find a suitable replacementwithin such time, resulting in a disruption in our operations that could adversely affect our financial condition, business andresults of operations.Our Investment Advisor has the right, under the Investment Advisory Agreement, to resign at any time on 60 days’ writtennotice, whether we have found a replacement or not. If our Investment Advisor resigns, we may not be able to find a newinvestment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services onacceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption,our financial condition, business and results of operations as well as our ability to pay distributions are likely to be adverselyaffected and the market price of our shares may decline. In addition, the coordination of our internal management and investmentactivities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executiveshaving the expertise possessed by our Investment Advisor and its affiliates. Even if we are able to retain comparable management,whether internal or external, the integration of such management and their lack of familiarity with our investment objective mayresult in additional costs and time delays that may adversely affect our financial condition, business and results of operations.Capitala Investment Advisors may not be able to achieve the same or similar returns as those achieved by its investment teamwhile they were employed at prior positions.Although in the past Mr. Alala and other members of our Investment Advisor’s investment team have held senior positions at anumber of investment firms, including the Legacy Funds, their track record and achievements are not necessarily indicative offuture results that will be achieved by our Investment Advisor. We cannot assure you that we will be able to achieve the resultsrealized by prior vehicles managed by our Investment Advisor’s investment team, including the Legacy Funds.Any failure on our part to maintain our status as a BDC would reduce our operating flexibility.We have elected to be regulated as a BDC under the 1940 Act. The 1940 Act imposes numerous constraints on the operationsof BDCs. For example, BDCs are required to invest at least 70% of their gross assets in specified types of securities, primarily inprivate companies or thinly traded U.S. public companies,36  TABLE OF CONTENTScash, cash equivalents, U.S. government securities and other high quality debt investments that mature in one year or less.Furthermore, any failure to comply with the requirements imposed on BDCs by the 1940 Act could cause the SEC to bring anenforcement action against us and/or expose us to claims of private litigants. In addition, upon approval of a majority of ourstockholders, we may elect to withdraw our status as a BDC. If we decide to withdraw our election, or if we otherwise fail toqualify, or maintain our qualification, as a BDC, we may be subject to the substantially greater regulation under the 1940 Act as aclosed-end investment company. Compliance with such regulations would significantly decrease our operating flexibility andcould significantly increase our costs of doing business.Regulations governing our operation as a BDC affect our ability to raise additional capital and the way in which we do so. As aBDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage.We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we referto collectively as “senior securities,” up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act,we are permitted, as a BDC, to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act,equals at least 200% of gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance ofsenior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sella portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when suchsales may be disadvantageous. Also, any amounts that we use to service our indebtedness would not be available for distributionsto our common stockholders. Furthermore, as a result of issuing senior securities, we would also be exposed to typical risksassociated with leverage, including an increased risk of loss.As of December 31, 2016, we had $170.7 million of outstanding SBA-guaranteed debentures, $113.4 million of 7.125% fixedrate notes due 2021 (the “Notes”) outstanding and $44.0 million outstanding under the Credit Facility that provides forborrowings of up to $120.0 million on a revolving basis and may be increased up to $150.0 million pursuant to its “accordion”feature. We have received an exemptive order from the SEC granting relief from the asset coverage requirements for certainindebtedness issued by Fund II and Fund III as SBICs. If we issue preferred stock, the preferred stock would rank “senior” tocommon stock in our capital structure, preferred stockholders would have separate voting rights on certain matters and might haveother rights, preferences, or privileges more favorable than those of our common stockholders, and the issuance of preferred stockcould have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium pricefor holders of our common stock or otherwise be in your best interest.We generally may not issue and sell our common stock at a price below net asset value per share. We may, however, sell ourcommon stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value pershare of our common stock if our Board determines that such sale is in our best interests and in the best interests of ourstockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and soldmay not be less than a price that, in the determination of our Board, closely approximates the market value of such securities (lessany commission or discount). If we raise additional funds by issuing more common stock or senior securities convertible into, orexchangeable for, our common stock, then the percentage ownership of our stockholders at that time will decrease, and you mayexperience dilution.At our 2016 Annual Stockholders Meeting, subject to certain determinations required to be made by our Board, ourstockholders approved our ability to sell or otherwise issue shares of our common stock, not exceeding 25% of our thenoutstanding common stock immediately prior to each such offering, at a price below the then current net asset value per shareduring a period beginning on May 3, 2016 and expiring on the earlier of the one year anniversary of the date of the 2016 AnnualStockholders Meeting and the date of our 2017 Annual Stockholders Meeting, which is expected to be held in May 2017.In certain limited circumstances, pursuant to an SEC staff interpretation, we may also issue shares at a price below net assetvalue in connection with a transferable rights offering so long as: (1) the offer does not discriminate among stockholders; (2) weuse our best efforts to ensure an adequate trading market exists for37  TABLE OF CONTENTSthe rights; and (3) the ratio of the offering does not exceed one new share for each three rights held. If we raise additional funds byissuing more common stock or senior securities convertible into, or exchangeable for, our common stock, the percentageownership of our stockholders at that time would decrease and they may experience dilution. Moreover, we can offer no assurancethat we will be able to issue and sell additional equity securities in the future, on favorable terms or at all.We borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing inus, and the calculation of our base management fee, which is based upon our gross assets, may have the effect of encouragingour Investment Advisor to utilize leverage when it may not be advisable to do so.The use of leverage magnifies the potential for gain or loss on amounts invested and, therefore, increases the risks associatedwith investing in our securities. In addition to the existing SBA-guaranteed debentures, the Notes and the Credit Facility, we mayborrow from and issue senior debt securities to banks, insurance companies and other lenders in the future. Holders of these seniorsecurities will have fixed dollar claims on our assets that are superior to the claims of our common stockholders, and we wouldexpect such lenders to seek recovery against our assets in the event of a default. If the value of our assets decreases, leverage wouldcause net asset value to decline more sharply than it otherwise would have had we not been leveraged. Similarly, any decrease inour income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could alsonegatively affect our ability to make distributions on our common stock. Leverage is generally considered a speculativeinvestment technique. Our ability to service any debt that we incur will depend largely on our financial performance and will besubject to prevailing economic conditions and competitive pressures. Moreover, as the management fee payable to our InvestmentAdvisor will be payable based on our gross assets, including those assets acquired through the use of leverage, our InvestmentAdvisor will have a financial incentive to incur leverage that may not be consistent with our stockholders’ interests. In addition,our common stockholders will bear the burden of any increase in our expenses as a result of leverage, including any increase in themanagement fee payable to our Investment Advisor.The Credit Facility, and any other credit facility into which we may enter, imposes financial and operating covenants thatrestrict our business activities, including limitations that could hinder our ability to finance additional loans and investments or tomake the distributions required to maintain our status as a RIC under the Code.To the extent we borrow money to finance our investments, changes in interest rates will affect our cost of capital and netinvestment income.To the extent we borrow money to finance our investments; our net investment income will depend, in part, upon thedifference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we can offer noassurance that a significant change in market interest rates will not have a material adverse effect on our net investment income inthe event we borrow money to finance our investments. In periods of rising interest rates, our cost of funds would increase, whichcould reduce our net investment income. We expect that our long-term fixed-rate investments will be financed primarily withequity and long-term debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest ratefluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. OurInvestment Advisor does not have significant experience with utilizing these techniques and did not implement these techniquesto any significant extent with our portfolio. If we do not implement these techniques properly, we could experience losses on ourhedging positions, which could be material.A disruption in the capital markets and the credit markets could impair our ability to raise capital and negatively affect ourbusiness.As a BDC, we have to maintain our ability to raise additional capital for investment purposes. Without sufficient access to thecapital markets or credit markets, we may be forced to curtail our business operations or we may not be able to pursue newbusiness opportunities.38  TABLE OF CONTENTSIn the recent past, the capital markets and the credit markets have experienced periods of extreme volatility and disruptionand, accordingly, there has been and may continue to be uncertainty in the financial markets in general. Continuing U.S. debtceiling and budget deficit concerns, including automatic spending cuts stemming from sequestration, together with deterioratingsovereign debt conditions in Europe, have increased the possibility of additional credit-rating downgrades and economicslowdowns, or a recession in the U.S. The impact of this or any further downgrades to the U.S. government’s sovereign credit ratingor its perceived creditworthiness could adversely affect the U.S. and global financial markets and economic conditions. Thesedevelopments, along with the European sovereign debt crisis, could cause interest rates and borrowing costs to rise, which maynegatively impact our ability to access the debt markets on favorable terms. Continued adverse economic conditions could have amaterial adverse effect on our business, financial condition and results of operations. Any further disruptive conditions in thefinancial industry and the impact of new legislation in response to those conditions could restrict our business operations andcould adversely impact our results of operations and financial condition.If the fair value of our assets declines substantially, we may fail to maintain the asset coverage ratios imposed upon us by the1940 Act. Any such failure would affect our ability to issue senior securities, including borrowings, and pay dividends, whichcould materially impair our business operations. Our liquidity could be impaired further by an inability to access the capitalmarkets or to consummate new borrowing facilities to provide capital for normal operations, including new originations. In recentyears, reflecting concern about the stability of the financial markets, many lenders and institutional investors have reduced orceased providing funding to borrowers.We have fully drawn on our SBA-guaranteed debentures and, absent changes to legislation or regulation, may not makeborrowings in excess of their aggregate $170.7 million of SBA-guaranteed debentures outstanding as of December 31, 2016. Wealso had approximately $113.4 million of the Notes outstanding as of December 31, 2016. In addition, as of December 31, 2016,we had approximately $44.0 million outstanding under the Credit Facility that provides for borrowings of up to $120.0 million ona revolving basis and may be increased up to $150.0 million pursuant to its “accordion” feature. If we are unable to secureadditional debt financing on commercially reasonable terms, our liquidity could be reduced significantly. If we are unable torepay amounts outstanding under any debt facilities we may obtain and are declared in default or are unable to renew or refinancethese facilities, we may not be able to operate our business in the normal course. These situations may arise due to circumstancesthat we may be unable to control, such as lack of access to the credit markets, a severe decline in the value of the U.S. dollar,another economic downturn or an operational problem that affects third parties or us, and could materially damage our business.You should also be aware that a rise in the general level of interest rates can be expected to lead to higher interest ratesapplicable to our debt investments. Accordingly, an increase in interest rates would make it easier for us to meet or exceed theincentive fee hurdle rate and may result in a substantial increase of the amount of incentive fees payable to our InvestmentAdvisor with respect to our pre-incentive fee net investment income.Global economic, political and market conditions may adversely affect our business, results of operations and financialcondition, including our revenue growth and profitability.The current worldwide financial market situation, as well as various social and political tensions in the U.S. and around theworld, may contribute to increased market volatility, may have long-term effects on the U.S. and worldwide financial markets, andmay cause economic uncertainties or deterioration in the United States and worldwide. The U.S. and global capital marketsexperienced extreme volatility and disruption during the economic downturn that began in mid-2007, and the U.S. economy wasin a recession for several consecutive calendar quarters during the same period. In 2010, a financial crisis emerged in Europe,triggered by high budget deficits and rising direct and contingent sovereign debt, which created concerns about the ability ofcertain nations to continue to service their sovereign debt obligations. Risks resulting from such debt crisis, including anyausterity measures taken in exchange for bailout of certain nations, and any future debt crisis in Europe or any similar crisiselsewhere could have a detrimental impact on the global economic recovery, sovereign and non-sovereign debt in certaincountries and the financial condition of financial institutions generally. In June 2016, the United Kingdom held a referendum inwhich voters approved an exit from the European Union (“Brexit”), and, accordingly, on February 1, 2017, the39  TABLE OF CONTENTSU.K. Parliament voted in favor of allowing the U.K. government to begin the formal process of Brexit. Brexit created political andeconomic uncertainty and instability in the global markets (including currency and credit markets), and especially in the UnitedKingdom and the European Union, and this uncertainty and instability may last indefinitely. There is continued concern aboutnational-level support for the Euro and the accompanying coordination of fiscal and wage policy among European Economic andMonetary Union member countries. In addition, the fiscal and monetary policies of foreign nations, such as Russia and China, mayhave a severe impact on the worldwide and U.S. financial markets.As a result of the 2016 U.S. election, the Republican Party currently controls both the executive and legislative branches ofgovernment, which increases the likelihood that legislation may be adopted that could significantly affect the regulation of U.S.financial markets. Areas subject to potential change, amendment or repeal include the Dodd-Frank Act and the authority of theFederal Reserve and the Financial Stability Oversight Council. The U.S. may also potentially withdraw from or renegotiate varioustrade agreements and take other actions that would change current trade policies of the U.S. We cannot predict which, if any, ofthese actions will be taken or, if taken, their effect on the financial stability of the U.S. Such actions could have a significantadverse effect on our business, financial condition and results of operations. We cannot predict the effects of these or similarevents in the future on the U.S. economy and securities markets or on our investments. We monitor developments and seek tomanage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that wewill be successful in doing so.Further downgrades of the U.S. credit rating, impending automatic spending cuts, another government shutdown or a failure toraise the statutory debt limit of the United States could negatively impact our liquidity, financial condition and earnings.Recent U.S. debt ceiling and budget deficit concerns have increased the possibility of additional credit-rating downgrades andeconomic slowdowns, or a recession in the U.S. In the future, the U.S. government may not be able to meet its debt paymentsunless the federal debt ceiling is raised. The federal debt limit has been suspended since November 2, 2015, but the limit is set tobe reinstated on March 15, 2017. If legislation increasing the debt ceiling is not enacted, as needed, and the debt ceiling isreached, the U.S. federal government may stop or delay making payments on its obligations, which could negatively impact theU.S. economy and our portfolio companies. In addition, disagreement over the federal budget has caused the U.S. federalgovernment to shut down for periods of time. Continued adverse political and economic conditions could have a material adverseeffect on our business, financial condition and results of operations.We may experience fluctuations in our quarterly and annual results.We may experience fluctuations in our quarterly and annual operating results due to a number of factors, including our abilityor inability to make investments in companies that meet our investment criteria, any sales, dispositions or liquidity events of ourportfolio companies, the interest rate payable on the debt securities we acquire, the level of portfolio dividend and fee income, thelevel of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree towhich we encounter competition in our markets and general economic conditions. Given that the portfolio is concentrated,distributions, dispositions or liquidity events affecting a portfolio company in which we own a significant position may adverselyaffect our net asset value and results of operations. As a result of these factors, results for any period should not be relied upon asbeing indicative of performance in future periods.Our Board may change our investment objective, operating policies and strategies without prior notice or stockholder approval,the effects of which may be adverse.Our Board has the authority to modify or waive our investment objective, operating policies, investment criteria and strategieswithout prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies,investment criteria and strategies would have on our business, net asset value, operating results and value of our stock. However,the effects might be adverse, which could negatively impact our ability to make distributions and cause you to lose all or part ofyour investment.40  TABLE OF CONTENTSWe will be subject to corporate-level U.S. federal income tax if we are unable to qualify or maintain our qualification as a RICunder the Code.Although we have elected to be treated as a RIC beginning with our taxable year ended August 31, 2014, no assurance can begiven that we will be able to continue to qualify for and maintain our qualification as a RIC under the Code. To continue tomaintain our qualification as a RIC under the Code, we must meet the following source-of-asset diversification, and distributionrequirements.The income source requirement will be satisfied if we obtain at least 90% of our income for each year from dividends, interest,gains from the sale or other disposition of stock or securities or similar sources. The asset diversification requirement will besatisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable year. Failure to meet thoserequirements may result in our having to dispose of certain investments quickly in order to prevent the loss of our qualification asa RIC under the Code. Because most of our investments will be in private companies, and therefore will be relatively illiquid, anysuch dispositions could be made at disadvantageous prices and could result in substantial losses.The annual distribution requirement for a RIC will be satisfied if we distribute to our stockholders on an annual basis at least90% of our net ordinary income and net short-term capital gains in excess of our net long-term capital losses, if any. Because wemay use debt financing, we are subject to certain asset coverage ratio requirements under the 1940 Act, as well as future financialcovenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributionsnecessary to satisfy the distribution requirement. If we are unable to obtain cash from other sources, we could fail to qualify as aRIC under the Code.If we fail to qualify as a RIC under the Code for any reason and remain or become subject to corporate-level U.S. federalincome tax on all of our income, the resulting corporate taxes could substantially reduce our net assets, the amount of incomeavailable for distribution or reinvestment and the amount of our distributions.We may not be able to pay our stockholders distributions, our distributions may not grow over time and a portion of ourdistributions may be a return of capital.We intend to pay distributions to our stockholders out of assets legally available for distribution. We cannot assure you thatwe will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases incash distributions. Our ability to pay distributions might be adversely affected by, among other things, the impact of one or moreof the risk factors described herein. In addition, the inability to satisfy the asset coverage test applicable to us as a BDC can limitour ability to pay distributions. All distributions will be paid at the discretion of our Board and will depend on our earnings, ourfinancial condition, maintenance of our RIC status, compliance with applicable BDC regulations and such other factors as ourBoard may deem relevant from time to time. We cannot assure you that we will pay distributions to our stockholders in the future.In the event we liquidate or dispose of a significant equity position in our portfolio, we may distribute a special dividend relatingto the realized capital gains from such investment in order to minimize to the greatest extent possible our U.S. federal income orexcise tax liability.When we make distributions, we will be required to determine the extent to which such distributions are paid out of current oraccumulated earnings and profits. Distributions in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital, which is a return of a portion of a shareholder’s original investment in our common stock, to the extent ofan investor’s basis in our stock and, assuming that an investor holds our stock as a capital asset, thereafter as a capital gain.Generally, a non-taxable return of capital will reduce an investor’s basis in our stock for U.S. federal income tax purposes, whichwill result in higher tax liability when the stock is sold.We may have difficulty paying our required distributions if we recognize income before or without receiving cash representingsuch income.For U.S. federal income tax purposes, we include in our taxable income certain amounts that we have not yet received in cash,such as PIK interest or original issue discount, which may arise if we receive warrants in connection with the origination of a loanor possibly in other circumstances. Such original issue discount or increases in loan balances as a result of contractual PIKarrangements are included in our taxable income41  TABLE OF CONTENTSbefore we receive any corresponding cash payments. We also may be required to include in our taxable income certain otheramounts that we will not receive in cash.Since, in certain cases, we may recognize taxable income before or without receiving corresponding cash payments, we mayhave difficulty meeting the annual distribution requirement necessary to maintain our qualification as a RIC under the Code.Accordingly, to satisfy our RIC distribution requirements, we may have to sell some of our investments at times and/or at prices wewould not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities. If we are not ableto obtain cash from other sources, we may fail to qualify as a RIC and thus become subject to corporate-level U.S. federal incometax.Capitala Investment Advisors is not obligated to reimburse us for any part of the incentive fee it receives that is based onaccrued income that we never receive.Part of the incentive fee payable by us to our Investment Advisor that relates to our net investment income is computed andpaid on income that may include interest that has been accrued but not yet received in cash, such as market discount, debtinstruments with PIK interest, preferred stock with PIK dividends and zero coupon securities. If a portfolio company defaults on aloan that is structured to provide accrued interest, it is possible that accrued interest previously used in the calculation of theincentive fee will become uncollectible. Our Investment Advisor will not be under any obligation to reimburse us for any part ofthe incentive fees it received that was based on accrued income that we never receive as a result of a default by an entity on theobligation that resulted in the accrual of such income.We may in the future choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of thecash you receive.We may distribute taxable dividends that are payable in part in our stock. In accordance with certain applicable Treasuryregulations and private letter rulings issued by the Internal Revenue Service (“IRS”), a RIC may treat a distribution of its ownstock as fulfilling the RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in eithercash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be atleast 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing toreceive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will anystockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash. If these and certain otherrequirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount ofcash that could have been received instead of stock. Taxable stockholders receiving such dividends (whether received in cash, ourstock, or a combination thereof) will be required to include the full amount of the dividend as ordinary income (or as long-termcapital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent of our current andaccumulated earnings and profits for U.S. federal income tax purposes. As a result, a U.S. stockholder may be required to pay taxwith respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in orderto pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on themarket price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required towithhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock.In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed ondividends, it may put downward pressure on the trading price of our stock.If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately reportour financial results or prevent fraud. As a result, stockholders and noteholders could lose confidence in our financial and otherpublic reporting, which would harm our business.Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together withadequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improvedcontrols, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition,any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), or thesubsequent testing by our independent registered public accounting firm (when undertaken, as noted below), may revealdeficiencies42  TABLE OF CONTENTSin our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective orretroactive changes to our consolidated financial statements or identify other areas for further attention or improvement. Inferiorinternal controls could also cause investors to lose confidence in our reported financial information, which could have a negativeeffect on our business.We are required to disclose changes made in our internal controls and procedures over financial reporting on a quarterly basisand our management is required to assess the effectiveness of these controls annually. However, for as long as we are an “emerginggrowth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to theeffectiveness of our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We could be an“emerging growth company” for up to five years from the date of our IPO.An independent assessment of the effectiveness of our internal controls could detect problems that our management’sassessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements andrequire us to incur the expense of remediation. As a public company, may incur significant additional expenses in the near term,which may negatively impact our financial performance and our ability to make distributions to our stockholders. This processalso will result in a diversion of management’s time and attention. We cannot be certain as to the timing of completion of anyevaluation, testing and remediation actions or the impact of the same on our operations, and we may not be able to ensure that theprocess is effective or that our internal controls over financial reporting are or will be effective in a timely manner. In the eventthat we are unable to maintain or achieve compliance with Section 404 of the Sarbanes-Oxley Act and related rules, the marketprice of our common stock may be adversely affected.New and pending legislation may allow us to incur additional leverage.As a BDC, under the 1940 Act generally we are not permitted to incur indebtedness unless immediately after such borrowingwe have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of ourtotal assets or we may borrow an amount equal to 100% of net assets). Legislation introduced in the U.S. House of Representatives,if passed, would modify this section of the 1940 Act and increase the amount of debt that BDCs may incur by modifying the assetcoverage percentage from 200% to 150%. In addition, in December 2015, the 2016 omnibus spending bill approved by Congressand signed into law by the President increased the amount of SBA-guaranteed debentures that affiliated SBIC funds can haveoutstanding from $225.0 million to $350.0 million, subject to SBA approval. This new legislation may allow us to issueadditional SBIC debentures above the $225.0 million of SBA-guaranteed debentures previously permitted pending applicationfor and receipt of additional SBIC licenses. If we incur this additional indebtedness in the future, your risk of an investment in oursecurities may increase.Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our businessstrategy.We and our portfolio companies will be subject to applicable local, state and federal laws and regulations. New legislationmay be enacted or new interpretations, rulings or regulations could be adopted, including those governing the types ofinvestments we are permitted to make, any of which could harm us and our stockholders, potentially with retroactive effect.Additionally, any changes to the laws and regulations governing our operations relating to permitted investments may cause us toalter our investment strategy in order to avail ourselves of new or different opportunities. Such changes could result in materialdifferences to the strategies and plans set forth herein and may result in our investment focus shifting from the areas of expertise ofour Investment Advisor’s investment team to other types of investments in which the investment team may have less expertise orlittle or no experience. Thus, any such changes, if they occur, could have a material adverse effect on our results of operations andthe value of your investment. In addition, any change to the SBA’s current debenture SBIC program could have a significantimpact on our ability to obtain lower-cost financing and, therefore, our competitive advantage over other finance companies.Over the last several years, there has been an increase in regulatory attention to the extension of credit outside of thetraditional banking sector, raising the possibility that some portion of the non-bank financial sector will be subject to newregulation. While it cannot be known at this time whether these regulations will43  TABLE OF CONTENTSbe implemented or what form they will take, increased regulation of non-bank credit extension could negatively impact ouroperations, cash flows or financial condition, impose additional costs on us, intensify the regulatory supervision of us or otherwiseadversely affect our business.Two of our wholly owned subsidiaries are licensed by the U.S. Small Business Administration, and as a result, we are subject toSBA regulations.Fund II and Fund III, which became our wholly owned subsidiaries after the completion of the Formation Transactions, arelicensed to act as SBICs and are regulated by the SBA. As of December 31, 2016, Fund II and Fund III portfolio companiesaccounted for most of our aggregate portfolio. The SBIC licenses allow our SBIC subsidiaries to borrow funds by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures. The SBAregulations require, among other things, that a licensed SBIC be examined periodically and audited by an independent auditor todetermine the SBIC’s compliance with the relevant SBA regulations.Under current SBA regulations, a licensed SBIC may provide capital to those entities that have a tangible net worth notexceeding $18.0 million and an average annual net income after U.S. federal income taxes not exceeding $6.0 million for the twomost recent fiscal years. In addition, a licensed SBIC must devote 25.0% of its investment activity to those entities that have atangible net worth not exceeding $6.0 million and an average annual net income after U.S. federal income taxes not exceeding$2.0 million for the two most recent fiscal years. The SBA regulations also provide alternative size standard criteria to determineeligibility, which depend on the industry in which the business is engaged and are based on factors such as the number ofemployees and gross sales. The SBA regulations permit licensed SBICs to make long term loans to small businesses, invest in theequity securities of such businesses and provide them with consulting and advisory services. The SBA also places certainlimitations on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs from providing funds forcertain purposes or to businesses in a few prohibited industries. Compliance with SBA requirements may cause a Legacy Fund toforego attractive investment opportunities that are not permitted under SBA regulations.The SBA also prohibits, without prior SBA approval, a “change of control” of an SBIC or transfers that would result in anyperson (or a group of persons acting in concert) owning 10.0% or more of a class of capital stock of a licensed SBIC. If Fund II orFund III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit orprohibit such Fund’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit such Fund frommaking new investments. Such actions by the SBA would, in turn, negatively affect us because Fund II and Fund III are our whollyowned subsidiaries. Each of Fund II and Fund III was in compliance with the terms of the SBA’s leverage requirements as ofDecember 31, 2016 as a result of having sufficient capital as defined under the SBA regulations.Our wholly owned SBIC subsidiaries may be unable to make distributions to us that will enable us to meet or maintain RICstatus, which could result in the imposition of a corporate-level U.S. federal income tax.In order for us to continue to qualify for RIC tax treatment and to minimize corporate-level U.S. federal income taxes, we willbe required to distribute substantially all of our net ordinary income and net capital gain income, including income from certain ofour subsidiaries, which includes the income from our SBIC subsidiaries. We will be partially dependent on our SBIC subsidiariesfor cash distributions to enable us to meet the RIC distribution requirements. Our SBIC subsidiaries may be limited by the SmallBusiness Investment Act of 1958, and SBA regulations governing SBICs, from making certain distributions to us that may benecessary to maintain our status as a RIC. We may have to request a waiver of the SBA’s restrictions for our SBIC subsidiaries tomake certain distributions to maintain our RIC status. We cannot assure you that the SBA will grant such waiver and if our SBICsubsidiaries are unable to obtain a waiver, compliance with the SBA regulations may result in loss of RIC tax treatment and aconsequent imposition of a corporate-level U.S. federal income tax on all of our income.44  TABLE OF CONTENTSOur business is subject to increasingly complex corporate governance, public disclosure and accounting requirements that arecostly and could adversely affect our business and financial results.As a publicly traded company, we incur legal, accounting and other expenses, including costs associated with the periodicreporting requirements applicable to a company whose securities are registered under the Securities Exchange Act of 1934, asamended, or the Exchange Act, as well as additional corporate governance requirements, including requirements under theSarbanes Oxley Act, and other rules implemented by the SEC. Also, we are subject to changing rules and regulations of federal andstate government as well as the stock exchange on which our common stock is listed. These entities, including the PublicCompany Accounting Oversight Board, the SEC and the NASDAQ Stock Market, have issued a significant number of new andincreasingly complex requirements and regulations over the course of the last several years and continue to develop additionalregulations and requirements in response to laws enacted by Congress. Our efforts to comply with these existing requirements, orany revised or amended requirements, have resulted in, and are likely to continue to result in, an increase in expenses and adiversion of management’s time from other business activities.We received an exemptive order from the SEC exempting us from certain provisions of the 1940 Act and the Exchange Act.On June 10, 2014, we received an exemptive order from the SEC exempting us, Fund II and Fund III from certain provisions ofthe 1940 Act (including an exemptive order granting relief from the asset coverage requirements for certain indebtedness issuedby Fund II and Fund III as SBICs) and from certain reporting requirements mandated by the Exchange Act with respect to Fund IIand Fund III. We intend to comply with the conditions of the order. As a result, we will generally be permitted to incur a greateramount of leverage relative to our total assets and net asset value, which may expose us to a greater degree of risk.We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, inturn, negatively affect the market price of our common stock and our ability to make distributions to our stockholders.Our business is highly dependent on the communications and information systems of the Investment Advisor. Certain of thesesystems are provided to the Investment Advisor by third-party service providers. Any failure or interruption of such systems,including as a result of the termination of an agreement with any such third-party service provider, sudden electrical ortelecommunications outages, natural disasters such as earthquakes, tornadoes, and hurricanes, events arising from local or largerscale political or social matters, including terrorist attacks, and cyber-attacks could cause delays or other problems in ouractivities. Any of the above, in turn, could have a material adverse effect on our operating results and negatively affect the marketprice of our common stock and our ability to make distributions to our stockholders.Terrorist attacks, acts of war or natural disasters may affect the market for our common stock, impact the businesses in whichwe invest and harm our business, operating results and financial condition.Terrorist acts, acts of war or natural disasters may disrupt our operations, as well as the operations of the businesses in which weinvest. Such acts have created, and continue to create, economic and political uncertainties and have contributed to globaleconomic instability. Future terrorist activities, military or security operations, or natural disasters could further weaken thedomestic/global economies and create additional uncertainties, which may negatively impact the businesses in which we investdirectly or indirectly and, in turn, could have a material adverse impact on our business, operating results and financial condition.Losses from terrorist attacks and natural disasters are generally uninsurable.45  TABLE OF CONTENTSTo the extent original issue discount and PIK interest constitute a portion of our income, we will be exposed to typical risksassociated with such income being required to be included in taxable and accounting income prior to receipt of cashrepresenting such income.Our investments may include original issue discount (“OID”) instruments and contractual PIK interest, which representscontractual interest added to a loan balance and due at the end of such loan’s term. To the extent OID or PIK interest constitute aportion of our income, we are exposed to typical risks associated with such income being required to be included in taxable andaccounting income prior to receipt of cash, including the following:•OID instruments may have higher yields, which reflect the payment deferral and credit risk associated with theseinstruments;•OID accruals may create uncertainty about the source of our distributions to stockholders;•OID and PIK instruments may have unreliable valuations because their continuing accruals require continuing judgmentsabout the collectability of the deferred payments and the value of the collateral; and•OID and PIK instruments may represent a higher credit risk than coupon loans.If we cannot obtain additional capital because of either regulatory or market price constraints, we could be forced to curtail orcease our new lending and investment activities, our net asset value could decrease and our level of distributions and liquiditycould be affected adversely.Our ability to secure additional financing and satisfy our financial obligations under indebtedness outstanding from time totime will depend upon our future operating performance, which is subject to the prevailing general economic and credit marketconditions, including interest rate levels and the availability of credit generally, and financial, business and other factors, many ofwhich are beyond our control. The prolonged continuation or worsening of current economic and capital market conditions couldhave a material adverse effect on our ability to secure financing on favorable terms, if at all.If we are unable to obtain additional debt capital, then our equity investors will not benefit from the potential for increasedreturns on equity resulting from leverage to the extent that our investment strategy is successful and we may be limited in ourability to make new commitments or fundings to our portfolio companies.We are an “emerging growth company” under the JOBS Act, and we cannot be certain if the reduced disclosure requirementsapplicable to emerging growth companies will make our securities less attractive to investors.We are and we will remain an “emerging growth company” as defined in the JOBS Act until the earlier of (a) the last day of thefiscal year (i) following the fifth anniversary of the completion of our IPO, (ii) in which we have total annual gross revenue of atleast $1.0 billion, or (iii) in which we are deemed to be a large accelerated filer, which means the market value of our commonstock that is held by non-affiliates exceeds $700 million as of the end of the previous second fiscal quarter, and (b) the date onwhich we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. For so long as we remainan “emerging growth company” we have chosen to take advantage of certain exemptions from various reporting requirements thatare applicable to other public companies that are not “emerging growth companies” including, but not limited to, not beingrequired to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act.In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” may take advantage of theextended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accountingstandards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until thosestandards would otherwise apply to private companies. We have chosen to take advantage of the extended transition period forcomplying with new or revised accounting standards, which may make it more difficult for investors and securities analysts toevaluate us since our financial statements may not be comparable to companies that comply with public company effective datesand may result in less investor confidence.46  TABLE OF CONTENTSBecause of the exemptions from various reporting requirements provided to us as an “emerging growth company” under theJOBS Act and because we will have an extended transition period for complying with new or revised financial accountingstandards, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it.Investors may be unable to compare our business with other companies in our industry if they believe that our financialaccounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when weneed it, our financial condition and results of operations may be materially and adversely affected.Our Board is authorized to reclassify any unissued shares of common stock into one or more classes of preferred stock, whichcould convey special rights and privileges to its owners.Under Maryland General Corporation Law and our charter, our Board is authorized to classify and reclassify any authorizedbut unissued shares of stock into one or more classes of stock, including preferred stock. Prior to the issuance of shares of eachclass or series, our Board will be required by Maryland law and our charter to set the terms, preferences, conversion or other rights,voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemptionfor each class or series. Thus, our Board could authorize the issuance of shares of preferred stock with terms and conditions thatcould have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium pricefor holders of our common stock or otherwise be in their best interest. The cost of any such reclassification would be borne by ourcommon stockholders. Certain matters under the 1940 Act require the separate vote of the holders of any issued and outstandingpreferred stock. For example, holders of preferred stock would vote separately from the holders of common stock on a proposal tocease operations as a BDC. In addition, the 1940 Act provides that holders of preferred stock are entitled to vote separately fromholders of common stock to elect two preferred stock directors. We currently have no plans to issue preferred stock. The issuanceof preferred shares convertible into shares of common stock may also reduce the net income and net asset value per share of ourcommon stock upon conversion, provided, that we will only be permitted to issue such convertible preferred stock to the extentwe comply with the requirements of Section 61 of the 1940 Act, including obtaining common stockholder approval. These effects,among others, could have an adverse effect on your investment in our common stock.Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have anadverse impact on the price of our common stock.The Maryland General Corporation Law and our charter and bylaws contain provisions that may discourage, delay or makemore difficult a change in control of Capitala Finance or the removal of our directors. We are subject to the Maryland BusinessCombination Act, subject to any applicable requirements of the 1940 Act. Our Board has adopted a resolution exempting from theMaryland Business Combination Act any business combination between us and any other person, subject to prior approval ofsuch business combination by our Board, including approval by a majority of our independent directors. If the resolutionexempting business combinations is repealed or our Board does not approve a business combination, the Maryland BusinessCombination Act may discourage third parties from trying to acquire control of us and increase the difficulty of consummatingsuch an offer. Our bylaws exempt from the Maryland Control Share Acquisition Act acquisitions of our stock by any person. If weamend our bylaws to repeal the exemption from the Maryland Control Share Acquisition Act, the Maryland Control ShareAcquisition Act also may make it more difficult for a third-party to obtain control of us and increase the difficulty ofconsummating such a transaction. It is the position of the staff of the SEC’s Division of Investment Management that if a BDCfails to opt-out of the Maryland Control Share Acquisition Act, it acts in a manner inconsistent with Section 18(i) of the 1940 Act.We have also adopted measures that may make it difficult for a third-party to obtain control of us, including provisions of ourcharter classifying our Board in three classes serving staggered three-year terms, and authorizing our Board to classify or reclassifyshares of our stock in one or more classes or series, to cause the issuance of additional shares of our stock, to amend our charterwithout stockholder approval and to increase or decrease the number of shares of stock that we have authority to issue. Theseprovisions, as well as other provisions of our charter and bylaws, may delay, defer or prevent a transaction or a change in controlthat might otherwise be in the best interests of our stockholders.47  TABLE OF CONTENTSThe foregoing provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and toencourage persons seeking to acquire control of us to negotiate first with our Board. However, these provisions may deprive ashareholder of the opportunity to sell such shareholder’s shares at a premium to a potential acquirer. We believe that the benefitsof these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among otherthings, the negotiation of such proposals may improve their terms. Our Board has considered both the positive and negativeeffects of the foregoing provisions and determined that they are in the best interest of our shareholders.The failure in cyber security systems, as well as the occurrence of events unanticipated in the Company’s disaster recoverysystems and management continuity planning or a support failure from external providers during a disaster could impair theCompany’s ability to conduct business effectively.The occurrence of a disaster such as a cyber-attack, a natural catastrophe, an industrial accident, a terrorist attack or war, eventsunanticipated in the Company’s disaster recovery systems, or a support failure from external providers, could have an adverseeffect on the Company’s ability to conduct business and on the Company’s results of operations and financial condition,particularly if those events affect the Company’s computer-based data processing, transmission, storage, and retrieval systems ordestroy data. If a significant number of the Company’s managers were unavailable in the event of a disaster, the Company’s abilityto effectively conduct its business could be severely compromised.Our business relies on secure information technology systems. We depend heavily upon computer systems to performnecessary business functions. These systems are subject to potential attacks, including through adverse events that threaten theconfidentiality, integrity or availability of our information resources (i.e. cyber-attacks). Despite the Company’s implementationof a variety of security measures, its computer systems could be subject to cyber-attacks and unauthorized access, such as physicaland electronic break-ins or unauthorized tampering. Like other companies, the Company may experience threats to its data andsystems, including malware and computer virus attacks, unauthorized access, system failures and disruptions. If one or more ofthese events occurs, it could potentially jeopardize the confidential, proprietary and other information processed and stored in,and transmitted through, the Company’s computer systems and networks, or otherwise cause interruptions or malfunctions in itsoperations, which could result in damage to the Company’s reputation, financial losses, litigation, increased costs, regulatorypenalties and/or customer dissatisfaction or loss.Risks Related to Our InvestmentsOur investments are very risky and highly speculative.We invest primarily in first lien loans, second lien loans, subordinated debt investments and select equity investments issuedby leveraged companies, each of which carries with it a significant degree of risk.First Lien Loans. There is a risk that the collateral securing our loans may decrease in value over time, may be difficult to sellin a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and marketconditions, including as a result of the inability of the portfolio company to raise additional capital, and, in some circumstances,our lien could be subordinated to claims of other creditors. In addition, deterioration in a portfolio company’s financial conditionand prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of thecollateral for the loan. Consequently, the fact that a loan is secured does not guarantee that we will receive principal and interestpayments according to the loan’s terms, or at all, or that we will be able to collect on the loan should we be forced to enforce ourremedies.Second Lien Loans. Our second lien debt investments have a second priority security interest in all or substantially all of theassets of the borrower. As such, other creditors may rank senior to us in the event of an insolvency, which could likely in manycases result in a substantial or complete loss on such investment in the case of such insolvency. This may result in an aboveaverage amount of risk and loss of principal.Subordinated Loans. Our subordinated debt investments are generally subordinated to first lien loans and may be unsecured.As such, other creditors may rank senior to us in the event of an insolvency, which could likely in many cases result in asubstantial or complete loss on such investment in the case of such insolvency. This may result in an above average amount of riskand loss of principal.48  TABLE OF CONTENTSEquity Investments. When we invest in loans, we may acquire equity securities as well. In addition, we may invest directly inthe equity securities of portfolio companies.The equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not beable to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may notbe sufficient to offset any other losses we experience. The portfolio currently has several significant equity positions.Distributions, dispositions, or liquidity events of these investments may affect our results of operations and cause us to have topay a special dividend relating to the realized gains from such investment in order to minimize to the greatest extent possible ourU.S. federal income or excise tax liability.In addition, investing in lower and traditional middle-market companies involves a number of significant risks, including:•these companies may have limited financial resources and may be unable to meet their obligations under their debtsecurities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in thelikelihood of us realizing any guarantees we may have obtained in connection with our investment;•they typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses,which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economicdownturns;•they are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death,disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfoliocompany and, in turn, on us;•they generally have less predictable operating results, may from time to time be parties to litigation, may be engaged inrapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantialadditional capital to support their operations, finance expansion or maintain their competitive position;•they may have difficulty accessing the capital markets to meet future capital needs, which may limit their ability to growor to repay their outstanding indebtedness upon maturity; and•our executive officers, directors and our Investment Advisor may, in the ordinary course of business, be named asdefendants in litigation arising from our investments in the portfolio companies.An investment strategy focused primarily on smaller privately held companies involves a high degree of risk and presentscertain challenges, including the lack of available information about these companies, a dependence on the talents and effortsof only a few key portfolio company personnel and a greater vulnerability to economic downturns.Our portfolio consists primarily of debt and equity investments in smaller privately owned venture capital-backed companies.Investing in venture capital-backed companies involves a number of significant risks. Typically, the debt in which we will investis not initially rated by any rating agency; however, we believe that if such investments were rated, they would be rated belowinvestment grade. Below investment grade securities, which are often referred to as “high yield” or “junk,” have predominantlyspeculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. Compared to larger publiclyowned companies, these venture capital-backed companies may be in a weaker financial position and experience wider variationsin their operating results, which may make them more vulnerable to economic downturns. Typically, these companies need morecapital to compete; however, their access to capital is limited and their cost of capital is often higher than that of their competitors.Our portfolio companies often face intense competition from larger companies with greater financial, technical and marketingresources and their success typically depends on the managerial talents and efforts of an individual or a small group of persons.Therefore, any loss of its key employees could affect a portfolio company’s ability to compete effectively and harm its financialcondition. Further, some of these companies conduct business in regulated industries that are susceptible to regulatory changes.These factors could impair the cash flow of our portfolio companies and result in other events, such as bankruptcy. These eventscould limit a portfolio company’s49  TABLE OF CONTENTSability to repay its obligations to us, which may have an adverse effect on the return on, or the recovery of, our investment in thesebusinesses. Deterioration in a borrower’s financial condition and prospects may be accompanied by deterioration in the value ofthe loan’s collateral.Generally, little public information exists about these companies, and we are required to rely on the ability of our InvestmentAdvisor’s investment team to obtain adequate information to evaluate the potential returns from investing in these companies. Ifwe are unable to uncover all material information about these companies, we may not make a fully informed investment decision,and we may lose money on our investments. Also, privately held companies frequently have less diverse product lines and smallermarket presence than larger competitors. These factors could adversely affect our investment returns as compared to companiesinvesting primarily in the securities of public companies.Many of our loans are not fully amortizing and if a borrower cannot repay or refinance such loans at maturity, our results willsuffer.Most of the loans in which we invest are not structured to fully amortize during their lifetime. Accordingly, a significantportion of the principal amount of such a loan may be due at maturity. As of December 31, 2016, all debt instruments in ourportfolio, on a fair value basis, will not fully amortize prior to maturity. In order to create liquidity to pay the final principalpayment, borrowers typically must raise additional capital. If they are unable to raise sufficient funds to repay us or we have notelected to enter into a new loan agreement providing for an extended maturity, the loan will go into default, which will require usto foreclose on the borrower’s assets, even if the loan was otherwise performing prior to maturity. This will deprive CapitalaFinance from immediately obtaining full recovery on the loan and prevent or delay the reinvestment of the loan proceeds in other,more profitable investments.Our investments in leveraged portfolio companies may be risky, and you could lose all or part of your investment.Investment in leveraged companies involves a number of significant risks. Leveraged companies in which we invest may havelimited financial resources and may be unable to meet their obligations under their loans and debt securities that we hold. Suchdevelopments may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of ourrealizing any guarantees that we may have obtained in connection with our investment. Smaller leveraged companies also mayhave less predictable operating results and may require substantial additional capital to support their operations, finance theirexpansion or maintain their competitive position.Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.Our portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or in some cases senior to,the debt in which we invest. By their terms, such 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 which weinvest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders ofdebt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in fullbefore we receive any distribution. After repaying such senior creditors, such portfolio company may not have sufficientremaining assets to repay its obligation to us. In the case of debt ranking equally with debt instruments in which we invest, wewould have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency,liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.Second priority liens on collateral securing loans that we make to our portfolio companies may be subject to control by seniorcreditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both thefirst priority creditors and us.Certain loans that we make are secured by a second priority security interest in the same collateral pledged by a portfoliocompany to secure senior debt owed by the portfolio company to commercial banks or other traditional lenders. Often the seniorlender has procured covenants from the portfolio company50  TABLE OF CONTENTSprohibiting the incurrence of additional secured debt without the senior lender’s consent. Prior to and as a condition of permittingthe portfolio company to borrow money from us secured by the same collateral pledged to the senior lender, the senior lender mayrequire assurances that it will control the disposition of any collateral in the event of bankruptcy or other default. In many suchcases, the senior lender requires us to enter into an “intercreditor agreement” prior to permitting the portfolio company to borrowfrom us. Typically the intercreditor agreements we are requested to execute expressly subordinate our debt instruments to thoseheld by the senior lender and further provide that the senior lender shall control: (i) the commencement of foreclosure or otherproceedings to liquidate and collect on the collateral; (ii) the nature, timing and conduct of foreclosure or other collectionproceedings; (iii) the amendment of any collateral document; (iv) the release of the security interests in respect of any collateral;and (v) the waiver of defaults under any security agreement. Because of the control we may cede to senior lenders underintercreditor agreements we may enter, we may be unable to realize the proceeds of any collateral securing some of our loans.If we make subordinated investments, the obligors or the portfolio companies may not generate sufficient cash flow to servicetheir debt obligations to us.We have made, and may make, subordinated investments that rank below other obligations of the obligor in right of payment.Subordinated investments are subject to greater risk of default than senior obligations as a result of adverse changes in thefinancial condition of the obligor or economic conditions in general. If we make a subordinated investment in a portfoliocompany, the portfolio company may be highly leveraged, and its relatively high debt-to-equity ratio may create increased risksthat its operations might not generate sufficient cash flow to service all of its debt obligations.The disposition of our investments may result in contingent liabilities.Substantially all of our investments involve loans and private securities. In connection with the disposition of an investmentin loans and private securities, we may be required to make representations about the business and financial affairs of the portfoliocompany typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers ofsuch investment to the extent that any such representations turn out to be inaccurate or with respect to potential liabilities. Thesearrangements may result in contingent liabilities that ultimately result in funding obligations that we must satisfy through ourreturn of distributions previously made to us.There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could besubject to lender liability claims.Even though we may have structured most of our investments as secured loans, if one of our portfolio companies were to gobankrupt, depending on the facts and circumstances, and based upon principles of equitable subordination as defined by existingcase law, a bankruptcy court could subordinate all or a portion of our claim to that of other creditors and transfer any lien securingsuch subordinated claim to the bankruptcy estate. The principles of equitable subordination defined by case law have generallyindicated that a claim may be subordinated only if its holder is guilty of misconduct or where the senior loan is re-characterized asan equity investment and the senior lender has actually provided significant managerial assistance to the bankrupt debtor. Wemay also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or instances where weexercise control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a result ofactions taken in rendering significant managerial assistance or actions to compel and collect payments from the borrower outsidethe ordinary course of business. Such risk of equitable subordination may be potentially heightened with respect to variousportfolio investments that we may be deemed to control. See also “— Because we will not hold controlling equity interests inmost of our portfolio companies, we may not be in a position to exercise control over our portfolio companies or to preventdecisions by management of our portfolio companies that could decrease the value of our investments.”51  TABLE OF CONTENTSEconomic recessions could impair our portfolio companies and harm our operating results.Certain of our portfolio companies may be susceptible to an economic downturn and may be unable to repay our loans duringthis period. Therefore, assets may become non-performing and the value of our portfolio may decrease during this period. Theadverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equityinvestments. A recession could lead to financial losses in our portfolio and a decrease in our revenues, net income and the value ofour assets.Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equityinvestments at fair value. Unfavorable economic conditions also could increase our funding costs, limit our access to the capitalmarkets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investmentsand harm our operating results.A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaultsand, potentially, acceleration of the time when the loans are due and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize the portfolio company’s ability to meet its obligations under the debt that wehold. We may incur additional expenses to the extent necessary to seek recovery upon default or to negotiate new terms with adefaulting portfolio company. In addition, if one of our portfolio companies were to go bankrupt, depending on the facts andcircumstances, including the extent to which we actually provided significant managerial assistance to that portfolio company, abankruptcy court might re-characterize our debt holdings and subordinate all or a portion of our claim to that of other creditors.These portfolio companies may face intense competition, including competition from companies with greater financialresources, more extensive research and development, manufacturing, marketing and service capabilities and greater number ofqualified and experienced managerial and technical personnel. They may need additional financing which they are unable tosecure and which we are unable or unwilling to provide, or they may be subject to adverse developments unrelated to thetechnologies they acquire.The lack of liquidity in our investments may adversely affect our business.We generally invest in companies whose securities are not publicly traded, and whose securities will be subject to legal andother restrictions on resale or will otherwise be less liquid than publicly traded securities. There is no established trading marketfor the securities in which we invest. The illiquidity of these investments may make it difficult for us to sell these investmentswhen desired. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly lessthan the value at which we had previously recorded these investments. As a result, we do not expect to achieve liquidity in ourinvestments in the near-term. Further, we may face other restrictions on our ability to liquidate an investment in a portfoliocompany to the extent that we have material non-public information regarding such portfolio company.Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio.Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as“follow-on” investments, in order to: (i) increase or maintain in whole or in part our equity ownership percentage; (ii) exercisewarrants, options or convertible securities that were acquired in the original or a subsequent financing; or (iii) attempt to preserveor enhance the value of our investment. We may elect not to make follow-on investments or otherwise lack sufficient funds tomake those investments. We will have the discretion to make any follow-on investments, subject to the availability of capitalresources. The failure to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfoliocompany and our initial investment, or may result in a missed opportunity for us to increase our participation in a successfuloperation. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-oninvestment because we do not want to increase our concentration of risk, we prefer other opportunities, we are subject to BDCrequirements that would prevent such follow-on investments, or the follow-on investment would affect our qualification as a RIC.For example, we may be prohibited under the 1940 Act from making follow-on investments in our portfolio companies that wemay be deemed to “control” or in which affiliates of our Investment Advisor are also invested.52  TABLE OF CONTENTSOur ability to enter into new transactions with our affiliates, and to restructure or exit our investments in portfolio companiesthat we are deemed to “control” under the 1940 Act, will be restricted by the 1940 Act, which may limit the scope of investmentopportunities available to us.We are prohibited under the 1940 Act from participating in certain transactions with our affiliates without the prior approval ofour independent directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstandingvoting securities will be our affiliate for purposes of the 1940 Act and we are generally prohibited from buying or selling anysecurity from or to such affiliate without the prior approval of our independent directors. The 1940 Act also prohibits certain“joint” transactions with certain of our affiliates, which could include concurrent investments in the same company, without priorapproval of our independent directors and, in some cases, the SEC. We are prohibited from buying or selling any security from orto any person that controls us or who owns more than 25% of our voting securities or certain of that person’s affiliates, or enteringinto prohibited joint transactions with such persons, absent the prior approval of the SEC. As a result of these restrictions, we maybe prohibited from buying or selling any security (other than any security of which we are the issuer) from or to any company thatis advised or managed by our Investment Advisor or its affiliates without the prior approval of the SEC, which may limit the scopeof investment opportunities that would otherwise be available to us.In the future, we may co-invest with investment funds, accounts and vehicles managed by our Investment Advisor or itsaffiliates when doing so is consistent with our investment strategy as well as applicable law and SEC staff interpretations. Wegenerally will only be permitted to co-invest with such investment funds, accounts and vehicles where the only term that isnegotiated is price. On June 1, 2016, the SEC issued an exemptive order permitting us and certain of our affiliates, to co-investtogether in portfolio companies subject to certain conditions included therein. We expect that this order will permit greaterflexibility to negotiate the terms of co-investments with investment funds, accounts and investment vehicles managed by ourInvestment Advisor or its affiliates in a manner consistent with our investment objective, positions, policies, strategies andrestrictions as well as regulatory requirements and other pertinent factors.In addition, within our portfolio there are investments that may be deemed to be “controlled” investments under the 1940 Act.To the extent that our investments in such portfolio companies need to be restructured or that we choose to exit these investmentsin the future, our ability to do so may be limited if such restructuring or exit also involves the affiliates of our Investment Advisorbecause such a transaction could be considered a joint transaction prohibited by the 1940 Act in the absence of our receipt ofrelief from the SEC in connection with such transaction. For example, if an affiliate of our Investment Advisor were required toapprove a restructuring of an investment in the portfolio and the affiliate of our Investment Advisor was deemed to be our affiliate,such a restructuring transaction may constitute a prohibited joint transaction under the 1940 Act.Our portfolio may lack diversification among portfolio companies, which may subject us to a risk of significant loss if one ormore of these companies defaults on its obligations under any of its debt instruments.Our portfolio may be concentrated in a limited number of portfolio companies. Beyond the asset diversification requirementsassociated with our qualification as a RIC under the Code, we do not have fixed guidelines for diversification, and ourinvestments may be concentrated in relatively few companies. As our portfolio is less diversified than the portfolios of some largerfunds, we are more susceptible to failure if a single loan fails. The disposition or liquidity of a significant investment may alsoadversely impact our net asset value and our results of operations. Similarly, the aggregate returns we realize may be significantlyadversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment.We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited with respectto the proportion of our assets that may be invested in securities of a single issuer.We are classified as a non-diversified investment company within the meaning of the 1940 Act, which means that we are notlimited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer. Beyond theasset diversification requirements associated with our qualification53  TABLE OF CONTENTSas a RIC under the Code, we do not have fixed guidelines for diversification. To the extent that we assume large positions in thesecurities of a small number of issuers or our investments are concentrated in relatively few industries, our net asset value mayfluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or themarket’s assessment of the issuer. We may also be more susceptible to any single economic or regulatory occurrence than adiversified investment company.Our portfolio may be concentrated in a limited number of industries, which may subject us to a risk of significant loss if there isa downturn in a particular industry in which a number of our investments are concentrated.Our portfolio may be concentrated in a limited number of industries. A downturn in any particular industry in which we areinvested could significantly impact the aggregate returns we realize. If an industry in which we have significant investmentssuffers from adverse business or economic conditions, as these industries have to varying degrees, a material portion of ourinvestment portfolio could be affected adversely, which, in turn, could adversely affect our financial position and results ofoperations.Because we will not hold controlling equity interests in most of our portfolio companies, we may not be in a position to exercisecontrol over our portfolio companies or to prevent decisions by management of our portfolio companies that could decrease thevalue of our investments.We currently hold controlling equity positions in six portfolio companies. Although we may do so in the future, we expectthat we will not hold controlling equity positions in most of our portfolio companies. If we do not hold a controlling equityposition in a portfolio company, we are subject to the risk that the portfolio company may make business decisions with which wedisagree, and that the management and/or stockholders of the portfolio company may take risks or otherwise act in ways that areadverse to our interests. Due to the lack of liquidity of the debt and equity investments that we typically hold in our portfoliocompanies, we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company andmay therefore suffer a decrease in the value of our investments.Defaults by our portfolio companies will harm our operating results.A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaultsand, potentially, termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under otheragreements and jeopardize our portfolio company’s ability to meet its obligations under the debt securities that we hold. We mayincur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfoliocompany. Any extension or restructuring of our loans could adversely affect our cash flows. In addition, if one of our portfoliocompanies were to go bankrupt, even though we may have structured our interest as senior debt, depending on the facts andcircumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcycourt might recharacterize our debt holding and subordinate all or a portion of our claim to that of other creditors. If any of theseoccur, it could materially and adversely affect our operating results and cash flows.If our portfolio companies are unable to protect their proprietary, technological and other intellectual property rights, ourbusiness and prospects could be harmed, and if portfolio companies are required to devote significant resources to protectingtheir intellectual property rights, the value of our investment could be reduced.Our future success and competitive position will depend in part upon the ability of our portfolio companies to obtain,maintain and protect proprietary technology used in their products and services. The intellectual property held by our portfoliocompanies often represents a substantial portion of the collateral securing our investments and/or constitutes a significant portionof the portfolio companies’ value that may be available in a downside scenario to repay our loans. Our portfolio companies willrely, in part, on patent, trade secret and trademark law to protect that technology, but competitors may misappropriate theirintellectual property, and disputes as to ownership of intellectual property may arise. Portfolio companies may, from time to time,be required to institute litigation to enforce their patents, copyrights or other intellectual property54  TABLE OF CONTENTSrights, protect their trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims ofinfringement. Such litigation could result in substantial costs and diversion of resources. Similarly, if a portfolio company is foundto infringe or misappropriate a third-party’s patent or other proprietary rights, it could be required to pay damages to the third-party, alter its products or processes, obtain a license from the third-party and/or cease activities utilizing the proprietary rights,including making or selling products utilizing the proprietary rights. Any of the foregoing events could negatively affect both theportfolio company’s ability to service our debt investment and the value of any related debt and equity securities that we own, aswell as any collateral securing our investment.Any unrealized losses we experience on our loan portfolio may be an indication of future realized losses, which could reduce ourincome available for distribution.As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at the fair value asdetermined in good faith by our Board. Decreases in the market values or fair values of our investments will be recorded asunrealized depreciation. Any unrealized losses in our loan portfolio could be an indication of a portfolio company’s inability tomeet its repayment obligations to us with respect to the affected loans. This could result in realized losses in the future andultimately in reductions of our income available for distribution in future periods.Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduceour return on equity.We are subject to the risk that the investments we make in our portfolio companies may be repaid prior to maturity. When thisoccurs, we will generally reinvest these proceeds in temporary investments or repay any revolving credit facility, depending onexpected future investment in new portfolio companies. Temporary investments will typically have substantially lower yieldsthan the debt being prepaid and we could experience significant delays in reinvesting these amounts. Any future investment in anew portfolio company may also be at lower yields than the debt that was repaid. As a result, our results of operations could bematerially adversely affected if one or more of our portfolio companies 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 commonstock.We may not realize gains from our equity investments.Certain investments that we may make include warrants or other equity securities. Investments in equity securities involve anumber of significant risks, including the risk of further dilution as a result of additional issuances, inability to access additionalcapital and failure to pay current distributions. Investments in preferred securities involve special risks, such as the risk of deferreddistributions, credit risk, illiquidity and limited voting rights. In addition, we may from time to time make non-control, equityinvestments in portfolio companies. Our goal is ultimately to realize gains upon our disposition of such equity interests. However,the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able torealize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not besufficient to offset any other losses we experience. We also may be unable to realize any value if a portfolio company does nothave a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow us to sell theunderlying equity interests. We will often seek puts or similar rights to give us the right to sell our equity securities back to theportfolio company issuer. We may be unable to exercise these put rights for the consideration provided in our investmentdocuments if the issuer is in financial distress.We may expose ourselves to risks if we engage in hedging transactions.If we engage in hedging transactions, we may expose ourselves to risks associated with such transactions. We may utilizeinstruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge againstfluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates.Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values ofsuch positions or prevent losses if the values of such positions decline. However, such hedging can establish other positionsdesigned to gain55  TABLE OF CONTENTSfrom those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactionsmay also limit the opportunity for gain if the values of the underlying portfolio positions increase. It may not be possible to hedgeagainst an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedgingtransaction at an acceptable price. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation betweensuch hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achievingthe intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currencyfluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely tofluctuate as a result of factors not related to currency fluctuations.The health and performance of our portfolio companies could be adversely affected by political and economic conditions in thecountries in which they conduct business.Some of the products of our portfolio companies are developed, manufactured, assembled, tested or marketed outside the U.S.Any conflict or uncertainty in these countries, including due to natural disasters, public health concerns, political unrest or safetyconcerns, could harm their business, financial condition and results of operations. In addition, if the government of any country inwhich their products are developed, manufactured or sold sets technical or regulatory standards for products developed ormanufactured in or imported into their country that are not widely shared, it may lead some of their customers to suspend importsof their products into that country, require manufacturers or developers in that country to manufacture or develop products withdifferent technical or regulatory standards and disrupt cross-border manufacturing, marketing or business relationships which, ineach case, could harm their businesses.Our equity ownership in a portfolio company may represent a control investment. Our ability to exit a control investment in atimely manner could result in a realized loss on the investment.We currently have, and may acquire in the future, control investments in portfolio companies. Our ability to divest ourselvesfrom a debt or equity investment in a controlled portfolio company could be restricted due to illiquidity in a private stock, limitedtrading volume on a public company’s stock, inside information on a company’s performance, insider blackout periods, or otherfactors that could prohibit us from disposing of the investment as we would if it were not a control investment. Additionally, wemay choose not to take certain actions to protect a debt investment in a control investment portfolio company. As a result, wecould experience a decrease in the value of our portfolio company holdings and potentially incur a realized loss on theinvestment.If the assets securing the loans that we make decrease in value, then we may lack sufficient collateral to cover losses.To attempt to mitigate credit risks, we will typically take a security interest in the available assets of our portfolio companies.There is no assurance that we will obtain or properly perfect our liens.There is a risk that the collateral securing our loans may decrease in value over time, may be difficult to sell in a timelymanner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions,including as a result of the inability of a portfolio company to raise additional capital. In some circumstances, our lien could besubordinated to claims of other creditors. Consequently, the fact that a loan is secured does not guarantee that we will receiveprincipal and interest payments according to the loan’s terms, or that we will be able to collect on the loan should we be forced toenforce our remedies.In addition, because we may invest in technology-related companies, a substantial portion of the assets securing ourinvestment may be in the form of intellectual property, if any, inventory and equipment and, to a lesser extent, cash and accountsreceivable. Intellectual property, if any, that is securing our loan could lose value if, among other things, the company’s rights tothe intellectual property are challenged or if the company’s license to the intellectual property is revoked or expires, thetechnology fails to achieve its intended results or a new technology makes the intellectual property functionally obsolete.Inventory may not be adequate to secure our loan if our valuation of the inventory at the time that we made the loan was notaccurate or if there is a reduction in the demand for the inventory.56  TABLE OF CONTENTSSimilarly, any equipment securing our loan may not provide us with the anticipated security if there are changes in technologyor advances in new equipment that render the particular equipment obsolete or of limited value, or if the company fails toadequately maintain or repair the equipment. Any one or more of the preceding factors could materially impair our ability torecover principal in a foreclosure.The effect of global climate change may impact the operations of our portfolio companies.There may be evidence of global climate change. Climate change creates physical and financial risk and some of our portfoliocompanies may be adversely affected by climate change. For example, the needs of customers of energy companies vary withweather conditions, primarily temperature and humidity. To the extent weather conditions are affected by climate change, energyuse could increase or decrease depending on the duration and magnitude of any changes. Increases in the cost of energy couldadversely affect the cost of operations of our portfolio companies if the use of energy products or services is material to theirbusiness. A decrease in energy use due to weather changes may affect some of our portfolio companies’ financial condition,through decreased revenues. Extreme weather conditions in general require more system backup, adding to costs, and cancontribute to increased system stresses, including service interruptions. Energy companies could also be affected by the potentialfor lawsuits against or taxes or other regulatory costs imposed on greenhouse gas emitters, based on links drawn betweengreenhouse gas emissions and climate change.In December 2015 the United Nations, of which the U.S. is a member, adopted a climate accord (the “Paris Agreement”) withthe long-term goal of limiting global warming and the short-term goal of significantly reducing greenhouse gas emissions. TheU.S. subsequently ratified the Paris Agreement, and it entered into force on November 4, 2016. As a result, some of our portfoliocompanies may become subject to new or strengthened regulations or legislation which could increase their operating costs and/ordecrease their revenues.We may choose to waive or defer enforcement of covenants in the debt securities held in our portfolio, which may cause us tolose all or part of our investment in these companies.We structure the debt investments in our portfolio companies to include business and financial covenants placing affirmativeand negative obligations on the operation of the company’s business and its financial condition. However, from time to time wemay elect to waive breaches of these covenants, including our right to payment, or waive or defer enforcement of remedies, such asacceleration of obligations or foreclosure on collateral, depending upon the financial condition and prospects of the particularportfolio company. These actions may reduce the likelihood of our receiving the full amount of future payments of interest orprincipal and be accompanied by a deterioration in the value of the underlying collateral as many of these companies may havelimited financial resources, may be unable to meet future obligations and may go bankrupt. This could negatively impact ourability to pay dividends, could adversely affect our results of operations and financial condition and cause the loss of all or part ofyour investment.Our investments in securities rated below investment grade are speculative in nature and are subject to additional risk factorssuch as increased possibility of default, illiquidity of the security, and changes in value based on changes in interest rates.The securities that we invest in are typically rated below investment grade. Securities rated below investment grade are oftenreferred to as “leveraged loans,” “high yield” or “junk” securities, and may be considered “high risk” compared to debtinstruments that are rated investment grade. High yield securities are regarded as having predominantly speculative characteristicswith respect to the issuer’s capacity to pay interest and repay principal in accordance with the terms of the obligations and involvemajor risk exposure to adverse conditions. In addition, high yield securities generally offer a higher current yield than thatavailable from higher grade issues, but typically involve greater risk. These securities are especially sensitive to adverse changesin general economic conditions, to changes in the financial condition of their issuers and to price fluctuation in response tochanges in interest rates. During periods of economic downturn or rising interest rates, issuers of below investment gradeinstruments may experience financial stress that could adversely affect their ability to make payments of principal and interest andincrease the possibility of default.57  TABLE OF CONTENTSOur investments may be in portfolio companies which may have limited operating histories and financial resources.We expect that our portfolio will continue to consist of investments that may have relatively limited operating histories. Thesecompanies may be particularly vulnerable to U.S. and foreign economic downturns such as the current recession and Europeanfinancial crisis, may have more limited access to capital and higher funding costs, may have a weaker financial position and mayneed more capital to expand or compete. These businesses also may experience substantial variations in operating results. Theymay face intense competition, including from companies with greater financial, technical and marketing resources. Furthermore,some of these companies do business in regulated industries and could be affected by changes in government regulation.Accordingly, these factors could impair their cash flow or result in other events, such as bankruptcy, which could limit their abilityto repay their obligations to us, and may adversely affect the return on, or the recovery of, our investment in these companies. Wecannot assure you that any of our investments in our portfolio companies will be successful. Our portfolio companies competewith larger, more established companies with greater access to, and resources for, further development in these new technologies.We may lose our entire investment in any or all of our portfolio companies.Risks Relating to our SecuritiesThe market price of our common stock may fluctuate significantly.The market price and liquidity of the expected market for shares of our common stock may be significantly affected bynumerous factors, some of which are beyond our control and may not be directly related to our operating performance. Thesefactors include:•price and volume fluctuations in the overall stock market from time to time;•investor demand for our shares;•significant volatility in the market price and trading volume of securities of BDCs or other companies in our sector, whichare not necessarily related to the operating performance of these companies;•changes in regulatory policies or tax guidelines with respect to RICs, BDCs or SBICs;•failure to qualify as a RIC, or the loss of RIC status;•any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;•changes, or perceived changes, in the value of our portfolio investments;•departures of the Investment Advisor’s key personnel;•operating performance of companies comparable to us; or•general economic conditions and trends and other external factors.Our business and operation could be negatively affected if we become subject to any securities litigation or shareholderactivism, which could cause us to incur significant expense, hinder execution of investment strategy and impact our stock price.In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation hasoften been brought against that company. Shareholder activism, which could take many forms or arise in a variety of situations,increased in the BDC space recently. While we are currently not subject to any securities litigation or shareholder activism, due tothe potential volatility of our stock price and for a variety of other reasons, we may in the future become the target of securitieslitigation or shareholder activism. Securities litigation and shareholder activism, including potential proxy contests, could resultin substantial costs and divert management’s and our Board’s attention and resources from our business. Additionally, suchsecurities litigation and shareholder activism could give rise to perceived uncertainties as to our future, adversely affect ourrelationships with service providers and make it more difficult to attract and retain qualified personnel. Also, we may be requiredto incur significant legal fees and other expenses related58  TABLE OF CONTENTSto any securities litigation and activist shareholder matters. Further, our stock price could be subject to significant fluctuation orotherwise be adversely affected by the events, risks and uncertainties of any securities litigation and shareholder activism.Investing in our common stock may involve an above average degree of risk.The investments we make may result in a higher amount of risk, volatility, or loss of principal than alternative investmentoptions. These investments in portfolio companies may be highly speculative and aggressive, and therefore, an investment in ourcommon stock may not be suitable for investors with lower risk tolerance.Our shares of common stock have a limited trading history and we cannot assure you that the market price of shares of ourcommon stock will not decline.Our shares of common stock have a limited trading history and we cannot assure you that a public trading market will besustained for such shares. We cannot predict the prices at which our common stock will trade. We cannot assure you that themarket price of shares of our common stock will not decline at any time. In addition, our common stock has from time to timetraded below its net asset value since our inception and if our common stock continues to trade below its net asset value, we willgenerally not be able to sell additional shares of our common stock to the public at its market price without first obtaining theapproval of our stockholders (including our unaffiliated stockholders) and our independent directors for such issuance.Our common stockholders will bear the expenses associated with our borrowings, and the holders of our debt securities willhave certain rights senior to our common stockholders.All of the costs of offering and servicing our debt securities, including interest thereon, is borne by our common stockholders.The interests of the holders of any debt we may issue will not necessarily be aligned with the interests of our commonstockholders. In particular, the rights of holders of our debt to receive interest or principal repayment will be senior to those of ourcommon stockholders. In addition, we may grant a lender a security interest in a significant portion or all of our assets, even if thetotal amount we may borrow from such lender is less than the amount of such lender’s security interest in our assets.Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of ourcommon stock.Sales of substantial amounts of our common stock, or the availability of such common stock for sale, could adversely affect theprevailing market prices for our common stock. If this occurs and continues for a sustained period of time, it could impair ourability to raise additional capital through the sale of securities should we desire to do so.Shares of our common stock have traded at a discount from net asset value and may do so in the future.Shares of closed-end investment companies have frequently traded at a market price that is less than the net asset value that isattributable to those shares. In part as a result of adverse economic conditions and increasing pressure within the financial sector ofwhich we are a part, our common stock has at times traded below its net asset value per share since our IPO on September 30, 2013.Our shares could continue trade at a discount to net asset value. The possibility that our shares of common stock may trade at adiscount from net asset value over the long term is separate and distinct from the risk that our net asset value will decrease. Wecannot predict whether shares of our common stock will trade above, at or below its net asset value. If our common stock tradesbelow its net asset value, we will generally not be able to issue additional shares of our common stock at its market price withoutfirst obtaining the approval for such issuance from our stockholders and our independent directors. If additional funds are notavailable to us, we could be forced to curtail or cease our new lending and investment activities, and our net asset value coulddecrease and our level of distributions could be impacted.59  TABLE OF CONTENTSYou may not receive distributions or our distributions may decline or may not grow over time, and you will experience dilutionin your ownership percentage if you opt out of our dividend reinvestment plan.We intend to make distributions on a monthly basis to our stockholders out of assets legally available for distribution. Wecannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. Our ability to pay distributions might be materially and adversely affected by the impact ofone or more of the risks described herein. Due to the asset coverage test applicable to us under the 1940 Act as a BDC, we may belimited in our ability to make distributions. All distributions will be made at the discretion of our Board and will depend on ourearnings, financial condition, maintenance of RIC status, compliance with applicable BDC, SBA regulations and such otherfactors as our Board may deem relevant from time to time. We cannot assure you that we will make distributions to ourstockholders in the future.All dividends declared in cash payable to stockholders that are participants in our dividend reinvestment plan areautomatically reinvested in shares of our common stock. As a result, our stockholders that opt out of our dividend reinvestmentplan will experience dilution in their ownership percentage of our common stock over time.We will have broad discretion over the use of proceeds of any successful offering of securities.We will have significant flexibility in applying the proceeds of any successful offering of our securities. We will also payoperating expenses, and may pay other expenses such as due diligence expenses of potential new investments, from net proceeds.Our ability to achieve our investment objective may be limited to the extent that the net proceeds of any offering, pending fullinvestment, are used to pay operating expenses. In addition, we can provide you no assurance that the any offering will besuccessful, or that by increasing the size of our available equity capital, our aggregate expenses, and correspondingly, our expenseratio, will be lowered.The net asset value per share of our common stock may be diluted if we sell shares of our common stock in one or more offeringsat prices below the then current net asset value per share of our common stock.At our 2016 Annual Stockholders Meeting, subject to certain determinations required to be made by our Board, ourstockholders approved our ability to sell or otherwise issue shares of our common stock, not exceeding 25% of our thenoutstanding common stock immediately prior to each such offering, at a price below the then current net asset value per shareduring a period beginning on May 3, 2016 and expiring on the earlier of the one-year anniversary of the date of the 2016 AnnualStockholders Meeting and the date of our 2017 Annual Stockholders Meeting, which is expected to be held in May 2017.Any decision to sell shares of our common stock below its then current net asset value per share would be subject to thedetermination by our Board that such issuance is in our and our stockholders’ best interests. If we were to sell shares of ourcommon stock below its then current net asset value per share; such sales would result in an immediate dilution to the net assetvalue per share of our common stock. This dilution would occur as a result of the sale of shares at a price below the then currentnet asset value per share of our common stock and a proportionately greater decrease in the stockholders’ interest in our earningsand assets and their voting interest in us than the increase in our assets resulting from such issuance. Because the number of sharesof common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect cannotbe predicted.Further, if our current stockholders do not purchase any shares to maintain their percentage interest, regardless of whether suchoffering is above or below the then current net asset value per share, their voting power will be diluted. For example, if we sell anadditional 10% of our common shares at a 10% discount from net asset value, a stockholder who does not participate in thatoffering for its proportionate interest will suffer net asset value dilution of up to 1.0% or $10 per $1,000 of net asset value.60  TABLE OF CONTENTSYour interest in Capitala Finance may be diluted if you do not fully exercise your subscription rights in any rights offering.In the event we issue subscription rights to purchase shares of our common stock, stockholders who do not fully exercise theirrights should expect that they will, at the completion of the offer, own a smaller proportional interest in Capitala Finance thanwould otherwise be the case if they fully exercised their rights.We cannot state precisely the amount of any such dilution in share ownership because we do not know at this time whatproportion of the shares would be purchased as a result of a rights offering.In addition, if the subscription price in a rights offering is less than our net asset value per share, then our stockholders wouldexperience an immediate dilution of the aggregate net asset value of their shares as a result of the rights offering. The amount ofany decrease in net asset value is not predictable because it is not known at this time what the subscription price and net assetvalue per share will be on the expiration date of any rights offering or what proportion of the shares will be purchased as a result ofsuch rights offering. Such dilution could be substantial.If we issue preferred stock, the net asset value and market value of our common stock will likely become more volatile.We cannot assure you that the issuance of preferred stock would result in a higher yield or return to the holders of our commonstock. The issuance of preferred stock would likely cause the net asset value and market value of the common stock to becomemore volatile. If the dividend rate on the preferred stock were to approach the net rate of return on our investment portfolio, thebenefit of leverage to the holders of the common stock would be reduced. If the dividend rate on the preferred stock were toexceed the net rate of return on our portfolio, the leverage would result in a lower rate of return to the holders of common stockthan if we had not issued preferred stock. Any decline in the net asset value of our investments would be borne entirely by theholders of common stock. Therefore, if the market value of our portfolio were to decline, the leverage would result in a greaterdecrease in net asset value to the holders of common stock than if we were not leveraged through the issuance of preferred stock.This greater net asset value decrease would also tend to cause a greater decline in the market price for the common stock. Wemight be in danger of failing to maintain the required asset coverage of the preferred stock or of losing our ratings, if any, on thepreferred stock or, in an extreme case, our current investment income might not be sufficient to meet the dividend requirements onthe preferred stock. In order to counteract such an event, we might need to liquidate investments in order to fund a redemption ofsome or all of the preferred stock. In addition, we would pay (and the holders of common stock would bear) all costs and expensesrelating to the issuance and ongoing maintenance of the preferred stock, including higher advisory fees if our total return exceedsthe dividend rate on the preferred stock. Holders of preferred stock may have different interests than holders of common stock andmay at times have disproportionate influence over our affairs.Holders of any preferred stock we might issue would have the right to elect members of our Board and class voting rights oncertain matters.Holders of any preferred stock we might issue, voting separately as a single class, would have the right to elect two members ofour Board at all times and in the event dividends become two full years in arrears would have the right to elect a majority of thedirectors until such arrearage is completely eliminated. In addition, preferred stockholders have class voting rights on certainmatters, including changes in fundamental investment restrictions and conversion to open-end status, and accordingly can vetoany such changes. Restrictions imposed on the declarations and payment of dividends or other distributions to the holders of ourcommon stock and preferred stock, both by the 1940 Act and by requirements imposed by rating agencies, if any, or the terms ofour credit facilities, if any, might impair our ability to maintain our qualification as a RIC for U.S. federal income tax purposes.While we would intend to redeem our preferred stock to the extent necessary to enable us to distribute our income as required tomaintain our qualification as a RIC, there can be no assurance that such actions could be effected in time to meet the taxrequirements.61  TABLE OF CONTENTSITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESOur executive offices are located at 4201 Congress Street, Suite 360, Charlotte, North Carolina 28209, and are provided by ourAdministrator in accordance with the terms of the Administration Agreement. We believe that our office facilities are suitable andadequate for our business as it is contemplated to be conducted.ITEM 3. LEGAL PROCEEDINGSNone of us, our Investment Advisor or Administrator or any of the Legacy Funds, are currently subject to any material legalproceedings, nor, to our knowledge, is any material legal proceeding threatened against us, or against our Investment Advisor orAdministrator or any of the Legacy Funds. From time to time, we, our Investment Advisor or Administrator, or any of the LegacyFunds may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to theenforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot bepredicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or resultsof operations.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.62  TABLE OF CONTENTSPART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIESPRICE RANGE OF COMMON STOCKOur common stock is traded on the NASDAQ Global Select Market under the symbol “CPTA.” The following table sets forth,for each fiscal quarter within the two most recent fiscal years, the range of high and low intraday sales prices of our common stockas reported on the NASDAQ Global Select Market, the premium (discount) of sales price to our net asset value (NAV) and thedistributions declared by us for each fiscal quarter. Fiscal 2016 NAV(1) High Low Premium or(Discount) ofHigh SalesPrice to NAV(2) Premium or(Discount) ofLow SalesPrice to NAV(2) DeclaredDistributions(3)Fourth Quarter $15.79 $13.95 $11.51 (11.7)% (27.1)% $0.39 Third Quarter $15.68 $15.80 $12.75 0.8% (18.7)% $0.47 Second Quarter $16.28 $14.20 $11.72 (12.8)% (28.0)% $0.47 First Quarter $16.29 $13.18 $9.54 (19.1)% (41.4)% $0.47 Fiscal 2015 NAV(1) High Low Premium or(Discount) ofHigh SalesPrice to NAV(2) Premium or(Discount) ofLow SalesPrice to NAV(2) DeclaredDistributions(3)Fourth Quarter $17.04 $14.66 $11.75 (14.0)% (31.0)% $0.47 Third Quarter $18.04 $16.76 $12.54 (7.1)% (30.5)% $0.47 Second Quarter $17.95 $19.10 $15.34 6.4% (14.5)% $0.47 First Quarter $18.35 $19.12 $17.97 4.2% (2.1)% $0.97 (1)Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset valueper share on the date of the high and low sales prices. The net asset values shown are based on outstanding shares at the end ofeach period.(2)Calculated as of the respective high or low intraday sales price divided by the quarter end NAV and subtracting 1.(3)Represents the distributions paid or to be paid in the specified quarter.HOLDERSThe last reported price for our common stock on March 6, 2017 was $14.02 per share. As of March 6, 2017 there were 55holders of record of our common stock.DISTRIBUTIONSIn order to qualify as a RIC and to avoid corporate-level U.S. federal income tax on the income we distribute to ourstockholders, we are required to distribute at least 90% of our net ordinary income and our net short-term capital gains in excess ofnet long-term capital losses, if any, to our stockholders on an annual basis. Additionally, we must distribute an amount at leastequal to the sum of 98% of our net ordinary income (during the calendar year) plus 98.2% of our net capital gain income (duringeach 12-month period ending on October 31) plus any net ordinary income and capital gain net income for preceding years thatwere not distributed during such years and on which we paid no U.S. federal income tax to avoid a U.S. federal excise tax. To theextent that we have income available, we intend to make monthly distributions to our stockholders. Our monthly stockholderdistributions, if any, will be determined by our Board on a quarterly basis. Any distribution to our stockholders will be declaredout of assets legally available for distribution.63  TABLE OF CONTENTSWe may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase theamount of our distributions from time to time. In addition, we may be limited in our ability to make distributions due to the assetcoverage requirements applicable to us as a BDC under the 1940 Act. If we do not distribute a certain percentage of our incomeannually, we will suffer adverse tax consequences, including the possible loss of our qualification as a RIC. We cannot assurestockholders that they will receive any distributions.To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of thosedistributions may be deemed a return of capital to our stockholders for U.S. federal income tax purposes. Thus, the source of adistribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains.Stockholders should read any written disclosure accompanying any stockholder distribution carefully and should not assume thatthe source of any distribution is our ordinary income or capital gains.We have adopted an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare adistribution, then stockholders’ cash distributions will be automatically reinvested in additional shares of our common stockunless a stockholder specifically “opts out” of our dividend reinvestment plan. If a stockholder opts out, that stockholder willreceive cash distributions. Although distributions paid in the form of additional shares of our common stock will generally besubject to U.S. federal, state and local taxes in the same manner as cash distributions, stockholders participating in our dividendreinvestment plan will not receive any corresponding cash distributions with which to pay any such applicable taxes.The following table summarizes our distributions declared during fiscal years ended 2017, 2016, and 2015: Date Declared Record Date Payment Date AmountPer ShareJanuary 3, 2017 January 20, 2017 January 30, 2017 $0.1300 January 3, 2017 February 20, 2017 February 27, 2017 0.1300 January 3, 2017 March 23, 2017 March 30, 2017 0.1300 Total Distributions Declared forFiscal 2017 $0.39 Date Declared Record Date Payment Date AmountPer ShareJanuary 4, 2016 January 22, 2016 January 28, 2016 $0.1567 January 4, 2016 February 19, 2016 February 26, 2016 0.1567 January 4, 2016 March 22, 2016 March 30, 2016 0.1567 April 1, 2016 April 22, 2016 April 28, 2016 0.1567 April 1, 2016 May 23, 2016 May 30, 2016 0.1567 April 1, 2016 June 21, 2016 June 29, 2016 0.1567 July 1, 2016 July 22, 2016 July 29, 2016 0.1567 July 1, 2016 August 22, 2016 August 30, 2016 0.1567 July 1, 2016 September 22, 2016 September 29, 2016 0.1567 September 22, 2016 October 21, 2016 October 28, 2016 0.1300 September 22, 2016 November 21, 2016 November 29, 2016 0.1300 September 22, 2016 December 21, 2016 December 29, 2016 0.1300 Total Distributions Declared forFiscal 2016 $1.80 64  TABLE OF CONTENTS Date Declared Record Date Payment Date AmountPer ShareJanuary 2, 2015 January 22, 2015 January 29, 2015 $0.1567 January 2, 2015 February 20, 2015 February 26, 2015 0.1567 January 2, 2015 March 23, 2015 March 30, 2015 0.1567 February 26, 2015 March 23, 2015 March 30, 2015 0.0500 February 26, 2015 April 23, 2015 April 29, 2015 0.0500 February 26, 2015 May 21, 2015 May 28, 2015 0.0500 February 26, 2015 June 22, 2015 June 29, 2015 0.0500 February 26, 2015 July 23, 2015 July 30, 2015 0.0500 February 26, 2015 August 21, 2015 August 28, 2015 0.0500 February 26, 2015 September 23, 2015 September 29, 2015 0.0500 February 26, 2015 October 23, 2015 October 29, 2015 0.0500 February 26, 2015 November 20, 2015 November 27, 2015 0.0500 February 26, 2015 December 22, 2015 December 30, 2015 0.0500 April 1, 2015 April 23, 2015 April 29, 2015 0.1567 April 1, 2015 May 21, 2015 May 28, 2015 0.1567 April 1, 2015 June 22, 2015 June 29, 2015 0.1567 July 1, 2015 July 23, 2015 July 30, 2015 0.1567 July 1, 2015 August 21, 2015 August, 28, 2015 0.1567 July 1, 2015 September 23, 2015 September 29, 2015 0.1567 October 1, 2015 October 23, 2015 October 29, 2015 0.1567 October 1, 2015 November 20, 2015 November 27, 2015 0.1567 October 1, 2015 December 22, 2015 December 30, 2015 0.1567 Total Distributions Declared forFiscal 2015 $2.38 PERFORMANCE GRAPHThe following graph compares the cumulative return on our common stock with that of the Standard & Poor’s 500 Stock Indexand the NASDAQ Financial 100 index, as we do not believe there is an appropriate index of companies with an investmentstrategy similar to our own with which to compare the return on our common stock, for the period from September 25, 2013, thedate our common stock began trading, through December 31, 2016. The graph assumes that on September 25, 2013, a personinvested $100 in each of our common stock, the Standard & Poor’s 500 Stock Index and the NASDAQ Financial 100 index. Thegraph measures total shareholder return, which takes into account both changes in stock price and dividends. The graph alsoassumes that dividends paid are reinvested in the same class of equity securities at the frequency with which dividends are paid onsuch securities during the applicable fiscal year.65  TABLE OF CONTENTSThe graph and other information furnished under this Part II Item 5 of this annual report on Form 10-K shall not be deemed tobe “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under, or to the liabilities of Section 18of, the Exchange Act. The stock price performance included in the above graph is not necessarily indicative of future stock priceperformance.SALES OF UNREGISTERED SECURITIESDuring the year ended December 31, 2016, we issued 90,700 shares of common stock under our dividend reinvestment plan.The issuances were not subject to the registration requirements under the Securities Act of 1933, as amended. The cash paid forshares of common stock issued under our dividend reinvestment plan during the year ended December 31, 2016 wasapproximately $1.1 million. Other than the shares issued under our dividend reinvestment plan during the year ended December31, 2016, we did not sell any unregistered equity securities.ISSUER PURCHASES OF EQUITY SECURITIESNone.ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATAThe following selected consolidated financial data of the Company as of and for the years ended December 31, 2016, 2015,2014 and 2013 are derived from our consolidated financial statements that have been audited by Ernst & Young LLP, ourindependent registered public accounting firm. This consolidated financial data should be read in conjunction with ourconsolidated financial statements and related notes thereto included elsewhere in this Form 10-K and with Management’sDiscussion and Analysis of Financial Condition and Results of Operations which follows (dollars in thousands except share andper share data): As of andfor theyear endedDecember 31,2016 As of andfor theyear endedDecember 31,2015 As of andfor theyear endedDecember 31,2014 As of andfor theyear endedDecember 31,2013Consolidated statements of operations data: Total investment income $68,312 $63,976 $49,528 $35,433 Total expenses, net of fee waivers 39,272 38,649 29,562 15,949 Net investment income 29,040 25,327 19,966 19,484 Net realized gain (loss) from investments (22,766) 5,436 832 2,187 Net unrealized appreciation (depreciation) oninvestments and written call option 2,878 (16,913) (24,238) 7,187 Net increase (decrease) in net assets resulting fromoperations $9,152 $13,850 $(3,440) $28,858 Per share data: Net investment income $1.84 $1.67 $1.54 $1.50 Net increase (decrease) in net assets resulting fromoperations $0.58 $0.91 $(0.27) $2.22 Distributions declared $1.80 $2.38 $1.88 $0.47 Net asset value per share $15.79 $17.04 $18.56 $20.71 Consolidated statements of assets and liabilities data: Total assets $584,415 $632,818 $539,864 $476,428 Total net assets $250,582 $268,802 $240,837 $268,670 Other data: Total Return(2)(3) 24.07% (20.43)% (0.85)% 1.88% Number of portfolio company investments at year end 53 57 52 41 Total portfolio investments for the year $120,844 $260,640 $216,276 $110,929 Investment repayments for the year $163,564 $142,713 $80,197 $52,755 (1)For historical periods prior to December 31, 2013, the Company had no operations and therefore earnings per share, dividendsdeclared per common share and weighted average shares outstanding information for the periods that include financial resultsprior to December 31, 2013 are not provided.66  TABLE OF CONTENTS(2)Total investment return for the years ended December 31, 2016, 2015 and 2014 is calculated assuming a purchase of commonshares at the current market value on the first day and a sale at the current market value on the last day of the period reported.Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under theCompany’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions.(3)Total investment return for the year ended December 31, 2013 is calculated assuming a purchase of common shares at the IPOoffering price per share at September 25, 2013 of $20.00 and a sale at the current market value on the last day of the periodreported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtainedunder the Company’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions. Totalinvestment returns covering less than a full period are not annualized.67  TABLE OF CONTENTSITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONSThe following discussion and analysis should be read in conjunction with our consolidated financial statements and relatednotes and other financial information appearing elsewhere in this Annual Report on Form 10-K.Forward-Looking StatementsThis Annual Report on Form 10-K, including Management’s Discussion and Analysis of Financial Condition and Results ofOperations, contains forward-looking statements that involve substantial risks and uncertainties. These forward-lookingstatements are not historical facts, but rather are based on current expectations, estimates and projections about the Company, ourcurrent and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as “anticipates,”“expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,”“projects,” and variations of these words and similar expressions are intended to identify forward-looking statements.Some of the statements in this Annual Report on Form 10-K constitute forward-looking statements, which relate to futureevents or our performance or financial condition. The forward-looking statements contained in this Annual Report on Form 10-Kinvolve risks and uncertainties, including statements as to:•our future operating results;•our business prospects and the prospects of our portfolio companies;•the impact of investments that we expect to make;•our contractual arrangements and relationships with third parties;•the dependence of our future success on the general economy and its impact on the industries in which we invest;•the ability of our portfolio companies to achieve their objectives;•our expected financings and investments;•the adequacy of our cash resources and working capital; and•the timing of cash flows, if any, from the operations of our portfolio companies.These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some ofwhich are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed orforecasted in the forward-looking statements, including without limitation:•an economic downturn could impair our portfolio companies’ ability to continue to operate or repay their borrowings,which could lead to the loss of some or all of our investments in such portfolio companies;•a contraction of available credit and/or an inability to access the equity markets could impair our lending and investmentactivities;•interest rate volatility could adversely affect our results, particularly if we use leverage as part of our investment strategy;and•the risks, uncertainties and other factors we identify in “Risk Factors” and elsewhere in this Annual Report on Form 10-K.Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of thoseassumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also couldbe inaccurate. Important assumptions include our ability to originate new loans and investments, certain margins and levels ofprofitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection orforward-looking68  TABLE OF CONTENTSstatement in this Annual Report on Form 10-K should not be regarded as a representation by us that our plans and objectives willbe achieved. These risks and uncertainties include those described or identified in “Risk Factors” and elsewhere in this AnnualReport on Form 10-K. You should not place undue reliance on these forward-looking statements, which apply only as of the dateof this Annual Report on Form 10-K. We undertake no obligation to revise or update any forward-looking statements, whether as aresult of new information, future events or otherwise, unless required by law or Securities and Exchange Commission (“SEC”) ruleor regulation.OverviewWe are a Maryland corporation that has elected to be regulated as a business development company (“BDC”) under theInvestment Company Act of 1940 as amended (the “1940 Act”). We are an “emerging growth company” within the meaning of theJumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and as such, are subject to reduced public company reportingrequirements. Our investment objective is to generate both current income and capital appreciation through debt and equityinvestments. We are managed by Capitala Investment Advisors, LLC (the “Investment Advisor”), and Capitala Advisors Corp. (the“Administrator”) provides the administrative services necessary for us to operate.We provide capital to lower and traditional middle-market companies in the United States, with a non-exclusive emphasis onthe Southeast, Southwest and Mid-Atlantic regions. We invest primarily in companies with a history of earnings growth andpositive cash flow, proven management teams, product or service with competitive advantages and industry-appropriate margins.We primarily invest in companies with between $4.5 million and $30 million in trailing twelve month earnings before interest,tax, depreciation, and amortization (“EBITDA”).We invest in first lien, second lien and subordinated loans. Most of our debt investments are coupled with equity interests,whether in the form of detachable “penny” warrants or equity co-investments made pari-passu with our borrowers’ financialsponsors.As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally must invest at least 70%of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies, cash, cashequivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, we are onlyallowed to borrow money such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing, withcertain limited exceptions. To maintain our regulated investment company (“RIC”) status, we must meet specified source-of-income and asset diversification requirements. To maintain our RIC tax treatment under subchapter M of the Internal RevenueCode of 1986, as amended (the “Code”) for U.S. federal income tax purposes, we must distribute at least 90% of our net ordinaryincome and realized net short-term capital gains in excess of realized net long-term capital losses, if any, for the taxable year.Corporate HistoryWe commenced operations on May 24, 2013 and completed our initial public offering (“IPO”) on September 30, 2013. TheCompany was formed for the purpose of (i) acquiring, through a series of transactions, an investment portfolio from the followingentities: CapitalSouth Partners Fund I Limited Partnership (“Fund I”); CapitalSouth Partners Fund II Limited Partnership (“FundII”); CapitalSouth Partners Fund III, L.P. (“Fund III Parent”); CapitalSouth Partners SBIC Fund III, L.P. (“Fund III”) andCapitalSouth Partners Florida Sidecar Fund I, L.P. (“Florida Sidecar” and, collectively with Fund I, Fund II, Fund III and Fund IIIParent, the “Legacy Funds”); (ii) raising capital in the IPO and (iii) continuing and expanding the business of the Legacy Funds bymaking additional debt and equity investments in lower middle-market and middle-market companies.On September 24, 2013, the Company acquired 100% of the limited partnership interests in Fund II, Fund III and FloridaSidecar and each of their respective general partners, as well as certain assets from Fund I and Fund III Parent, in exchange for anaggregate of 8,974,420 shares of the Company’s common stock (the “Formation Transactions”). Fund II, Fund III and FloridaSidecar became the Company’s wholly owned subsidiaries. Fund II and Fund III retained their SBIC licenses, and continued tohold their existing investments at the time of IPO and have continued to make new investments after the IPO. The IPO consisted69  TABLE OF CONTENTSof the sale of 4,000,000 shares of the Company’s common stock at a price of $20.00 per share, resulting in net proceeds to theCompany of $74.25 million, after deducting underwriting fees and commissions totaling $4.0 million and offering expensestotaling $1.75 million. The other costs of the IPO were borne by the limited partners of the Legacy Funds.At the time of the Formation Transactions, our portfolio consisted of: (1) approximately $326.3 million in investments; (2) anaggregate of approximately $67.1 million in cash, interest receivable and other assets; and (3) liabilities of approximately $202.2million of SBA-guaranteed debt payable. We have two SBIC-licensed subsidiaries that have elected to be regulated as BDCsunder the 1940 Act.Basis of PresentationThe Company is considered an investment company as defined in Accounting Standards Codification (“ASC”) Topic946 — Financial Services — Investment Companies (“ASC 946”). The accompanying consolidated financial statements havebeen prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”)and pursuant to the requirements for reporting on Form 10-K and Article 6 and Article 10 of Regulation S-X. The consolidatedfinancial statements of the Company include the accounts of the Company and its wholly owned subsidiaries as described in theFormation Transactions above. The transactions related to Fund II, Fund III, and Florida Sidecar constituted an exchange of sharesbetween entities under common control and have been accounted for in accordance with ASC Topic 805, Business Combinations(“ASC 805”).The Company’s financial position as of December 31, 2016 and 2015 is presented on a consolidated basis. The effects of allintercompany transactions between the Company and its subsidiaries (Fund II, Fund III, and Florida Sidecar) have been eliminatedin consolidation. All financial data and information included in these consolidated financial statements have been presented onthe basis described above. In the opinion of management, the consolidated financial statements reflect all adjustments that arenecessary for the fair presentation of financial results as of and for the periods presented.ConsolidationAs provided under Regulation S-X and ASC 946, the Company will generally not consolidate its investment in a companyother than an investment company subsidiary or a controlled operating company whose business consists of providing services tothe Company. Accordingly, the Company consolidated the results of the Company’s wholly owned subsidiaries in itsconsolidated financial statements. The Company did not consolidate its interest in Capitala Senior Liquid Loan Fund I, LLC(“CSLLF”) during the periods it was in existence because the investment was not considered a substantially wholly ownedinvestment company subsidiary. Further, CSLLF was a joint venture for which shared power existed relating to the decisions thatmost significantly impacted the economic performance of the entity. See Note 4 to the consolidated financial statements fordescription of the Company’s investment in CSLLF.RevenuesWe generate revenue primarily from the periodic cash interest we collect on our debt investments. In addition, most of our debtinvestments offer the opportunity to participate in a borrower’s equity performance through warrant participation, direct equityownership or otherwise, which we expect to result in revenue in the form of dividends and/or capital gains. Further, we maygenerate revenue in the form of commitment, origination, amendment, structuring or diligence fees, monitoring fees, fees forproviding managerial assistance and possibly consulting fees and performance-based fees. These fees will be recognized as theyare earned.70  TABLE OF CONTENTSExpensesOur primary operating expenses include the payment of investment advisory fees to our Investment Advisor, our allocableportion of overhead and other expenses incurred by our Administrator in performing its obligations under an administrationagreement between us and the Administrator (the “Administration Agreement”) and other operating expenses as detailed below.Our investment advisory fee will compensate our Investment Advisor for its work in identifying, evaluating, negotiating, closing,monitoring and servicing our investments. We will bear all other expenses of our operations and transactions, including (withoutlimitation):•the cost of our organization;•the cost of calculating our net asset value, including the cost of any third-party valuation services;•the cost of effecting sales and repurchases of our shares and other securities;•interest payable on debt, if any, to finance our investments;•fees payable to third parties relating to, or associated with, making investments (such as legal, accounting and travelexpenses incurred in connection with making investments), including fees and expenses associated with performing duediligence reviews of prospective investments and advisory fees;•transfer agent and custodial fees;•fees and expenses associated with marketing efforts;•costs associated with our reporting and compliance obligations under the 1940 Act, the Securities Exchange Act of 1934,as amended, other applicable federal and state securities laws and ongoing stock exchange listing fees;•federal, state and local taxes;•independent directors’ fees and expenses;•brokerage commissions;•costs of proxy statements, stockholders’ reports and other communications with stockholders;•fidelity bond, directors’ and officers’ liability insurance, errors and omissions liability insurance and other insurancepremiums;•direct costs and expenses of administration, including printing, mailing, telephone and staff;•fees and expenses associated with independent audits and outside legal costs; and•all other expenses incurred by either our Administrator or us in connection with administering our business, includingpayments under the Administration Agreement that will be based upon our allocable portion of overhead and otherexpenses incurred by our Administrator in performing its obligations under the Administration Agreement, including rent,the fees and expenses associated with performing compliance functions, and our allocable portion of any costs ofcompensation and related expenses of our chief compliance officer and our chief financial officer and their respectiveadministrative support staff.Critical Accounting Policies and Use of EstimatesIn the preparation of our consolidated financial statements and related disclosures, we have adopted various accountingpolicies that govern the application of U.S. GAAP. Our significant accounting policies are described in Note 2 to the consolidatedfinancial statements. While all of these policies are important to understanding our financial statements, certain accountingpolicies and estimates are considered critical due to their impact on the reported amounts of assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses for the periods covered by such financial statements. Wehave identified investment valuation, revenue recognition, and income taxes as our most critical accounting estimates. Wecontinuously evaluate our estimates, including those related to the matters described below.71  TABLE OF CONTENTSBecause of the nature of the judgments and assumptions we make, actual results could materially differ from those estimates underdifferent assumptions or conditions. A discussion of our critical accounting policies follows.Valuation of InvestmentsThe Company applies fair value accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic820 — Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework used tomeasure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, the Company hascategorized its financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fairvalue hierarchy as discussed in Note 4 to our consolidated financial statements.In determining fair value, our board of directors (the “Board”) uses various valuation approaches, and engages a third-partyindependent valuation firm, which provides positive assurance on the investments it reviews. In accordance with U.S. GAAP, a fairvalue hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use ofunobservable inputs by requiring that the most observable inputs be used when available.Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtainedfrom sources independent of the Board. Unobservable inputs reflect the Boards’ assumptions about the inputs market participantswould use in pricing the asset or liability developed based upon the best information available in the circumstances. The fairvalue hierarchy is categorized into three levels based on the inputs as follows:Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Companyhas the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations arebased on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entaila significant degree of judgment.Level 2 — Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable,either directly or indirectly.Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.The availability of valuation techniques and observable inputs can vary from security to security and is affected by a widevariety of factors including the type of security, whether the security is new and not yet established in the marketplace, and othercharacteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable orunobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarilyrepresent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonablydetermined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than thevalues that would have been used had a market for the securities existed. Accordingly, the degree of judgment exercised by theCompany in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fairvalue may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair valuehierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that issignificant to the fair value measurement.Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specificmeasure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflectthose that market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that arecurrent as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability ofprices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower levelwithin the fair value hierarchy.72  TABLE OF CONTENTSAs a practical expedient, the Company used net asset value (“NAV”) as the basis for the fair value of its investment in CSLLF.CSLLF recorded its underlying investments at fair value on a daily basis utilizing pricing information from third-party sources. Inthe event pricing is not available or an investment is considered illiquid, management may perform model-based analyticalvaluations in instances where an investment is considered illiquid or for which pricing is not available from third-party sources.Valuation TechniquesEnterprise Value Waterfall ApproachThe enterprise value waterfall approach determines an enterprise value based on EBITDA multiples of publicly tradedcompanies that are considered similar to the subject portfolio company. The Company considers a variety of items in determininga reasonable pricing multiple, including, but not limited to, operating results, budgeted projections, growth, size, risk,profitability, leverage, management depth, diversification, market position, supplier or customer dependence, asset utilization,liquidity metrics, and access to capital markets. EBITDA of the portfolio company is adjusted for non-recurring items in order toreflect a normalized level of earnings that is representative of future earnings. In certain instances, the Company may also utilizerevenue multiples to determine enterprise value. When available, the Company may assign a pricing multiple or value its equityinvestments based on the value of recent investment transactions in the subject portfolio company or offers to purchase theportfolio company. The enterprise value is adjusted for financial instruments with seniority to the Company’s ownership and forthe effect of any instrument which may dilute the Company’s investment in the portfolio company. The adjusted enterprise valueis then apportioned based on the seniority and privileges of the Company’s investments within the portfolio company.The enterprise value waterfall approach is primarily utilized to value the Company’s equity securities, including warrants.However, the Company may utilize the enterprise value waterfall approach to value certain debt securities.Income ApproachThe income approach utilizes a discounted cash flow methodology in which the Company estimates fair value based on thepresent value of expected cash flows discounted at a market rate of interest. The determination of a discount rate, or required rateof return, takes into account the portfolio company’s fundamentals and perceived credit risk. Because the majority of theCompany’s portfolio companies do not have a public credit rating, determining a discount rate often involves assigning animplied credit rating based on the portfolio company’s operating metrics compared to average metrics of similar publicly rateddebt. Operating metrics include, but are not limited to, EBITDA, interest coverage, leverage ratio, return on capital, and debt toequity ratios. The implied credit rating is used to assign a base discount rate range based on publicly available yields on similarlyrated debt securities. The Company may apply a premium to the discount rate utilized in determining fair value when performancemetrics and other qualitative information indicate that there is an additional level of uncertainty about collectability of cashflows.Asset ApproachThe asset approach values an investment based on value or the underlying collateral securing the investment. This approach isused when the Company has reason to believe that it will not collect all principal and interest in accordance with the contractualterms of the debt agreement.Revenue RecognitionThe Company’s revenue recognition policies are as follows:Interest income and paid-in-kind interest income: Interest income is recorded on the accrual basis to the extent that suchamounts are expected to be collected. The Company has loans in the portfolio that contain a payment-in-kind (“PIK”) provision.The PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at maturity, isrecorded on the accrual basis to the extent that such amounts are expected to be collected. PIK interest is not accrued if theCompany does not expect the issuer to be able to pay all principal and interest when due.73  TABLE OF CONTENTSNon-accrual investments: Generally, when interest and/or principal payments on a loan become 90 days or more past due, or ifthe Company otherwise does not expect the borrower to be able to service its debt and other obligations, the Company will placethe loan on non-accrual status, and will generally cease recognizing interest income and PIK interest on that loan for financialreporting purposes. Interest payments received on non-accrual loans may be recognized as income or applied to principaldepending upon management’s judgment. The Company writes off any previously accrued and uncollected cash interest when itis determined that interest is no longer considered collectible. The Company may elect to cease accruing PIK interest and continueaccruing interest income in cases where a loan is currently paying its interest income but, in management’s judgment, there is areasonable likelihood of principal loss on the loan. Non-accrual loans are returned to accrual status when the borrower’s financialcondition improves such that management believes current interest and principal payments are expected to be collected.Gains and losses on investment sales and paydowns: Realized gains and losses on investments are recognized using thespecific identification method.Dividend income and paid-in-kind dividends: Dividend income is recognized on the date dividends are declared. Dividendincome may be reversed in the event that a previously declared dividend is no longer expected to be paid by the portfoliocompany. The Company holds preferred equity investments in the portfolio that contain a payment-in-kind dividend (“PIKdividends”) provision. PIK dividends, which represent contractually deferred dividends added to the equity balance, are recordedon the accrual basis to the extent that such amounts are expected to be collected. The Company will typically cease accrual of PIKdividends when the fair value of the equity investment is less than the cost basis of the investment or when it is otherwisedetermined by management that PIK dividends are unlikely to be collected. If management determines that a decline in fair valueis temporary in nature and the PIK dividends are more likely than not to be collected, management may elect to continue accruingPIK dividends.Original issue discount/premiums: Discounts/premiums received to par on loans purchased are capitalized and accreted oramortized into income over the life of the loan. Any remaining discount/premium is accreted or amortized into income uponprepayment of the loan.Other income: Origination fees (to the extent services are performed to earn such income), amendment fees, consent fees, andother fees associated with investments in portfolio companies are recognized as income when the investment transaction closes.Prepayment penalties received by the Company for debt instruments repaid prior to the maturity date are recorded as income uponreceipt.Income TaxesPrior to the Formation Transactions, the Legacy Funds were treated as partnerships for U.S. federal, state and local income taxpurposes and, therefore, no provision has been made in the accompanying consolidated financial statements for federal, state orlocal income taxes. In accordance with the partnership tax law requirements, each partner would include their respectivecomponents of the Legacy Funds’ taxable profits or losses, as shown on their Schedule K-1 in their respective tax or informationreturns. The Legacy Funds are disregarded entities for tax purposes prior to and post the Formation Transactions.The Company has elected to be treated for U.S. federal income tax purposes, and intends to comply with the requirement toqualify annually thereafter, as a RIC under Subchapter M of the Code and, among other things, intends to make the requisitedistributions to its stockholders which will relieve the Company from U.S. federal income taxes. Therefore, no provision has beenrecorded for U.S. federal income taxes.In order to qualify as a RIC, among other requirements, the Company is required to timely distribute to its stockholders at least90.0% of its investment company taxable income, as defined by the Code, for each fiscal tax year. The Company will be subject toa nondeductible U.S. federal excise tax of 4.0% on undistributed income if it does not distribute at least 98.0% of its ordinaryincome in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31.Depending on the level of taxable income earned in an excise tax year, the Company may choose to carry forward taxableincome in excess of current year dividend distributions into the next excise tax year and pay a 4.0% excise tax on such income, asrequired. To the extent that the Company determines that its estimated current year annual taxable income will be in excess ofestimated current year dividend distributions74  TABLE OF CONTENTSfor excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned.Since the Company’s IPO, the Company has not accrued or paid excise tax.In accordance with certain applicable treasury regulations and private letter rulings issued by the Internal Revenue Service, aRIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receivehis or her entire distribution in either cash or stock of the RIC subject to a limitation on the aggregate amount of cash to bedistributed to all stockholders, which limitation must be at least 20.0% of the aggregate declared distribution. If too manystockholders elect to receive cash, each stockholder electing to receive cash will receive a pro rata amount of cash (with thebalance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20.0% of hisor her entire distribution in cash. If these and certain other requirements are met, for U.S federal income tax purposes, the amountof the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock.ASC Topic 740 — Income Taxes (“ASC 740”), provides guidance for how uncertain tax positions should be recognized,measured, presented and disclosed in the consolidated financial statements. ASC 740 requires the evaluation of tax positionstaken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are“more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not”threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, ifany, related to unrecognized tax benefits as income tax expense in the consolidated statements of operations. As of December 31,2016 and December 31, 2015, there were no uncertain tax positions.The Company is required to determine whether a tax position of the Company is more likely-than-not to be sustained uponexamination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on thetechnical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater thanfifty percent likely of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized could resultin the Company recording a tax liability that could negatively impact the Company’s net assets.U.S. GAAP provides guidance on thresholds, measurement, de-recognition, classification, interest and penalties, accounting ininterim periods, disclosure, and transition that is intended to provide better financial statement comparability among differententities.The Company has concluded that it was not necessary to record a liability for any such tax positions as of December 31, 2016and 2015. However, the Company’s conclusions regarding this policy may be subject to review and adjustment at a later datebased on factors including, but not limited to, ongoing analyses of, and changes to, tax laws, regulations and interpretationsthereof.The Company’s activities from commencement of operations remain subject to examination by U.S. federal, state, and localtax authorities. No interest expense or penalties have been assessed for the years ended December 31, 2016, 2015 and 2014. If theCompany were required to recognize interest and penalties, if any, related to unrecognized tax benefits this would be recognizedas income tax expense in the consolidated statements of operations.Portfolio and Investment ActivityAs of December 31, 2016, our portfolio consisted of investments in 53 portfolio companies with a fair value of approximately$541.6 million.During the year ended December 31, 2016, we made approximately $120.8 million of investments and had approximately$163.6 million in repayments and sales of investments resulting in net repayments and sales of approximately $42.8 million forthe year. During the year ended December 31, 2015, we made approximately $260.6 million of investments and hadapproximately $142.7 million in repayments and sales resulting in net investments of approximately $117.9 million for the year.During the year ended December 31, 2014, we made approximately $216.3 million of investments and had approximately $80.2million in repayments and sales resulting in net investments of approximately $136.1 million for the year.75  TABLE OF CONTENTSOn August 31, 2016, we sold a portion of 14 securities across 10 portfolio companies to CapitalSouth Partners Florida SidecarFund II, L.P. (“FSC II”), including granting an option to acquire a portion of our equity investment in Eastport Holdings, LLC (the“Written Call Option”), in exchange for 100% of the partnership interests in FSC II. Concurrent with the sale of these assets to FSCII, we received cash consideration of $47.6 million from an affiliated third-party purchaser in exchange for 100% of thepartnership interests of FSC II. These assets were sold to FSC II at their June 30, 2016 fair market values, resulting in net realizedgain of $0.1 million. The proceeds from the redemption of partnership interests in FSC II are included in gross repayments andsales of investments received for the year ended December 31, 2016. Our Board pre-approved this transaction pursuant to Section57(f) of the 1940 Act.The Company collected and will periodically collect principal and interest payments related to certain of the securitiespurchased by FSC II. Such principal and interest payments will be remitted timely to FSC II based on its proportionate share of thesecurity. FSC II does not have any recourse to the Company related to the non-payment of principal or interest related by theunderlying issuers of the securities.The Written Call Option granted FSC II the right to purchase up to 31.25% of our equity investment in Eastport Holdings,LLC. The Written Call Option has a strike price of $1.5 million and a termination date of August 31, 2018. The fair value of theWritten Call Option, which has been treated as a derivative liability and is recorded in the financial statement line item WrittenCall Option at fair value in our consolidated statements of assets and liabilities, was approximately $2.7 million as of December31, 2016. For purposes of determining the fair value of the Written Call Option, we calculated the difference in the fair value of theunderlying equity investment in Eastport Holdings, LLC and the strike price of the Written Call Option, or intrinsic value. Thetime value of the Written Call Option as of December 31, 2016 was determined to be insignificant. The Written Call Option isclassified as a Level 3 financial instrument. The Written Call Option was the only option contract granted by us during the yearended December 31, 2016, and the Written Call Option remained outstanding as of December 31, 2016.As of December 31, 2016, our average portfolio company investment and our largest portfolio company investment atamortized cost and fair value was approximately $9.7 million and $10.2 million, and $22.1 million and $29.9 million,respectively. As of December 31, 2016, the Company had approximately $36.3 million of cash and cash equivalents. As ofDecember 31, 2015, our average portfolio company investment and our largest portfolio company investment at amortized costand fair value was approximately $10.0 million and $10.4 million, and $28.3 million and $28.3 million, respectively. As ofDecember 31, 2015, the Company had approximately $34.1 million of cash and cash equivalents.As of December 31, 2016, our debt investment portfolio, which represented 82.8% of our total portfolio, had a weightedaverage annualized yield of approximately 13.2%, exclusive of the impact of our non-accrual debt investments. As of December31, 2016, 57.1% of our debt investment portfolio was bearing a fixed rate of interest. As of December 31, 2015, our debtinvestment portfolio, which represented 80.2% of our total portfolio, had a weighted average yield of approximately 12.3%,exclusive of the impact of our non-accrual debt investments. As of December 31, 2015, 65.5% of our debt investment portfoliowas bearing a fixed rate of interest.The following table summarizes the amortized cost and the fair value of investments and cash and cash equivalents as ofDecember 31, 2016 (dollars in thousands): Investments atAmortized Cost Percentageof Total Investments atFair Value Percentageof TotalFirst Lien Debt $244,647 44.5% $226,578 39.2% Second Lien Debt 74,559 13.5 71,483 12.3 Subordinated Debt 148,849 27.1 150,232 26.0 Equity and Warrants 45,721 8.3 93,346 16.2 Cash and Cash Equivalents 36,281 6.6 36,281 6.3 Total $550,057 100.0% $577,920 100.0% 76  TABLE OF CONTENTSThe following table summarizes the amortized cost and the fair value of investments and cash and cash equivalents as ofDecember 31, 2015 (dollars in thousands): Investments atAmortized Cost Percentageof Total Investments atFair Value Percentageof TotalFirst Lien Debt $207,957 34.5% $199,843 31.9% Second Lien Debt 82,435 13.6 80,610 12.9 Subordinated Debt 205,480 34.0 194,485 31.0 Equity and Warrants 54,315 9.0 99,651 15.9 Capitala Senior Liquid Loan Fund I, LLC 20,000 3.3 17,867 2.9 Cash and Cash Equivalents 34,105 5.6 34,105 5.4 Total $604,292 100.0% $626,561 100.0% The following table shows the portfolio composition by industry grouping at fair value (dollars in thousands): December 31, 2016 December 31, 2015 Investments atFair Value Percentage ofTotal Portfolio Investments atFair Value Percentage ofTotal PortfolioBusiness Services $51,731 9.5% $24,280 4.1% Consumer Products 30,209 5.6 — — Medical Device Distributor 25,768 4.8 27,681 4.7 Financial Services 25,553 4.7 26,230 4.4 Information Technology 24,232 4.5 8,000 1.3 Specialty Retail 22,067 4.1 — — Consumer Electronics 20,818 3.8 28,300 4.8 Footwear Retail 19,236 3.5 18,682 3.2 Building Products 18,152 3.3 18,299 3.1 Transportation 16,856 3.1 27,244 4.6 Food Product Manufacturer 16,599 3.1 17,436 2.9 Sales & Marketing Services 16,376 3.0 17,858 3.0 Oil & Gas Services 15,083 2.8 31,472 5.3 Retail 15,000 2.8 — — Home Décor Manufacturer 14,670 2.7 14,614 2.5 Textile Equipment Manufacturer 13,134 2.4 12,854 2.2 Printing Services 12,761 2.4 17,088 2.9 Bowling Products 12,503 2.3 12,124 2.0 Computer Supply Retail 12,183 2.2 11,038 1.9 Farming 11,779 2.2 15,408 2.6 Healthcare Management 10,851 2.0 11,525 1.9 Bakery Supplies Distributor 10,776 2.0 16,146 2.8 Industrial Equipment Rental 10,755 2.0 13,181 2.2 Fuel Transportation Services 10,303 1.9 4,425 0.8 Automobile Part Manufacturer 10,076 1.9 11,908 2.0 Construction Services 9,500 1.7 12,500 2.1 Professional and Personal Digital Imaging 9,000 1.7 15,000 2.5 Healthcare 8,582 1.6 9,750 1.7 QSR Franchisor 8,497 1.6 3,342 0.6 Conglomerate 8,374 1.5 7,321 1.2 Produce Distribution 6,182 1.1 5,182 0.9 Specialty Clothing 5,011 0.9 4,696 0.8 77  TABLE OF CONTENTS December 31, 2016 December 31, 2015 Investments atFair Value Percentage ofTotal Portfolio Investments atFair Value Percentage ofTotal PortfolioSatellite Communications $5,000 0.9% $4,932 0.8% Restaurant 4,857 0.9 — — Industrial Specialty Services 4,750 0.9 4,881 0.8 Oil & Gas Engineering and ConsultingServices 4,500 0.8 10,075 1.7 Online Merchandise Retailer 4,169 0.8 4,382 0.7 Advertising & Marketing Services 3,910 0.7 3,926 0.7 Replacement Window Manufacturer 2,571 0.5 3,196 0.5 Automotive Chemicals & Lubricants 2,230 0.4 3,981 0.7 Specialty Defense Contractor 1,532 0.3 1,800 0.3 Home Repair Parts Manufacturer 1,408 0.3 5,401 0.9 Data Processing & Digital Marketing 1,015 0.2 10,206 1.7 Household Product Manufacturer 1,001 0.2 758 0.1 Entertainment 987 0.2 986 0.2 Retail Display & Security Services 537 0.1 21,917 3.7 In-Home Healthcare Services 446 0.1 721 0.1 Dental Practice Management 109 0.0 8,452 1.4 IT Government Contracting — — 20,000 3.4 Investment Fund — — 17,867 3.0 Energy Services — — 10,500 1.8 Crane Rental and Sales — — 5,032 0.9 Industrial Manufacturing — — 3,582 0.6 Scrap Metal Recycler — — 3,106 0.5 Disaster Recovery Homebuilding — — 2,000 0.3 Western Wear Retail — — 1,171 0.2 Total $541,639 100.0% $592,456 100.0% With the exception of the international investment holdings noted below, all investments made by the Company as ofDecember 31, 2016 and December 31, 2015 were made in portfolio companies located in the U.S. The geographic composition isdetermined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primarysource of the portfolio company’s business. The following table shows the portfolio composition by geographic region at fairvalue as of December 31, 2016 and December 31, 2015 (dollars in thousands): At December 31, 2016 At December 31, 2015 Investments atFair Value Percentage ofTotal Portfolio Investments atFair Value Percentage ofTotal PortfolioSouth $257,162 47.5% $307,056 51.9% Midwest 118,682 21.9 87,911 14.8 West 85,642 15.8 85,414 14.4 Northeast 68,613 12.7 102,020 17.2 International 11,540 2.1 10,055 1.7 Total $541,639 100.0% $592,456 100.0% In addition to various risk management tools, our Investment Advisor also uses an investment rating system to characterizeand monitor our expected level of return on each investment in our portfolio.As part of our valuation procedures, we risk rate all of our investments. In general, our investment rating system uses a scale of1 to 5, with 1 being the lowest probability of default and principal loss. Our internal rating is not an exact system, but it is usedinternally to estimate the probability of: (i) default on our debt securities and (ii) loss of our debt principal, in the event of adefault. In general, our internal rating system78  TABLE OF CONTENTSmay also assist our valuation team in its determination of the estimated fair value of equity securities or equity-like securities. Ourinternal risk rating system generally encompasses both qualitative and quantitative aspects of our portfolio companies.Our internal investment rating system incorporates the following five categories: InvestmentRating Definition1 In general, the investment may be performing above our internal expectations. Fullreturn of principal and interest is expected. Capital gain is expected.2 In general, the investment may be performing within our internal expectations, andpotential risks to the applicable investment are considered to be neutral or favorablecompared to any potential risks at the time of the original investment. All newinvestments are initially given this rating.3 In general, the investment may be performing below our internal expectations andtherefore, investments in this category may require closer internal monitoring;however, the valuation team believes that no loss of investment return (interest and/ordividends) or principal is expected. The investment also may be out of compliancewith certain financial covenants.4 In general, the investment may be performing below internal expectations andquantitative or qualitative risks may have increased substantially since the originalinvestment. Loss of some or all principal is expected.5 In general, the investment may be performing substantially below our internalexpectations and a number of quantitative or qualitative risks may have increasedsubstantially since the original investment. Loss of some or all principal is expected.Our Investment Advisor will monitor and, when appropriate, change the investment ratings assigned to each investment in ourportfolio. In connection with our valuation process, our Investment Advisor will review these investment ratings on a quarterlybasis, and our Board will affirm such ratings. The investment rating of a particular investment should not, however, be deemed tobe a guarantee of the investment’s future performance.The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of December31, 2016 and 2015 (dollars in thousands): As of December 31, 2016 As of December 31, 2015Investment Rating Investments atFair Value Percentage ofTotalInvestments Investments atFair Value Percentage ofTotalInvestments1 $183,826 33.9% $191,894 32.4% 2 215,058 39.7 335,388 56.6 3 125,381 23.2 37,164 6.3 4 17,374 3.2 28,010 4.7 5 — — — — Total $541,639 100.0% $592,456 100.0% As of December 31, 2016, we had debt investments in three portfolio companies on non-accrual status with an amortized costof $29.5 million and a fair value of $17.4 million, which represented 5.7% and 3.2% of the investment portfolio, respectively. Asof December 31, 2015, we had debt investments in five portfolio companies on non-accrual status with an amortized cost of $47.1million and a fair value of $28.0 million, which represented 8.3% and 4.7% of the investment portfolio, respectively.Capitala Senior Liquid Loan Fund I, LLCOn March 24, 2015, the Company and Trinity Universal Insurance Company (“Trinity”), a subsidiary of Kemper Corporation(“Kemper”), entered into a limited liability company agreement to co-manage CSLLF. The purpose and design of the joint venturewas to invest primarily in broadly syndicated senior secured loans to middle-market companies, which were purchased on thesecondary market. Capitala and Trinity committed79  TABLE OF CONTENTSto provide $25.0 million of equity to CSLLF, with Capitala providing $20.0 million and Trinity providing $5.0 million, resultingin an 80%/20% economic ownership between the two parties. The board of directors and investment committee of CSLLF weresplit 50/50 between Trinity and Capitala, resulting in equal voting power between the two entities. In September 2016, theCompany and Trinity elected to wind-down operations of CSLLF. During the fourth quarter of 2016, CSLLF sold all referencedassets underlying the total return swap (“TRS”) and declared final distributions, inclusive of dividends and return of capital, inDecember 2016.For the years ended December 31, 2016 and December 31, 2015, we received $1.8 million and $0.9 million, respectively, individend income from our equity interest in CSLLF. For the year ended December 31, 2016, CSLLF declared a return of capitaldistribution to the Company in the amount of $20.0 million, which included $19.9 million in cash received in December 2016and $0.1 million to be paid in the first quarter of 2017.On March 27, 2015, CSLLF entered into a TRS with Bank of America, N.A. (“Bank of America”) that was indexed to a basketof senior secured loans purchased by CSLLF. CSLLF obtained the economic benefit of the loans underlying the TRS, includingthe net interest spread between the interest income generated by the underlying loans and the interest expense type payment underthe TRS, the realized gain (loss) on liquidated loans, and the unrealized appreciation (depreciation) on the underlying loans.The terms of the TRS were governed by an ISDA 2002 Master Agreement, the Schedule thereto, and Credit Support Annex tosuch Schedule, and the confirmation exchanged thereunder, between CSLLF and Bank of America, which collectively establishedthe TRS, and are collectively referred to herein as the “TRS Agreement.” Pursuant to the terms of the TRS Agreement, CSLLFselected a portfolio of loans with a maximum market value (determined at the time each such loan becomes subject to the TRS) of$100.0 million, which was also referred to as the maximum notional amount of the TRS. Each individual loan, and the portfolio ofloans taken as a whole, had to meet criteria described in the TRS Agreement. CSLLF received from Bank of America, a periodicpayment on set dates that was based upon any coupons, both earned and accrued, generated by the loans underlying the TRS,subject to limitations described in the TRS Agreement as well as any fees associated with the loans included in the portfolio.CSLLF paid to Bank of America interest at a rate equal to the London Interbank Offered Rate (“LIBOR”) plus 1.25% per annum;the LIBOR option paid by CSLLF was determined on an asset by asset basis such that the tenor of the LIBOR option (1 month, 3month, etc.) matched the tenor of the underlying reference asset. In addition, upon the termination of any loan subject to the TRSor any repayment of the underlying reference asset, CSLLF either received from Bank of America the appreciation in the value ofsuch loan, or paid to Bank of America any depreciation in the value of such loan.CSLLF was required to pay an unused facility fee of 1.25% on any amount of unused facility under the minimum facilityamount of $70.0 million as outlined in the TRS Agreement. Such unused facility fees were not applied during the first 4 monthsand last 60 days of the term of the TRS. CSLLF also agreed to pay Bank of America customary fees and expenses in connectionwith the establishment and maintenance of the TRS.CSLLF was required to initially cash collateralize a specified percentage of each loan (generally 20% to 35% of the marketvalue of senior secured loans) included under the TRS in accordance with margin requirements described in the TRS Agreement.As of December 31, 2016 and December 31, 2015, CSLLF has posted $0.0 million and $19.1 million, respectively, in collateral toBank of America in relation to the TRS which is recorded on CSLLF’s statements of assets and liabilities as cash held as collateralon total return swap. CSLLF may be required to post additional collateral as a result of a decline in the mark-to-market value of theportfolio of loans subject to the TRS. The cash collateral represents CSLLF’s maximum credit exposure as of December 31, 2016and December 31, 2015.In connection with the TRS, CSLLF has made customary representations and warranties and is required to comply with variouscovenants, reporting requirements and other customary requirements for similar transactions governed by an ISDA 2002 MasterAgreement. As of December 31, 2016, CSLLF was in compliance with regards to any covenants or requirements of the TRS.80  TABLE OF CONTENTSCSLLF’s receivable due on the TRS represents realized amounts from payments on underlying loans in the total return swapportfolio. At December 31, 2016 and December 31, 2015, the receivable due on TRS was $0.1 million and $0.5 million,respectively, and is recorded on CSLLF’s statements of assets and liabilities below. CSLLF does not offset collateral posted inrelation to the TRS with any unrealized appreciation or depreciation outstanding in the statements of assets and liabilities as ofDecember 31, 2016 and December 31, 2015.Transactions in TRS contracts during the year ended December 31, 2016 resulted in $2.3 million in realized gains and $2.8million in unrealized appreciation, which is recorded on CSLLF’s statements of operations below. Transactions in TRS contractsduring the year ended December 31, 2015 resulted in $1.4 million in realized gains and $(2.8) million in unrealized depreciation,which is recorded on CSLLF’s statements of operations below.CSLLF only held one derivative position as of December 31, 2015. The derivative held was subject to a netting arrangement.There were no derivative positions held as of December 31, 2016. The following table represents CSLLF’s gross and net amountsafter offset under Master Agreements of the derivative assets and liabilities presented by the derivative type, net of the relatedcollateral pledged by the CSLLF as of December 31, 2015 (dollars in thousands): Gross DerivativeAssets/(Liabilities)Subject to MA DerivativeAmountAvailable forOffset Net AmountPresentedin the SelectedStatements ofAssetsand Liabilities CashCollateralReceived NetAmount ofDerivativeAssets/(Liabilities)December 31, 2015 Total ReturnSwap(1) $(2,828) $— $(2,828) $— $(2,828) (1)Cash was posted for initial margin requirements for the total return swap as of December 31, 2015 and is reported on CSLLF’sstatements of assets and liabilities as cash collateral on total return swap.The following represents the volume of the CSLLF’s derivative transactions during the years ended December 31, 2016 and2015 (dollars in thousands): For theyear endedDecember 31,2016 For theyear endedDecember 31,2015(1)Average notional par amount of contract $56,681 $61,306 (1)Average calculated from period of TRS inception, March 27, 2015 to December 31, 2015.Below is a summary of CSLLF’s portfolio of TRS reference assets as of December 31, 2015 (dollars in thousands): As ofDecember 31,2015Senior secured loans(1) $81,201 Weighted average current interest rate on senior secured loans 5.2% Number of borrowers in CSLLF 45 Largest portfolio company investment(1) $2,985 Total of five largest portfolio company investments(1) $13,424 (1)Based on principal amount outstanding at period end.81  TABLE OF CONTENTSThe following is a summary of the TRS reference assets as of December 31, 2015 (dollars in thousands): Portfolio Company(4) Business Description Maturity Date Current Interest Rate(2)(6) Principal Cost FairValue(1) UnrealizedAppreciation/(Depreciation)21st Century Oncology, Inc. Healthcare, Education andChildcare April, 2022 6.5% (3 Month LIBOR+5.5%, 1% floor) $1,990 $1,970 $1,662 $(308) ABG Intermediate Holdings 2,LLC(5) Textiles and Leather May, 2021 5.5% (3 Month LIBOR+4.5%, 1% floor) 1,733 1,715 1,698 (17) American Rock Salt Company,LLC Mining, Steel, Iron and NonPrecious Metals May, 2021 4.75% (3 MonthLIBOR +3.75%, 1% floor) 1,985 1,985 1,892 (93) Anchor Glass Container Corp Containers, Packaging and Glass July, 2022 4.5% (3 Month LIBOR+3.5%, 1% floor) 482 479 479 — Ardent Legacy Acquisitions,Inc. Healthcare, Education andChildcare August, 2021 6.5% (3 Month LIBOR+5.5%, 1% floor) 1,995 1,975 1,975 — Aspen Dental Management, Inc. Healthcare, Education andChildcare April, 2022 5.5% (3 Month LIBOR+4.5%, 1% floor) 1,493 1,485 1,487 2 Asurion, LLC Insurance August, 2022 5.0% (3 Month LIBOR+4.0%, 1% floor) 2,239 2,228 2,043 (185) Bass Pro Group, LLC Retail Stores June, 2020 4.0% (3 Month LIBOR+3.25%, .75% floor) 992 989 951 (38) Belk, Inc. Retail Stores December,2022 5.75% (1 MonthLIBOR +4.75%, 1% floor) 2,000 1,780 1,758 (22) Bioplan USA, Inc. Diversified/Conglomerate Service September,2021 5.75% (1 MonthLIBOR +4.75%, 1% floor) 992 843 831 (12) Blue Coat Systems, Inc. Electronics May, 2022 4.5% (2 Month LIBOR+3.5%, 1% floor) 2,000 2,000 1,928 (72) Brock Holdings III, Inc. Buildings and Real Estate March, 2017 6.0% (3 Month LIBOR+4.5%, 1.5% floor) 1,488 1,480 1,383 (97) CDS U.S. IntermediateHoldings, Inc. Leisure, Amusement,Entertainment July, 2022 5.0% (3 Month LIBOR+4.0%, 1% floor) 997 995 940 (55) Chelsea Petroleum Products ILLC Oil & Gas October, 2022 5.25% (1 MonthLIBOR +4.25%, 1% floor) 500 498 485 (13) Communications Sales &Leasing, Inc. Finance October, 2022 5.0% (1 Month LIBOR+4.0%, 1% floor) 1,990 1,950 1,838 (112) Concordia Healthcare Corp Healthcare, Education andChildcare October, 2021 5.25% (3 MonthLIBOR +4.25%, 1% floor) 1,000 945 958 13 Convatec Healthcare E S.A. Healthcare, Education andChildcare June, 2020 4.25% (6 MonthLIBOR +3.25%, 1% floor) 1,990 1,988 1,951 (37) Emerging MarketsCommunications, LLC Telecommunications July, 2021 6.75% (3 MonthLIBOR +5.75%, 1% floor) 2,487 2,450 2,332 (118) Eresearch Technology, Inc. Healthcare, Education andChildcare May, 2022 6.0% (3 Month LIBOR+5.0%, 1% floor) 2,487 2,475 2,434 (41) Genoa Healthcare Group, LLC Healthcare, Education andChildcare May, 2022 4.5% (3 Month LIBOR+3.5%, 1% floor) 1,990 1,980 1,930 (50) Hostess Brands, Inc. Beverage, Food and Tobacco August, 2022 4.5% (3 Month LIBOR+3.5%, 1% floor) 1,995 1,990 1,983 (7) IMG Worldwide, Inc. Leisure, Amusement,Entertainment May, 2021 5.25% (3 MonthLIBOR +4.25%, 1% floor) 1,990 1,995 1,953 (42) Infiltrator Systems, Inc. Containers, Packaging and Glass May, 2022 5.25% (3 MonthLIBOR +4.25%, 1% floor) 995 990 988 (2) Informatica Corporation Electronics August, 2022 4.5% (3 Month LIBOR+3.5%, 1% floor) 2,494 2,489 2,394 (95) Integra Telecom, Inc. Telecommunications August, 2020 5.25% (3 MonthLIBOR +4.25%, 1% floor) 2,977 2,963 2,873 (90) JILL Holdings, LLC Retail Stores May, 2022 6.0% (3 Month LIBOR+5.0%, 1% floor) 1,995 1,985 1,905 (80) LPL Holdings, Inc Finance November,2022 4.75% (2 MonthLIBOR +4.0%, .75% floor) 1,500 1,485 1,466 (19) LS Deco, LLC Buildings and Real Estate May, 2022 5.5% (3 Month LIBOR+4.5%, 1% floor) 1,375 1,361 1,334 (27) LTF Merger Sub, Inc. Leisure, Amusement,Entertainment June, 2022 4.25% (3 MonthLIBOR +3.25%, 1% floor) 1,493 1,488 1,452 (36) Mitel Networks Corp Telecommunications April, 2022 5.5% (3 Month LIBOR+4.5%, 1% floor) 2,985 2,955 2,951 (4) Mohegan Tribal GamingAuthority Leisure, Amusement,Entertainment November,2019 5.5% (3 Month LIBOR+4.5%, 1% floor) 1,929 1,927 1,881 (46) 82  TABLE OF CONTENTS Portfolio Company(4) Business Description Maturity Date Current Interest Rate(2)(6) Principal Cost FairValue(1) UnrealizedAppreciation/(Depreciation)Navios Maritime MidstreamPartners, LP Cargo Transport June, 2020 5.5% (3 Month LIBOR+4.5%, 1% floor) $1,990 $1,970 $1,964 $(6) Novelis, Inc. Mining, Steel, Iron and NonPrecious Metals June, 2022 4.0% (3 Month LIBOR+3.25%, .75% floor) 2,488 2,475 2,369 (106) Penn Products Terminals, LLC Cargo Transport April, 2022 4.75% (3 MonthLIBOR +3.75%, 1% floor) 744 741 696 (45) Pharmaceutical ProductDevelopment Inc. Healthcare, Education andChildcare August, 2022 4.25% (3 MonthLIBOR +3.25%, 1% floor) 1,990 1,980 1,930 (50) Securus Technologies, Inc. Telecommunications April, 2020 5.25% (3 MonthLIBOR +4.25%, 1% floor) 2,000 1,980 1,425 (555) Skillsoft Corporation Electronics April, 2021 5.75% (6 MonthLIBOR +4.75%, 1% floor) 1,990 1,970 1,672 (298) Sterigenics-Nordion Holdings,LLC Healthcare, Education andChildcare May, 2022 4.25% (3 MonthLIBOR +3.25%, 1% floor) 1,995 1,990 1,935 (55) STG-Fairway Acquisitions, Inc Diversified/Conglomerate Service June, 2022 6.25% (3 MonthLIBOR +5.25%, 1% floor) 2,486 2,449 2,430 (19) Tekni-Plex Incorporated Containers, Packaging and Glass June, 2022 4.5% (3 Month LIBOR+3.5%, 1% floor) 2,487 2,475 2,475 — Touchtunes Music Corp Electronics May, 2022 5.75% (3 MonthLIBOR +4.75%, 1% floor) 1,493 1,485 1,448 (37) TWCC Holding Corp Broadcasting & Entertainment February, 2020 5.75% (1 MonthLIBOR +5.0%, .75% floor) 1,985 1,965 1,983 18 US Renal Care, Inc.(3) Healthcare, Education andChildcare November,2022 5.25% (3 MonthLIBOR +4.25%, 1% floor) 2,000 1,980 1,980 — USAGM Holdco LLC Diversified/Conglomerate Service July, 2022 4.75% (2 MonthLIBOR +3.75%, 1% floor) 2,000 1,980 1,903 (77) Zep, Inc. Non Durable Consumer Products June, 2022 5.5% (3 Month LIBOR+4.5%, 1% floor) 995 990 989 (1) $81,201 $80,268 $77,334 $(2,934) Total accrued interest, net of expenses $106 Total unrealized depreciation on TRS $(2,828) (1)Represents the fair value determined in accordance with ASC Topic 820. The determination of fair value is outside the scope ofthe Board’s valuation process described herein.(2)All interest is payable in cash.(3)The referenced asset is unsettled as of December 31, 2015.(4)All referenced assets are senior secured loans.(5)The referenced asset has an unfunded commitment of $0.3 million.(6)The interest rate disclosed reflects the interest rate as of the last day of the period. The borrower has the election to change thetenor of LIBOR utilized at each maturity; as such, the tenor reflected herein may change in future periods.83  TABLE OF CONTENTSBelow is certain summarized financial information for CSLLF as of December 31, 2016 and December 31, 2015 and for theyears ended December 31, 2016 and December 31, 2015 (dollars in thousands):Selected Statements of Assets and Liabilities: As ofDecember 31,2016 As ofDecember 31,2015ASSETS Cash held as collateral on Total Return Swap $— $19,145 Non-collateral cash and cash equivalents — 5,586 Receivable due on Total Return Swap 82 452 Total assets $82 $25,183 LIABILITIES Unrealized depreciation on Total Return Swap $— $2,828 Accrued expenses — 21 Distribution payable 82 — Total liabilities $82 $2,849 NET ASSETS Paid in capital $— $25,000 Undistributed realized income from operations — 162 Unrealized depreciation on Total Return Swap — (2,828) Total net assets $— $22,334 Total liabilities and net assets $82 $25,183 Selected Statements of Operations Information: For theYear EndedDecember 31,2016 For theperiod fromMarch 27,2015 toDecember 31,2015Administrative and legal expenses $(193) $(104) Net operating loss $(193) $(104) Net realized gain on Total Return Swap $2,306 $1,366 Net change in unrealized appreciation (depreciation) on Total ReturnSwap 2,828 (2,828) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROMOPERATIONS $4,941 $(1,566) Results of OperationsOperating results for the years ended December 31, 2016, 2015 and 2014 are as follows (dollars in thousands): For the Year Ended December 31, 2016 2015 2014Total investment income $68,312 $63,976 $49,528 Total expenses, net of fee waivers 39,272 38,649 29,562 Net investment income 29,040 25,327 19,966 Total realized gain (loss) from investments (22,766) 5,436 832 Net unrealized appreciation (depreciation) on investments 5,594 (16,913) (24,238) Net unrealized depreciation on written call option (2,716) — — Net increase (decrease) in net assets resulting from operations $9,152 $13,850 $(3,440) 84  TABLE OF CONTENTSInvestment incomeThe composition of our investment income for the years ended December 31, 2016, 2015 and 2014 was as follows (dollars inthousands): For the Year Ended December 31, 2016 2015 2014Interest income $54,990 $50,586 $36,067 Fee income 4,118 5,944 3,051 Payment-in-kind interest and dividend income 6,300 5,084 2,833 Dividend income 2,792 2,101 7,557 Interest from cash and cash equivalents 27 5 20 Other income 85 256 — Total investment income $68,312 $63,976 $49,528 The income reported as interest income and PIK interest and dividend income is generally based on the stated rates asdisclosed in our consolidated schedule of investments. Accretion/(Amortization) of discounts and premiums paid for purchasedloans are included in interest income as an adjustment to yield. As a general rule, our interest income and PIK interest anddividend income is recurring in nature.We also generate fee income primarily through origination fees charged for new investments, and secondarily via amendmentfees, consent fees, prepayment penalties, and other fees. While the fee income is typically non-recurring for each investment, mostof our new investments include an origination fee; as such, fee income is dependent upon our volume of directly originatedinvestments and the fee structure associated with those investments.We earn dividends on certain equity investments within our investment portfolio. As noted in our consolidated schedule ofinvestments, some investments are scheduled to pay a periodic dividend, though these recurring dividends do not make up asignificant portion of our total investment income. We may and have received more substantial one-time dividends from ourequity investments as part of dividend recapitalizations.For the year ended December 31, 2016, total investment income increased $4.3 million, or 6.8% compared to the year endedDecember 31, 2015. The increase from the prior period relates primarily to higher interest and PIK income from a larger averageinvestment portfolio. For the year ended December 31, 2016, we generated $2.1 million in origination fees from new deploymentsand $2.0 million in other fees. Comparatively, for the year ended December 31, 2015, we generated $3.5 million in originationfees from new deployments and $2.4 million in other fees. The year over year decline in origination fee income was due to adecline in investment originations. Dividend income increased from $2.1 million for the year ended December 31, 2015 to $2.8million for the year ended December 31, 2016, mostly driven by a $0.9 million increase in dividends paid by CSLLF.For the year ended December 31, 2015, total investment income increased $14.4 million, or 29.2% compared to the fiscal yearended December 31, 2014. The increase from the prior period relates primarily to higher interest and PIK income from a growinginvestment portfolio. For the year ended December 31, 2015, we generated $3.5 million in origination fees from new deploymentsand $2.4 million in other fees. Comparatively, for the year ended December 31, 2014, we generated $1.9 million in originationfees from new deployments and $1.2 million in other fees. The year over year increase in origination fee income was aided by anincrease in directly originated investments. The year over year increase in other fees was due primarily to $0.8 million inprepayment penalties for the year ended December 31, 2015, compared to $0.0 million for the year ended December 31, 2014.These increases in interest, fees, and PIK were offset by a $5.5 million decline in dividend income, from $7.6 million for the yearended December 31, 2014 to $2.1 million for the year ended December 31, 2015. The decline was driven by several significantdividends paid in 2014 as part of dividend recapitalizations and the overall shrinking of our equity portfolio since the IPO.85  TABLE OF CONTENTSOperating expensesThe composition of our expenses for the years ended December 31, 2016, 2015 and 2014 was as follows (dollars in thousands): For the Year Ended December 31 2016 2015 2014Interest and financing expenses $19,711 $19,022 $13,375 Base management fees, net of management fee waiver 10,588 10,590 9,051 Incentive fees, net of incentive fee waiver 5,169 4,985 2,838 General and administrative expenses 3,804 4,052 4,298 Total expenses, net of fee waivers $39,272 $38,649 $29,562 For the year ended December 31, 2016, operating expenses increased $0.6 million, or 1.6%, compared to the year endedDecember 31, 2015. The increase from the prior period was primarily due to an increase in interest and financing expenses due to alarger average outstanding balance on the Credit Facility for the year ended December 31, 2016 compared to the year endedDecember 31, 2015. Other expenses remained relatively unchanged year over year.For the year ended December 31, 2015, operating expenses increased $9.1 million, or 30.7%, compared to the year endedDecember 31, 2014. The increase from the prior period was primarily due to an increase in interest and financing expenses due to(i) the issuance of Notes in June of 2014 and (ii) the Credit Facility in October 2014. Management fees increased over prior perioddue to growth in assets under management. Incentive fees increased from prior period due to increase in pre-incentive fee netinvestment income.Net realized gains (losses) on sales of investmentsDuring the years ended December 31, 2016, 2015 and 2014, we recognized $(22.8) million, $5.4 million and $0.8 million ofnet realized gains (losses) on our portfolio investments, respectively.Net unrealized appreciation (depreciation) on investments and Written Call OptionNet change in unrealized appreciation (depreciation) on investments reflects the net change in the fair value of our investmentportfolio. For the years ended December 31, 2016, 2015 and 2014, we had $5.6 million, $(16.9) million and $(24.2) million ofunrealized appreciation (depreciation), respectively, on portfolio investments.Appreciation on investments for the year ended December 31, 2016 was partially offset by depreciation of $(2.7) millionrelated to the Written Call Option. As previously noted, unrealized appreciation (depreciation) on the Written Call Option is basedon the change in fair value of the underlying equity investment in Eastport Holdings, LLC less the strike price of the Written CallOption.Changes in net assets resulting from operationsFor the years ended December 31, 2016, 2015 and 2014 we recorded a net increase (decrease) in net assets resulting fromoperations of $9.2 million, $13.9 million, and $(3.4) million, respectively. Based on the weighted average shares of common stockoutstanding for the years ended December 31, 2016, 2015 and 2014, our per share net increase (decrease) in net assets resultingfrom operations was $0.58, $0.91 and $(0.27), respectively.Summarized Financial Information of Our Unconsolidated SubsidiariesThe Company holds a control interest, as defined by the 1940 Act, in five portfolio companies that are considered significantsubsidiaries under the guidance in Regulation S-X, but are not consolidated in the Company’s consolidated financial statements.Below is a brief description of each such portfolio company, along with summarized financial information as of December 31,2016 and December 31, 2015 and for the three years in the period then ended.86  TABLE OF CONTENTSPrint Direction, Inc.Print Direction, Inc., incorporated in Georgia on May 11, 2006, is a professional printing services firm serving customers,particularly fast food, retail, and other similar chains, throughout the U.S. Print Direction, Inc. also provides warehousing anddistribution services for these customers. The income (loss) the Company generated from Print Direction, Inc., which includes allinterest, dividends, PIK interest and dividends, fees, and unrealized appreciation (depreciation), was $(3.8) million, $(1.1) million,and $2.6 million for the years ended December 31, 2016, December 31, 2015 and December 31, 2014, respectively.Navis Holdings, Inc.Navis Holdings, Inc., incorporated in Delaware on December 21, 2010, designs and manufactures leading machinery for theglobal knit and woven finishing textile industries. The income the Company generated from Navis Holdings, Inc., which includesall interest, dividends, PIK interest and dividends, fees, and unrealized appreciation (depreciation), was $1.9 million, $4.2 millionand $4.2 million for the years ended December 31, 2016, December 31, 2015 and December 31, 2014, respectively.On-Site Fuel Service, Inc.On-Site Fuel Service, Inc. is a 100% owned subsidiary of On-Site Fuel Holdings, Inc., which was incorporated in Delaware onDecember 19, 2011. On-Site Fuel Service, Inc. provides fueling services for commercial and government vehicle fleets throughoutthe southeast U.S.. The income (loss) the Company generated from On-Site Fuel Service, Inc., which includes all interest,dividends, PIK interest and dividends, fees, and unrealized appreciation (depreciation), was $4.5 million, $(3.2) million, and $(4.8)million for the years ended December 31, 2016, December 31, 2015, and December 31, 2014, respectively.CableOrganizer Holdings, LLCCableOrganizer Holdings, LLC, a Delaware limited liability company that began operations on April 23, 2013, is a leadingonline provider of cable and wire management products. The income the Company generated from CableOrganizer Holdings,LLC, which includes all interest, dividends, PIK interest and dividends, fees, and unrealized appreciation (depreciation), was $1.9million, $0.4 million, and $2.9 million for the years ended December 31, 2016, December 31, 2015 and December 31, 2014,respectively.Eastport Holdings, LLCEastport Holdings, LLC, an Ohio limited liability company organized on November 1, 2011, is a holding company consistingof marketing and advertising companies located across the U.S. The income the Company generated from Eastport Holdings, LLC,which includes all interest, dividends, PIK interest and dividends, fees, and unrealized appreciation (depreciation), was $14.3million for the year ended December 31, 2016. The Company invested in the portfolio company in January 2016. As such,comparative financial information for the prior periods is not presented.The summarized financial information of our unconsolidated subsidiaries was as follows (dollars in thousands): As ofBalance Sheet – Print Direction, Inc. December31,2016 December 31,2015Current assets $3,596 $4,934 Noncurrent assets 5,023 4,805 Total assets $8,619 $9,739 Current liabilities $3,467 $2,997 Noncurrent liabilities 14,856 14,602 Total liabilities $18,323 $17,599 Total deficit $(9,704) $(7,860) 87  TABLE OF CONTENTS For the year endedStatements of Operations – Print Direction, Inc. December 31,2016 December 31,2015 December 31,2014Net sales $16,357 $17,637 $22,553 Cost of goods sold 7,221 7,428 8,994 Gross profit $9,136 $10,209 $13,559 Other expenses $12,315 $11,544 $13,455 Income (loss) before income taxes (3,179) (1,335) 104 Income tax provision (benefit) (1,335) (772) 36 Net income (loss) $(1,844) $(563) $68 As ofBalance Sheet – Navis Holdings, Inc. December 31,2016 December 31,2015Current assets $5,006 $5,000 Noncurrent assets 3,448 3,963 Total assets $8,454 $8,963 Current liabilities $2,458 $3,076 Noncurrent liabilities 7,017 6,926 Total liabilities $9,475 $10,002 Total deficit $(1,021) $(1,039) For the year endedStatements of Operations – Navis Holdings, Inc. December 31,2016 December 31,2015 December 31,2014Net sales $17,803 $17,076 $16,114 Cost of goods sold 10,933 11,087 10,444 Gross profit $6,870 $5,989 $5,670 Other expenses $4,988 $5,414 $4,973 Income before income taxes 1,882 575 697 Income tax provision 739 343 277 Net income $1,143 $232 $420 As ofBalance Sheet – On-Site Fuel Service, Inc. December 31,2016 December 31,2015Current assets $12,151 $8,112 Noncurrent assets 17,644 16,036 Total assets $29,795 $24,148 Current liabilities $17,911 $9,252 Noncurrent liabilities 17,929 16,906 Total liabilities $35,840 $26,158 Total deficit $(6,045) $(2,010) For the year endedStatements of Operations – On-Site Fuel Service, Inc. December 31,2016 December 31,2015 December 31,2014Net sales $107,776 $114,137 $189,778 Cost of goods sold 102,679 106,668 180,528 Gross profit $5,097 $7,469 $9,250 Other expenses $9,132 $13,592 $14,589 Loss before income taxes (4,035) (6,123) (5,339) Income tax provision (benefit) — 1,967 (1,826) Net loss $(4,035) $(8,090) $(3,513) 88  TABLE OF CONTENTS As ofBalance Sheet – CableOrganizer Holdings, LLC December 31,2016 December 31,2015Current assets $5,837 $3,850 Noncurrent assets 11,402 11,385 Total assets $17,239 $15,235 Current liabilities $4,437 $2,834 Noncurrent liabilities 12,134 11,285 Total liabilities $16,571 $14,119 Total equity $668 $1,116 For the year endedStatements of Operations – CableOrganizer Holdings, LLC December 31,2016 December 31,2015 December 31,2014Net sales $23,277 $25,315 $20,887 Cost of goods sold 15,716 16,874 13,486 Gross profit $7,561 $8,441 $7,401 Other expenses $9,021 $10,012 $8,694 Loss before income taxes (1,460) (1,571) (1,293) Income tax provision — — — Net loss $(1,460) $(1,571) $(1,293) Balance Sheet – Eastport Holdings, LLC As ofDecember 31,2016Current assets $106,388 Noncurrent assets 148,704 Total assets $255,092 Current liabilities $157,393 Noncurrent liabilities 52,044 Total liabilities $209,437 Total equity $45,655 Statement of Operations – Eastport Holdings, LLC For theyear endedDecember 31,2016Net sales $552,004 Cost of goods sold 429,089 Gross profit $122,915 Other expenses $108,822 Income before income taxes 14,093 Income tax provision 2,791 Net income $11,302 Financial Condition, Liquidity and Capital ResourcesWe use and intend to use existing cash primarily to originate investments in new and existing portfolio companies, paydistributions to our shareholders, and repay indebtedness.On September 30, 2013, we issued 4,000,000 shares at $20.00 per share in our IPO, yielding net proceeds of $74.25 million.On June 16, 2014, we issued $113.4 million in aggregate principal amount of 7.125% fixed-rate notes (the “Notes”), yieldingnet proceeds of $109.1 million after underwriting costs. The Notes will mature on June 16, 2021, and may be redeemed in whole orin part at any time or from time to time at our option on or89  TABLE OF CONTENTSafter June 17, 2017 at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. The notesbear interest at a rate of 7.125% per year payable quarterly on March 16, June 16, September 16, and December 16 of each year,beginning on September 16, 2014. The Notes are listed on the New York Stock Exchange under the trading symbol “CLA” with apar value $25.00 per share.On October 17, 2014, we entered into a senior secured revolving credit agreement (the “Credit Facility”) with ING Capital,LLC, as administrative agent, arranger, and bookrunner, and the lenders party thereto. The Credit Facility initially provides forborrowings up to $120.0 million and may be increased up to $150.0 million pursuant to its “accordion” feature. The CreditFacility matures on October 17, 2018. As of December 31, 2016, we had $44.0 million outstanding and $76.0 million availableunder the Credit Facility.On April 13, 2015, we completed an underwritten offering of 3,500,000 shares of its common stock at a public offering price of$18.32 per share. The total proceeds received in the offering net of underwriting discounts and offering costs were approximately$61.7 million.Including the net proceeds from our IPO on September 30, 2013, we have raised approximately $245.0 million in net proceedsfrom debt and equity offerings and obtained credit availability through our Credit Facility of $120.0 million through December31, 2016.As of December 31, 2016, Fund II had $26.2 million in regulatory capital and $20.7 million in SBA-guaranteed debenturesoutstanding and Fund III had $75.0 million in regulatory capital and $150.0 million in SBA-guaranteed debentures outstanding.In addition to our existing SBA-guaranteed debentures, we may, if permitted by regulation, seek to issue additional SBA-guaranteed debentures as well as other forms of leverage and borrow funds to make investments. On June 10, 2014, we received anexemptive order from the SEC exempting us, Fund II and Fund III from certain provisions of the 1940 Act (including an exemptiveorder granting relief from the asset coverage requirements for certain indebtedness issued by Fund II and Fund III as SBICs) andfrom certain reporting requirements mandated by the Securities Exchange Act of 1934, as amended, with respect to Fund II andFund III. We intend to comply with the conditions of the order.As of December 31, 2016, we had $36.3 million in cash and cash equivalents, and our net assets totaled $250.6 million.Contractual obligationsWe have entered into two contracts under which we have material future commitments: the Investment Advisory Agreement,pursuant to which the Investment Advisor serves as our investment adviser, and the Administration Agreement, pursuant to whichour Administrator agrees to furnish us with certain administrative services necessary to conduct our day-to-day operations.Payments under the Investment Advisory Agreement in future periods will be equal to: (1) a percentage of the value of our grossassets; and (2) an incentive fee based on our performance. Payments under the Administration Agreement will occur on anongoing basis as expenses are incurred on our behalf by our Administrator.The Investment Advisory Agreement and the Administration Agreement are each terminable by either party without penaltyupon 60 days’ written notice to the other. If either of these agreements is terminated, the costs we incur under new agreements mayincrease. In addition, we will likely incur significant time and expense in locating alternative parties to provide the services weexpect to receive under both our Investment Advisory Agreement and our Administration Agreement. Any new investmentadvisory agreement would also be subject to approval by our stockholders.A summary of our significant contractual payment obligations as of December 31, 2016 are as follows (dollars in thousands): Contractual Obligations Payments Due by Period Less Than1 Year 1 – 3Years 3 – 5Years More Than5 Years TotalSBA Debentures $— $5,000 $80,700 $85,000 $170,700 Notes — — 113,438 — 113,438 Credit Facility — 44,000 — — 44,000 Total Contractual Obligations $— $49,000 $194,138 $85,000 $328,138 90  TABLE OF CONTENTSDistributionsIn order to qualify as a RIC and to avoid corporate-level U.S. federal income tax on the income we distribute to ourstockholders, we are required to distribute at least 90% of our net ordinary income and our net short-term capital gains in excess ofnet long-term capital losses, if any, to our stockholders on an annual basis. Additionally, we must distribute an amount at leastequal to the sum of 98% of our net ordinary income (during the calendar year) plus 98.2% of our net capital gain income (duringeach 12-month period ending on October 31) plus any net ordinary income and capital gain net income for preceding years thatwere not distributed during such years and on which we paid no U.S. federal income tax to avoid a U.S. federal excise tax. Wemade quarterly distributions to our stockholders for the first four full quarters subsequent to our IPO. To the extent we haveincome available, we have made and intend to make monthly distributions thereafter. Our monthly stockholder distributions, ifany, will be determined by our Board on a quarterly basis. Any distribution to our stockholders will be declared out of assetslegally available for distribution.We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase theamount of our distributions from time to time and from time to time we may decrease the amount of our distributions. In addition,we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a BDC under the1940 Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, includingthe possible loss of our qualification as a RIC. We cannot assure stockholders that they will receive any distributions.To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of thosedistributions may be deemed a return of capital to our stockholders for U.S. federal income tax purposes. Thus, the source of adistribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains.Stockholders should read any written disclosure accompanying any stockholder distribution carefully and should not assume thatthe source of any distribution is our ordinary income or capital gains.We have adopted an “opt out” dividend reinvestment plan (“DRIP”) for our common stockholders. As a result, if we declare adistribution, then stockholders’ cash distributions will be automatically reinvested in additional shares of our common stockunless a stockholder specifically “opts out” of our DRIP. If a stockholder opts out, that stockholder will receive cash distributions.Although distributions paid in the form of additional shares of our common stock will generally be subject to U.S. federal, stateand local taxes in the same manner as cash distributions, stockholders participating in our DRIP will not receive anycorresponding cash distributions with which to pay any such applicable taxes.The following tables summarize our distributions declared since the IPO through December 31, 2016: Date Declared Record Date Payment Date AmountPer ShareJanuary 4, 2016 January 22, 2016 January 28, 2016 $0.1567 January 4, 2016 February 19, 2016 February 26, 2016 0.1567 January 4, 2016 March 22, 2016 March 30, 2016 0.1567 April 1, 2016 April 22, 2016 April 28, 2016 0.1567 April 1, 2016 May 23, 2016 May 30, 2016 0.1567 April 1, 2016 June 21, 2016 June 29, 2016 0.1567 July 1, 2016 July 22, 2016 July 29, 2016 0.1567 July 1, 2016 August 22, 2016 August 30, 2016 0.1567 July 1, 2016 September 22, 2016 September 29, 2016 0.1567 September 22, 2016 October 21, 2016 October 28, 2016 0.1300 September 22, 2016 November 21, 2016 November 29, 2016 0.1300 September 22, 2016 December 21, 2016 December 29, 2016 0.1300 Total Distributions Declared andDistributed $1.80 91  TABLE OF CONTENTS Date Declared Record Date Payment Date AmountPer ShareJanuary 2, 2015 January 22, 2015 January 29, 2015 $0.1567 January 2, 2015 February 20, 2015 February 26, 2015 0.1567 January 2, 2015 March 23, 2015 March 30, 2015 0.1567 February 26, 2015 March 23, 2015(1) March 30, 2015 0.0500 February 26, 2015 April 23, 2015(1) April 29, 2015 0.0500 February 26, 2015 May 21, 2015(1) May 28, 2015 0.0500 February 26, 2015 June 22, 2015(1) June 29, 2015 0.0500 February 26, 2015 July 23, 2015(1) July 30, 2015 0.0500 February 26, 2015 August 21, 2015(1) August 28, 2015 0.0500 February 26, 2015 September 23,2015(1) September 29, 2015 0.0500 February 26, 2015 October 23, 2015(1) October 29, 2015 0.0500 February 26, 2015 November 20,2015(1) November 27, 2015 0.0500 February 26, 2015 December 22,2015(1) December 30, 2015 0.0500 April 1, 2015 April 23, 2015 April 29, 2015 0.1567 April 1, 2015 May 21, 2015 May 28, 2015 0.1567 April 1, 2015 June 22, 2015 June 29, 2015 0.1567 July 1, 2015 July 23, 2015 July 30, 2015 0.1567 July 1, 2015 August 21, 2015 August 28, 2015 0.1567 July 1, 2015 September 23, 2015 September 29, 2015 0.1567 October 1, 2015 October 23, 2015 October 29, 2015 0.1567 October 1, 2015 November 20, 2015 November 27, 2015 0.1567 October 1, 2015 December 22, 2015 December 30, 2015 0.1567 Total Distributions Declared andDistributed $2.38 Date Declared Record Date Payment Date AmountPer ShareFebruary 27, 2014 March 14, 2014 March 26, 2014 $0.4700 May 8, 2014 June 9, 2014 June 26, 2014 0.4700 August 7, 2014 September 12, 2014 September 26, 2014 0.4700 October 2, 2014 October 22, 2014 October 30, 2014 0.1567 October 2, 2014 November 21, 2014 November 28, 2014 0.1567 October 2, 2014 December 19, 2014 December 30, 2014 0.1567 Total Distributions Declared andDistributed $1.88 (1)On February 26, 2015, the Company’s Board declared a special distribution of $0.50 per share of the Company’s commonstock, which was paid monthly over the remainder of 2015.Related PartiesWe have entered into the Investment Advisory Agreement with the Investment Advisor. Mr. Alala, our chief executive officerand chairman of our Board, is the managing partner and chief investment officer of the Investment Advisor, and Mr. Broyhill, amember of our Board, has an indirect controlling interest in the Investment Advisor.In addition, an affiliate of the Investment Advisor also manages CapitalSouth Partners SBIC Fund IV, L.P. (“Fund IV”); aprivate investment limited partnership providing financing solutions to smaller and lower middle-market companies that had itsfirst closing in March 2013 and obtained SBA approval for its SBIC license in April 2013. In addition to Fund IV, affiliates of theInvestment Advisor may manage several affiliated funds whereby institutional limited partners in Fund IV have the opportunity toco-invest with Fund IV in portfolio investments. An affiliate of the Investment Advisor also manages Capitala Private Credit92  TABLE OF CONTENTSFund V, L.P. (“Fund V”); a private investment limited partnership providing financing solutions to the lower middle-market andtraditional middle-market. The Investment Advisor and its affiliates may also manage other funds in the future that may haveinvestment mandates that are similar, in whole and in part, with ours. To the extent permitted by the 1940 Act and interpretation ofthe SEC staff, the Investment Advisor and its affiliates may determine that an investment is appropriate for us and for one or moreof those other funds. In such event, depending on the availability of such investment and other appropriate factors, the InvestmentAdvisor or its affiliates may determine that we should invest side-by-side with one or more other funds. Any such investments willbe made only to the extent permitted by applicable law and interpretive positions of the SEC and its staff, and consistent with theInvestment Advisor’s allocation procedures. We do not expect to make co-investments, or otherwise compete for investmentopportunities, with Fund IV because its focus and investment strategy differ from our own. However, we do expect to make co-investments with Fund V given its similar investment strategy.On September 10, 2015, we, Fund II, Fund III, Fund V, and the Investment Advisor filed an application for exemptive reliefwith the SEC to permit an investment fund and one or more other affiliated investment funds, including future affiliatedinvestment funds, to participate in the same investment opportunities through a proposed co-investment program where suchparticipation would otherwise be prohibited under the 1940 Act. On June 1, 2016, the SEC issued an order permitting this relief.This exemptive relief is subject to certain conditions designed to ensure that the participation by one investment fund in a co-investment transaction would not be on a basis different from or less advantageous than that of other affiliated investment funds.On August 31, 2016, the Company sold assets to FSC II in exchange for 100% of the partnership interests in FSC II.Concurrent with the sale of these assets to FSC II, the Company received cash consideration of $47.6 million from an affiliatedthird-party purchaser in exchange for 100% of the partnership interests of FSC II. The Company’s Board pre-approved thistransaction pursuant to Section 57(f) of the 1940 Act. Capitala Advisors Corp., the Company’s administrator, also serves as theadministrator to FSC II.We have entered into a license agreement with the Investment Advisor, pursuant to which the Investment Advisor has agreedto grant us a non-exclusive, royalty-free license to use the name “Capitala.”We have entered into the Administration Agreement with our Administrator. Pursuant to the terms of the AdministrationAgreement, our Administrator provides us with the office facilities and administrative services necessary to conduct our day-to-day operations. Mr. Alala, our chief executive officer, and chairman of our Board, is the chief executive officer, president and adirector of our Administrator.Off-Balance Sheet ArrangementsAs of December 31, 2016 and December 31, 2015, the Company had outstanding unfunded commitments related to debtinvestments in existing portfolio companies of $1.2 million and $4.4 million, respectively.We have no other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on ourfinancial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures orcapital resources.Recent DevelopmentsDistributionsOn January 3, 2017, our Board declared the following distributions: Date Declared Record Date Payment Date AmountPer ShareJanuary 3, 2017 January 20, 2017 January 30, 2017 $0.1300 January 3, 2017 February 20, 2017 February 27, 2017 0.1300 January 3, 2017 March 23, 2017 March 30, 2017 0.1300 93  TABLE OF CONTENTSPortfolio ActivityOn January 3, 2017, the Company exited its investment in Medical Depot Inc., receiving $14.7 million in cash for itssubordinated debt investment, repaid at par, and $6.3 million in cash related to its equity investment. The equity realizationresulted in a $5.0 million realized gain.On January 9, 2017, the Company received $5.0 million in cash repayment for its subordinated debt investment in EmergingMarkets Communications, LLC, repaid at par.On January 20, 2017, the Company invested $16.0 million in first lien debt and $2.0 million in membership units of CurrencyCapital, LLC. The debt investment has a yield of LIBOR + 11.0%, with a 0.5% floor.On February 2, 2017, the Company restructured its investment in U.S. Well Services, LLC, exchanging its $15.3 million firstlien debt investment for an $8.5 million first lien debt investment, yielding LIBOR + 9.0% or LIBOR + 11.0% if paid in kind, andan initial 4.9% equity ownership in USWS Holdings, LLC. In addition, the Company committed $2.1 million in a first lienrevolving credit facility to US Well Services, LLC, yielding LIBOR + 6.0% and obtained an initial 0.4% equity ownership inUSWS Holdings, LLC.On February 21, 2017, the Company received $4.8 million in cash repayment for its second lien debt investment in BrockHoldings III, Inc.94  TABLE OF CONTENTSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKWe are subject to financial market risks, including changes in interest rates. Changes in interest rates may affect both our costof funding and our interest income from portfolio investments and cash and cash equivalents. We may hedge against interest ratefluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements ofthe 1940 Act. For the year ended December 31, 2016, we did not engage in hedging activities.As of December 31, 2016, we held 21 securities bearing a variable rate of interest. Our variable rate investments representapproximately 42.9% of the fair value of total interest earning investments. As of December 31, 2016, 59.1% of variable ratesecurities were yielding interest at a rate equal to the established interest rate floor and 40.9% of variable rate securities wereyielding interest at a rate above its existing floor or were not subject to an interest rate floor. As of December 31, 2016, we had$44.0 million outstanding on our Credit Facility, which has a variable rate of interest at LIBOR + 300 basis points. As ofDecember 31, 2016, all of our other interest paying liabilities, consisting of $170.7 million in SBA-guaranteed debentures and$113.4 million in notes payable, were bearing interest at a fixed rate.Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. Because wefund a portion of our investments with borrowings, our net investment income is affected by the difference between the rate atwhich we invest and the rate at which we borrow. As a result, there can be no assurance that a significant change in market interestrates will not have a material adverse effect on our net investment income.Based on our December 31, 2016 consolidated statements of assets and liabilities, the following table shows the annual impacton net income (excluding the potential related incentive fee impact) of base rate changes in interest rates (considering interest ratefloors for variable rate securities) assuming no changes in our investment and borrowing structure (dollars in thousands): Basis Point Change Increase(decrease)in interestincome (Increase)decreasein interestexpense Increasein netincomeUp 300 basis points $5,820 $(1,320) $4,500 Up 200 basis points 3,824 (880) 2,944 Up 100 basis points 1,843 (440) 1,403 Down 100 basis points (158) 344 186 Down 200 basis points — — — Down 300 basis points — — — 95  TABLE OF CONTENTSITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm F-1 Audited Financial Statements: Consolidated Statements of Assets and Liabilities as of December 31, 2016 and December 31, 2015 F-2 Consolidated Statements of Operations for the years ended December 31, 2016, December 31, 2015and December 31, 2014 F-3 Consolidated Statements of Changes in Net Assets for the years ended December 31, 2016, December31, 2015 and December 31, 2014 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2016, December 31, 2015and December 31, 2014 F-5 Consolidated Schedules of Investments as of December 31, 2016 and December 31, 2015 F-6 Notes to Consolidated Financial Statements F-18 96  TABLE OF CONTENTSReport of Independent Registered Public Accounting FirmThe Board of Directors and Shareholders of Capitala Finance Corp.We have audited the accompanying consolidated statements of assets and liabilities of Capitala Finance Corp. (the Company),including the consolidated schedules of investments, as of December 31, 2016 and 2015, and the related consolidated statementsof operations, changes in net assets, and cash flows for each of the three years in the period ended December 31, 2016. Thesefinancial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on thesefinancial statements 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 the financialstatements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Company’sinternal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financialhighlights. An audit also includes assessing the accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as ofDecember 31, 2016 and 2015 by correspondence with the custodian and directly with management or designees of the portfoliocompanies, as applicable. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financialposition of Capitala Finance Corp. at December 31, 2016 and 2015, and the consolidated results of its operations, changes in itsnet assets, its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generallyaccepted accounting principles./s/ Ernst & Young LLPMarch 7, 2017Charlotte, North CarolinaF-1  TABLE OF CONTENTSCapitala Finance Corp. Consolidated Statements of Assets and Liabilities(in thousands, except share and per share data) As of December 31,2016 December 31,2015ASSETS Investments at fair value Non-control/non-affiliate investments (amortized cost of $391,706 and$391,031, respectively) $393,525 $404,513 Affiliate investments (amortized cost of $39,279 and $99,290, respectively) 61,464 117,350 Control investments (amortized cost of $82,791 and $79,866, respectively) 86,650 70,593 Total investments at fair value (amortized cost of $513,776 and $570,187,respectively) 541,639 592,456 Cash and cash equivalents 36,281 34,105 Interest and dividend receivable 5,735 5,390 Due from related parties 182 256 Prepaid expenses 506 503 Other assets 72 108 Total assets $584,415 $632,818 LIABILITIES SBA debentures (net of deferred financing costs of $2,911 and $3,537,respectively) $167,789 $180,663 Notes (net of deferred financing costs of $3,025 and $3,583, respectively) 110,413 109,855 Credit Facility (net of deferred financing costs of $759 and $1,649, respectively) 43,241 68,351 Due to related parties 35 6 Management and incentive fee payable 6,426 1,687 Interest and financing fees payable 2,657 2,987 Accounts payable and accrued expenses 536 467 Written call option at fair value (proceeds of $20 and $0, respectively) 2,736 — Total liabilities $333,833 $364,016 Commitments and contingencies (Note 2) NET ASSETS Common stock, par value $.01, 100,000,000 common shares authorized,15,868,045 and 15,777,345 common shares issued and outstanding,respectively $159 $158 Additional paid in capital 240,184 239,104 Undistributed net investment income 22,973 8,570 Accumulated net realized losses from investments (37,881) (1,299) Net unrealized appreciation on investments 27,863 22,269 Net unrealized depreciation on written call option (2,716) — Total net assets $250,582 $268,802 Total liabilities and net assets $584,415 $632,818 Net asset value per share $15.79 $17.04 See accompanying notes to consolidated financial statements.F-2  TABLE OF CONTENTSCapitala Finance Corp. Consolidated Statements of Operations(in thousands, except share and per share data) For the Year Ended December 31 2016 2015 2014INVESTMENT INCOME Interest and fee income: Non-control/non-affiliate investments $42,667 $39,535 $16,209 Affiliate investments 5,723 11,589 17,105 Control investments 10,718 5,406 5,804 Total interest and fee income 59,108 56,530 39,118 Payment-in-kind interest and dividend income: Non-control/non-affiliate investments 4,965 2,644 937 Affiliate investments 383 1,363 1,169 Control investments 952 1,077 727 Total payment-in-kind interest and dividend income 6,300 5,084 2,833 Dividend income: Non-control/non-affiliate investments 263 617 1,818 Affiliate investments 115 115 774 Control investments 2,414 1,369 4,965 Total dividend income 2,792 2,101 7,557 Other Income 85 256 — Interest income from cash and cash equivalents 27 5 20 Total investment income 68,312 63,976 49,528 EXPENSES Interest and financing expenses 19,711 19,022 13,375 Base management fee 10,588 10,590 9,289 Incentive fees 6,842 6,043 2,838 General and administrative expenses 3,804 4,052 4,298 Expenses before incentive fee waiver 40,945 39,707 29,800 Incentive fee waiver (See Note 7) (1,673) (1,058) — Management fee waiver (See Note 7) — — (238) Total expenses, net of fee waivers 39,272 38,649 29,562 NET INVESTMENT INCOME 29,040 25,327 19,966 REALIZED AND UNREALIZED GAIN (LOSS) ONINVESTMENTS AND WRITTEN CALL OPTION: Net realized gain (loss) from investments: Non-control/non-affiliate investments 1,261 8,758 2,564 Affiliate investments (24,172) (9,109) (1,843) Control investments 145 5,787 111 Total realized gain (loss) from investments (22,766) 5,436 832 Net unrealized appreciation (depreciation) on investments 5,594 (16,913) (24,238) Net unrealized depreciation on written call option (2,716) — — Net loss on investments and written call option (19,888) (11,477) (23,406) NET INCREASE (DECREASE) IN NET ASSETS RESULTINGFROM OPERATIONS $9,152 $13,850 $(3,440) NET INCREASE (DECREASE) IN NET ASSETS PER SHARERESULTING FROM OPERATIONS – BASIC AND DILUTED $0.58 $0.91 $(0.27) WEIGHTED AVERAGE COMMON STOCKOUTSTANDING – BASIC AND DILUTED 15,819,175 15,210,577 12,974,420 DISTRIBUTIONS PAID PER SHARE $1.80 $2.38 $1.88 See accompanying notes to consolidated financial statements.F-3  TABLE OF CONTENTSCapitala Finance Corp. Consolidated Statements of Changes in Net Assets(in thousands, except share data) Common Stock AdditionalPaid inCapital UndistributedNetInvestmentIncome AccumulatedNet RealizedGains(Losses) NetUnrealizedAppreciation/(Depreciation)onInvestments NetUnrealizedDepreciationon WrittenCall Option Total Number ofShares ParValueBALANCE, December 31, 2013 12,974,420 $130 $188,408 $16,760 $(48) $63,420 $— $268,670 Net investment income — — — 19,966 — — — 19,966 Net realized gain from investments — — — — 832 — — 832 Net change in unrealizeddepreciation on investments — — — — — (24,238) — (24,238) Issuance of common stock, net ofoffering and underwriting costs — — — — — — — — Repurchase and retirement ofcommon stock under stockrepurchase program — — — — — — — — Distributions to Shareholders: Stock issued under dividendreinvestment plan — — — — — — — — Distributions declared — — — (24,393) — — — (24,393) Tax reclassification ofstockholders’ equity inaccordance with generallyaccepted accounting principles — — — (19) 19 — — — BALANCE, December 31, 2014 12,974,420 $130 $188,408 $12,314 $803 $39,182 $— $240,837 Net investment income — — — 25,327 — — — 25,327 Net realized gain from investments — — — — 5,436 — — 5,436 Net change in unrealizeddepreciation on investments — — — — — (16,913) — (16,913) Issuance of common stock, net ofoffering and underwriting costs 3,500,000 35 61,665 — — — — 61,700 Repurchase and retirement ofcommon stock under stockrepurchase program (774,858) (8) (11,992) — — — — (12,000) Distributions to Shareholders: Stock issued under dividendreinvestment plan 77,783 1 1,023 — — — — 1,024 Distributions declared — — — (25,673) (10,936) — — (36,609) Tax reclassification ofstockholders’ equity inaccordance with generallyaccepted accounting principles — — — (3,398) 3,398 — — — BALANCE, December 31, 2015 15,777,345 $158 $239,104 $8,570 $(1,299) $22,269 $— $268,802 Net investment income — — — 29,040 — — — 29,040 Net realized loss from investments — — — — (22,766) — — (22,766) Net change in unrealizedappreciation on investments — — — — — 5,594 5,594 Net change in unrealizeddepreciation on written calloption — — — — — (2,716) (2,716) Distributions to Shareholders: Stock issued under dividendreinvestment plan 90,700 1 1,102 — — — — 1,103 Distributions declared — — — (28,475) — — — (28,475) Tax reclassification ofstockholders’ equity inaccordance with generallyaccepted accounting principles — — (22) 13,838 (13,816) — — — BALANCE, December 31, 2016 15,868,045 $159 $240,184 $22,973 $(37,881) $27,863 $(2,716) $250,582 See accompanying notes to consolidated financial statements.F-4  TABLE OF CONTENTSCapitala Finance Corp. Consolidated Statements of Cash Flows(in thousands) For the Year Ended December 31 2016 2015 2014CASH FLOWS FROM OPERATING ACTIVITIES Net increase (decrease) in net assets resulting from operations $9,152 $13,850 $(3,440) Adjustments to reconcile net increase (decrease) in net assetsresulting from operations to net cash provided by (used in)operating activities: Purchase of investments (120,844) (260,640) (216,276) Repayments and sales of investments 163,564 142,713 80,197 Net realized (gain) loss on investments 22,766 (5,436) (832) Net unrealized (appreciation) depreciation on investments (5,594) 16,913 24,238 Payment-in-kind interest and dividends (6,300) (5,084) (2,833) Accretion of original issue discount on investments (2,775) (585) (111) Proceeds from written call option 20 — — Net unrealized depreciation on written call option 2,716 — — Amortization of deferred financing fees 2,149 1,966 1,072 Changes in assets and liabilities: Interest and dividend receivable (345) (2,277) (196) Due from related parties 74 262 1,127 Prepaid expenses (3) 12 139 Other assets 36 166 (274) Due to related parties 29 (2) (513) Management and incentive fee payable 4,739 1,528 (1,998) Interest and financing fees payable (330) 85 179 Accounts payable and accrued expenses 69 145 165 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 69,123 (96,384) (119,356) CASH FLOWS FROM FINANCING ACTIVITIES Paydowns on SBA debentures (13,500) (8,000) (10,000) Proceeds from Credit Facility 29,000 105,000 — Payments to Credit Facility (55,000) (35,000) — Issuance of Notes — — 113,438 Issuance of common stock, net of offering and underwriting costs — 61,700 — Distributions paid to shareholders (27,372) (35,585) (24,393) Repurchases of common stock under stock repurchase program — (12,000) — Deferred financing fees paid (75) (733) (6,204) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (66,947) 75,382 72,841 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,176 (21,002) (46,515) CASH AND CASH EQUIVALENTS, beginning of year 34,105 55,107 101,622 CASH AND CASH EQUIVALENTS, end of year $36,281 $34,105 $55,107 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $17,591 $16,349 $12,120 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ANDFINANCING TRANSACTIONS Distribution paid through dividend reinvestment plan shareissuances $1,103 $1,024 $— See accompanying notes to consolidated financial statements.F-5  TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments(in thousands, except for units/shares)December 31, 2016 Company(4),(5) Industry Type of Investment PrincipalAmount Cost Fair Value % ofNet AssetsNon-control/non-affiliated investments – 157.1% AAE Acquisition, LLC Industrial Equipment Rental Second Lien Debt (12% Cash,Due 3/31/18) $11,000 $11,000 $10,755 4.3% AAE Acquisition, LLC Industrial Equipment Rental Membership Units (14% fullydiluted) 17 — 0.0% 11,017 10,755 4.3% American Clinical Solutions, LLC Healthcare First Lien Debt (10.5% Cash (3month LIBOR + 9.5%, 1%Floor), Due 6/11/20)(13) 9,034 9,034 8,582 3.4% 9,034 8,582 3.4% American Exteriors, LLC Replacement WindowManufacturer First Lien Debt (10% PIK,Due 1/1/17)(1)(2) 6,456 4,679 2,571 1.0% American Exteriors, LLC Replacement WindowManufacturer Common Stock Warrants(10% fully diluted) — — 0.0% 4,679 2,571 1.0% AmeriMark Direct, LLC Consumer Products First Lien Debt (12.75% Cash,Due 9/8/21) 19,700 19,192 19,542 7.8% 19,192 19,542 7.8% B&W Quality Growers, LLC Farming Subordinated Debt (14% Cash,Due 7/23/20) 6,000 5,996 6,000 2.4% B&W Quality Growers, LLC Farming Membership Unit Warrants(91,739 Units) 20 5,779 2.3% 6,016 11,779 4.7% BigMouth, Inc. Consumer Products First Lien Debt (12.6% Cash,Due 11/14/21)(3) 10,313 10,313 10,313 4.1% BigMouth, Inc. Consumer Products Series A Preferred Stock(350,000 shares, 8% PIK)(6) 354 354 0.1% 10,667 10,667 4.2% Bluestem Brands, Inc. Online Merchandise Retailer First Lien Debt (8.5% Cash (1month LIBOR + 7.5%, 1%Floor), Due 11/7/20) 4,279 4,169 4,169 1.7% 4,169 4,169 1.7% Brock Holdings III, Inc. Industrial Specialty Services Second Lien Debt (10% Cash (1month LIBOR + 8.25%, 1.75%Floor), Due 3/16/18) 5,000 4,935 4,750 1.9% 4,935 4,750 1.9% Brunswick Bowling Products, Inc. Bowling Products First Lien Debt (8% Cash (1month LIBOR + 6.0%, 2%Floor), Due 5/22/20) 1,600 1,600 1,600 0.6% Brunswick Bowling Products, Inc. Bowling Products First Lien Debt (16.25% Cash (1month LIBOR + 14.25%, 2%Floor), Due 5/22/20) 5,586 5,586 5,586 2.2% Brunswick Bowling Products, Inc. Bowling Products Preferred Shares (2,966 shares,8% PIK)(6) 3,384 5,317 2.1% 10,570 12,503 4.9% Burke America Parts Group, LLC Home Repair Parts Manufacturer Membership Units (14 units) 5 1,408 0.6% 5 1,408 0.6% California Pizza Kitchen, Inc. Restaurant Second Lien Debt (11% Cash (1month LIBOR + 10%, 1%Floor), Due 8/23/23) 5,000 4,857 4,857 1.9% 4,857 4,857 1.9% Caregiver Services, Inc. In-Home Healthcare Services Common Stock (293,186shares) 258 137 0.1% See accompanying notes to consolidated financial statements.F-6  TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2016 Company(4),(5) Industry Type of Investment PrincipalAmount Cost Fair Value % ofNet AssetsCaregiver Services, Inc. In-Home Healthcare Services Common Stock Warrants(655,908 units)(7) $264 $309 0.1% 522 446 0.2% Cedar Electronics Holding Corp. Consumer Electronics Subordinated Debt (12% Cash,Due 12/26/20) $21,550 21,550 20,818 8.3% 21,550 20,818 8.3% Community Choice Financial, Inc. Financial Services First Lien Debt (18% Cash (1month LIBOR + 17%, 1%Floor), Due 3/30/18)(1)(8) 15,000 15,000 15,000 6.0% 15,000 15,000 6.0% Construction Partners, Inc. Construction Services Second Lien Debt (11.5% Cash,Due 6/12/20) 9,500 9,500 9,500 3.8% 9,500 9,500 3.8% Corporate Visions, Inc. Sales & Marketing Services Subordinated Debt (9% Cash,2% PIK, Due 11/29/21) 16,267 16,267 15,648 6.2% Corporate Visions, Inc. Sales & Marketing Services Common Stock (15,750 shares) 1,575 728 0.3% 17,842 16,376 6.5% CSM Bakery Solutions, LLC Bakery Supplies Distributor Second Lien Debt (8.75% Cash(1 month LIBOR + 7.75%, 1%Floor), Due 8/7/22) 12,000 11,813 10,776 4.3% 11,813 10,776 4.3% Emerging Markets Communications,LLC Satellite Communications Second Lien Debt (10.625%Cash (1 month LIBOR +9.625%, 1% Floor), Due 7/1/22) 5,000 4,946 5,000 2.0% 4,946 5,000 2.0% Flavors Holdings, Inc. Food Product Manufacturer First Lien Debt (6.75% Cash (1month LIBOR + 5.75%, 1%Floor), Due 4/3/20) 7,100 6,930 6,411 2.6% Flavors Holdings, Inc. Food Product Manufacturer Second Lien Debt (11% Cash (1month LIBOR + 10%, 1%Floor), Due 10/3/21) 12,000 11,671 10,188 4.1% 18,601 16,599 6.7% Group Cirque du Soleil, Inc. Entertainment Second Lien Debt (9.25% Cash(3 month LIBOR + 8.25%, 1%Floor), Due 7/8/23)(8) 1,000 988 987 0.4% 988 987 0.4% Immersive Media Tactical Solutions,LLC Specialty Defense Contractor Subordinated Debt (Due12/9/19)(9) 2,000 2,000 1,532 0.6% 2,000 1,532 0.6% Kelle’s Transport Service, LLC Transportation First Lien Debt (14% Cash,Due 3/31/19) 13,674 13,668 13,252 5.3% Kelle’s Transport Service, LLC Transportation Preferred Units (1,000 units,10% PIK Dividend)(6) 3,433 3,433 1.4% Kelle’s Transport Service, LLC Transportation Common Stock Warrants (15%fully diluted) 22 171 0.1% 17,123 16,856 6.8% Medical Depot, Inc. Medical Device Distributor Subordinated Debt (14% Cash,Due 9/27/20)(1) 14,667 14,667 14,667 5.9% Medical Depot, Inc. Medical Device Distributor Series C Convertible PreferredStock (740 shares) 1,333 6,440 2.6% 16,000 21,107 8.5% Nielsen & Bainbridge, LLC Home Décor Manufacturer Second Lien Debt (10.5% Cash(6 month LIBOR + 9.25%, 1%Floor), Due 8/15/21) 15,000 14,849 14,670 5.9% 14,849 14,670 5.9% See accompanying notes to consolidated financial statements.F-7  TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2016 Company(4),(5) Industry Type of Investment PrincipalAmount Cost Fair Value % ofNet AssetsNth Degree, Inc. Business Services First Lien Debt (8.0% Cash (1month LIBOR + 7%, 1% Floor),1% PIK, Due 12/14/20) $9,904 $9,904 $9,904 4.0% Nth Degree, Inc. Business Services First Lien Debt (12.5% Cash (1month LIBOR + 11.5%, 1%Floor), 2% PIK, Due 12/14/20) 7,351 7,351 7,351 2.9% Nth Degree, Inc. Business Services Preferred Stock (10% PIKdividend)(6) 2,662 4,581 1.8% 19,917 21,836 8.7% Portrait Innovations, Inc. Professional and Personal DigitalImaging Subordinated Debt (12% Cash,Due 2/26/20) 9,000 9,000 9,000 3.6% 9,000 9,000 3.6% Sequoia Healthcare Management,LLC Healthcare Management First Lien Debt (12% Cash, 4%PIK, Due 7/17/19) 10,851 10,750 10,851 4.3% 10,750 10,851 4.3% Sierra Hamilton, LLC Oil & Gas Engineering andConsulting Services First Lien Debt (12.25% Cash,Due 12/15/18)(2) 15,000 15,000 4,500 1.8% 15,000 4,500 1.8% Sur La Table, Inc. Retail First Lien Debt (12% Cash,Due 7/28/20) 15,000 15,000 15,000 6.0% 15,000 15,000 6.0% Taylor Precision Products, Inc. Household Product Manufacturer Series C Preferred Stock (379shares) 758 1,001 0.4% 758 1,001 0.4% U.S. Well Services, LLC Oil & Gas Services First Lien Debt (14.1% PIK (1month LIBOR + 13.5%, 0.5%floor), Due 5/2/19) 15,083 15,054 15,083 6.0% 15,054 15,083 6.0% Velum Global Credit Management,LLC Financial Services First Lien Debt (15% PIK,Due 12/31/17)(1)(8) 10,553 10,553 10,553 4.2% 10,553 10,553 4.2% Vintage Stock, Inc. Specialty Retail First Lien Debt (13.1% Cash (1month LIBOR + 12.5%, 0.5%floor), 3% PIK, Due 11/3/21) 22,067 22,067 22,067 8.8% 22,067 22,067 8.8% Vology, Inc. Information Technology Subordinated Debt (15% Cash(3 month LIBOR + 14%, 1%Floor, 2% PIK), Due 1/24/21) 8,082 8,082 8,082 3.2% 8,082 8,082 3.2% Western Windows Systems, LLC Building Products First Lien Debt (11.7% Cash,Due 7/31/20)(3) 10,500 10,500 10,500 4.2% Western Windows Systems, LLC Building Products Membership Units (39,860units) 3,000 7,652 3.0% 13,500 18,152 7.2% Xirgo Technologies, LLC Information Technology Subordinated Debt (11.5% Cash,Due 3/1/22) 15,750 15,750 15,750 6.3% Xirgo Technologies, LLC Information Technology Membership Units (400,000units) 400 400 0.2% 16,150 16,150 6.5% Sub Total Non-control/non-affiliated investments $391,706 $393,525 157.1% See accompanying notes to consolidated financial statements.F-8  TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2016 Company(4),(5) Industry Type of Investment PrincipalAmount Cost Fair Value % ofNet AssetsAffiliate investments – 24.5% Burgaflex Holdings, LLC Automobile Part Manufacturer Subordinated Debt (14% Cash,Due 8/9/19)(10) $3,000 $3,000 $3,000 1.2% Burgaflex Holdings, LLC Automobile Part Manufacturer Subordinated Debt (12% Cash,Due 8/9/19)(10) 5,828 5,828 5,828 2.3% Burgaflex Holdings, LLC Automobile Part Manufacturer Common Stock (1,253,198shares) 1,504 1,248 0.5% 10,332 10,076 4.0% City Gear, LLC Footwear Retail Subordinated Debt (13% Cash,Due 9/28/17)(1) 8,231 8,231 8,231 3.3% City Gear, LLC Footwear Retail Preferred Membership Units(2.78% fully diluted, 9% CashDividend)(6) 1,269 1,269 0.5% City Gear, LLC Footwear Retail Membership Unit Warrants(11.38% fully diluted) — 9,736 3.9% 9,500 19,236 7.7% GA Communications, Inc. Advertising & Marketing Services Series A-1 Preferred Stock(1,998 shares, 8% PIKdividend)(6) 2,648 2,864 1.1% GA Communications, Inc. Advertising & Marketing Services Series B-1 Common Stock(200,000 shares) 2 1,046 0.4% 2,650 3,910 1.5% J&J Produce Holdings, Inc. Produce Distribution Subordinated Debt (13% Cash,Due 7/16/18) 6,182 6,182 6,182 2.5% J&J Produce Holdings, Inc. Produce Distribution Common Stock (8,182 shares) 818 — 0.0% J&J Produce Holdings, Inc. Produce Distribution Common Stock Warrants (6,369shares) — — 0.0% 7,000 6,182 2.5% LJS Partners, LLC QSR Franchisor Common Stock (1,500,000shares) 1,525 8,497 3.4% 1,525 8,497 3.4% MJC Holdings, LLC Specialty Clothing Series A Preferred Units(2,000,000 units) 1,000 5,011 2.0% 1,000 5,011 2.0% MMI Holdings, LLC Medical Device Distributor First Lien Debt (12% Cash,Due 1/31/18)(1) 2,600 2,600 2,600 1.0% MMI Holdings, LLC Medical Device Distributor Subordinated Debt (6% Cash,Due 1/31/18)(1) 400 388 400 0.2% MMI Holdings, LLC Medical Device Distributor Preferred Units (1,000 units, 6%PIK dividend)(6) 1,296 1,433 0.6% MMI Holdings, LLC Medical Device Distributor Common Membership Units (45units) — 228 0.1% 4,284 4,661 1.9% MTI Holdings, LLC Retail Display & Security Services Membership Units (2,000,000units)(12) — 537 0.2% — 537 0.2% Source Capital Penray, LLC Automotive Chemicals &Lubricants Subordinated Debt (13% Cash,Due 4/8/19)(1) 1,425 1,425 1,425 0.6% Source Capital Penray, LLC Automotive Chemicals &Lubricants Membership Units (11.3%ownership) 750 805 0.3% 2,175 2,230 0.9% STX Healthcare ManagementServices, Inc. Dental Practice Management Common Stock (1,200,000shares)(12) — 109 0.0% — 109 0.0% V12 Holdings, Inc. Data Processing & DigitalMarketing Subordinated Debt(12) 813 1,015 0.4% 813 1,015 0.4% Sub Total Affiliate investments $39,279 $61,464 24.5% See accompanying notes to consolidated financial statements.F-9  TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2016 Company(4),(5) Industry Type of Investment PrincipalAmount Cost Fair Value % ofNet AssetsControl investments – 34.6% CableOrganizer Acquisition, LLC Computer Supply Retail First Lien Debt (12% Cash, 4%PIK, Due 5/24/18) $11,882 $11,882 $11,882 4.8% CableOrganizer Acquisition, LLC Computer Supply Retail Common Stock (19.7% fullydiluted ownership) 1,394 200 0.1% CableOrganizer Acquisition, LLC Computer Supply Retail Common Stock Warrants (10%fully diluted ownership) — 101 0.0% 13,276 12,183 4.9% Eastport Holdings, LLC Business Services Subordinated Debt (13.9% Cash(3 month LIBOR + 13%, 0.5%Floor), Due 4/29/20) 16,500 13,982 16,500 6.6% Eastport Holdings, LLC Business Services Membership Units (30.1% fullydiluted)(11) 4,733 13,395 5.3% 18,715 29,895 11.9% Micro Precision, LLC Conglomerate Subordinated Debt (10% Cash,Due 9/15/18)(1) 1,862 1,862 1,862 0.8% Micro Precision, LLC Conglomerate Subordinated Debt (14% Cash,4% PIK, Due 9/15/18)(1) 3,989 3,989 3,989 1.6% Micro Precision, LLC Conglomerate Series A Preferred Units (47units) 1,629 2,523 1.0% 7,480 8,374 3.4% Navis Holdings, Inc. Textile Equipment Manufacturer First Lien Debt (15% Cash,Due 10/30/20)(1) 6,500 6,500 6,500 2.6% Navis Holdings, Inc. Textile Equipment Manufacturer Class A Preferred Stock (1,000shares, 10% Cash Dividend) 1,000 1,000 0.4% Navis Holdings, Inc. Textile Equipment Manufacturer Common Stock (300,000shares) 1 5,634 2.2% 7,501 13,134 5.2% On-Site Fuel Services, Inc. Fuel Transportation Services Subordinated Debt (14% Cash,4% PIK, Due 12/19/17)(1)(2) 10,303 9,837 10,303 4.1% On-Site Fuel Services, Inc. Fuel Transportation Services Series A Preferred Stock(32,782 shares) 3,278 — 0.0% On-Site Fuel Services, Inc. Fuel Transportation Services Series B Preferred Stock (23,648shares) 2,365 — 0.0% On-Site Fuel Services, Inc. Fuel Transportation Services Common Stock (33,107 shares) 33 — 0.0% 15,513 10,303 4.1% Print Direction, Inc. Printing Services First Lien Debt (10% Cash, 2%PIK, Due 2/24/19) 17,316 17,316 12,761 5.1% Print Direction, Inc. Printing Services Common Stock (18,543 shares) 2,990 — 0.0% Print Direction, Inc. Printing Services Common Stock Warrants (820shares) — — 0.0% 20,306 12,761 5.1% Sub Total Control investments $82,791 $86,650 34.6% TOTAL INVESTMENTS – 216.2% $513,776 $541,639 216.2% Derivatives – (1.1)% Eastport Holdings, LLC Business Services Written Call Option(11) $(20) $(2,736) (1.1)% $(20) $(2,736) (1.1)% TOTAL DERIVATIVES – (1.1)% $(20) $(2,736) (1.1)% (1)The maturity date of the original investment has been extended.(2)Non-accrual investment.(3)The cash rate equals the approximate current yield on our last-out portion of the unitranche facility.(4)All debt investments are income producing, unless otherwise noted. Equity and warrant investments are non-incomeproducing, unless otherwise noted. See accompanying notes to consolidated financial statements.F-10  TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2016(5)Percentages are based on net assets of $250,582 as of December 31, 2016.(6)The equity investment is income producing, based on rate disclosed.(7)The equity investment has an exercisable put option.(8)Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of the InvestmentCompany Act of 1940, as amended. Qualifying assets must represent at least 70% of the Company’s total assets at the time ofacquisition of any additional non-qualifying assets. As of December 31, 2016, 4.5% of the Company’s total assets were non-qualifying assets.(9)Interest rate was amended to zero. The Company is entitled to receive earn-out payments of up to $2.4 million in satisfaction ofthe debt.(10)In addition to the stated rate, the investment is paying 3% default interest.(11)The Company has written a call option that enables CapitalSouth Partners Florida Sidecar Fund II, L.P. to purchase up to31.25% of the Company’s interest at a strike price of $1.5 million. As of December 31, 2016, the fair value of the written calloption is approximately $2.7 million. See Note 4 to the consolidated financial statements for further detail on the written calloption transaction.(12)The investment has been exited. The residual value reflects estimated escrow to be settled post-closing.(13)The portfolio company is currently being charged default interest rate of prime plus 10.5%. See accompanying notes to consolidated financial statements.F-11  TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments(in thousands, except for units/shares)December 31, 2015 Company(4),(5) Industry Type of Investment PrincipalAmount Cost Fair Value % ofNet AssetsNon-control/non-affiliated investments – 150.5% AAE Acquisition, LLC Industrial Equipment Rental Second Lien Debt (12% Cash,Due 3/31/18)(1) $11,000 $11,000 $11,000 4.1% AAE Acquisition, LLC Industrial Equipment Rental Membership Units (14% fullydiluted) 17 2,181 0.8% 11,017 13,181 4.9% American Clinical Solutions, LLC Healthcare First Lien Debt (10.5% Cash (3month LIBOR + 9.5%, 1%Floor), Due 6/11/20) 9,750 9,750 9,750 3.6% 9,750 9,750 3.6% American Exteriors, LLC Replacement WindowManufacturer First Lien Debt (14% Cash,Due 1/15/16)(1)(2) 4,879 3,679 3,196 1.2% American Exteriors, LLC Replacement WindowManufacturer Common Stock Warrants (15%fully diluted) — — 0.0% 3,679 3,196 1.2% B&W Quality Growers, LLC Farming Subordinated Debt (14% Cash,Due 7/23/20) 10,000 9,992 10,000 3.7% B&W Quality Growers, LLC Farming Membership Unit Warrants(91,739 Units) 20 5,408 2.0% 10,012 15,408 5.7% Bluestem Brands, Inc. Online Merchandise Retailer First Lien Debt (8.5% Cash (1month LIBOR + 7.5%, 1%Floor), Due 11/7/20) 4,529 4,382 4,382 1.6% 4,382 4,382 1.6% Boot Barn Holdings, Inc. Western Wear Retail Common Stock (95,252shares)(8) 381 1,171 0.4% 381 1,171 0.4% Brock Holdings III, Inc. Industrial Specialty Services Second Lien Debt (10% Cash (1month LIBOR + 8.25%, 1.75%Floor), Due 3/16/18) 5,000 4,881 4,881 1.8% 4,881 4,881 1.8% Brunswick Bowling Products, Inc. Bowling Products First Lien Debt (8% Cash (1month LIBOR + 6.0%, 2%Floor),Due 5/22/20) 2,000 2,000 2,000 0.7% Brunswick Bowling Products, Inc. Bowling Products First Lien Debt (16.25% Cash (1month LIBOR + 14.25%, 2%Floor), Due 5/22/20) 6,983 6,983 6,983 2.6% Brunswick Bowling Products, Inc. Bowling Products Preferred Shares (2,966 shares,8% PIK)(6) 3,118 3,141 1.2% 12,101 12,124 4.5% Burke America Parts Group, LLC Home Repair Parts Manufacturer First Lien Debt (9.5% Cash,Due 4/30/20) 5,000 4,868 4,868 1.8% Burke America Parts Group, LLC Home Repair Parts Manufacturer Membership Units (14 units) 5 533 0.2% 4,873 5,401 2.0% Caregiver Services, Inc. In-Home Healthcare Services Common Stock (293,186shares) 258 223 0.1% Caregiver Services, Inc. In-Home Healthcare Services Common Stock Warrants(655,908 units)(7) 264 498 0.2% 522 721 0.3% Cedar Electronics Holding Corp. Consumer Electronics Subordinated Debt (12% Cash,Due 12/26/20) 28,300 28,300 28,300 10.5% 28,300 28,300 10.5% Community Choice Financial, Inc. Financial Services First Lien Debt (14% Cash (1month LIBOR + 13%, 1%Floor), Due 3/27/17)(8)(11) 17,161 17,161 17,161 6.4% 17,161 17,161 6.4% See accompanying notes to consolidated financial statements.F-12  TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2015 Company(4),(5) Industry Type of Investment PrincipalAmount Cost Fair Value % ofNet AssetsConstruction Partners, Inc. Construction Services Second Lien Debt (11.5% Cash,Due 6/12/20) $12,500 $12,500 $12,500 4.7% 12,500 12,500 4.7% Corporate Visions, Inc. Sales & Marketing Services Subordinated Debt (9% Cash,2% PIK, Due 11/29/21) 15,941 15,941 15,941 5.9% Corporate Visions, Inc. Sales & Marketing Services Common Stock (15,750 shares) 1,575 1,917 0.7% 17,516 17,858 6.6% Crowley Holdings, Inc. Transportation Series A Income PreferredShares (6,000 shares, 10% Cash,2% PIK dividend)(6) 6,271 6,271 2.3% 6,271 6,271 2.3% CSM Bakery Solutions, LLC Bakery Supplies Distributor Second Lien Debt (8.75% Cash(1 month LIBOR + 7.75%, 1%Floor), Due 8/7/22) 17,000 16,687 16,146 6.0% 16,687 16,146 6.0% DSW Homes, LLC Disaster Recovery Homebuilding First Lien Debt (12.61% Cash (3month LIBOR + 12%),Due 9/24/18) 2,000 2,000 2,000 0.7% 2,000 2,000 0.7% Emerging Markets Communications,LLC Satellite Communications Second Lien Debt (10.625%Cash (1 month LIBOR +9.625%, 1% Floor), Due 7/1/22) 5,000 4,932 4,932 1.8% 4,932 4,932 1.8% Flavors Holdings, Inc. Food Product Manufacturer First Lien Debt (6.75% Cash (1month LIBOR + 5.75%, 1%Floor), Due 4/3/20) 7,500 7,265 6,917 2.6% Flavors Holdings, Inc. Food Product Manufacturer Second Lien Debt (11% Cash (1month LIBOR + 10%, 1%Floor), Due 10/3/21) 12,000 11,601 10,519 3.9% 18,866 17,436 6.5% Group Cirque du Soleil, Inc. Entertainment Second Lien Debt (9.25% Cash(3 month LIBOR + 8.25%, 1%Floor), Due 7/8/23)(8) 1,000 986 986 0.4% 986 986 0.4% Immersive Media Tactical Solutions,LLC Specialty Defense Contractor Subordinated Debt (Due12/9/19)(14) 2,000 2,000 1,800 0.7% 2,000 1,800 0.7% Kelle’s Transport Service, LLC Transportation First Lien Debt (14% Cash,Due 3/31/19) 14,562 14,551 14,562 5.4% Kelle’s Transport Service, LLC Transportation Preferred Units (1,000 units,10% PIK Dividend)(6) 3,101 3,101 1.2% Kelle’s Transport Service, LLC Transportation Common Stock Warrants (15%fully diluted) 22 3,310 1.2% 17,674 20,973 7.8% Maxim Crane Works, L.P. Crane Rental and Sales Second Lien Debt (10.25% Cash(1 month LIBOR + 9.25%, 1%Floor), Due 11/26/18) 5,000 5,032 5,032 1.9% 5,032 5,032 1.9% Medical Depot, Inc. Medical Device Distributor Subordinated Debt (14% Cash,Due 9/27/20)(1) 14,667 14,667 14,667 5.5% Medical Depot, Inc. Medical Device Distributor Series C Convertible PreferredStock (740 shares) 1,333 8,345 3.1% 16,000 23,012 8.6% Merlin International, Inc. IT Government Contracting Subordinated Debt (12.5% Cash,Due 12/16/19) 20,000 20,000 20,000 7.4% 20,000 20,000 7.4% See accompanying notes to consolidated financial statements.F-13  TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2015 Company(4),(5) Industry Type of Investment PrincipalAmount Cost Fair Value % ofNet AssetsNielsen & Bainbridge, LLC Home Décor Manufacturer Second Lien Debt (10.25% Cash(6 month LIBOR + 9.25%, 1%Floor), Due 8/15/21) $15,000 $14,816 $14,614 5.4% 14,816 14,614 5.4% Nth Degree, Inc. Business Services First Lien Debt (8.0% Cash (1month LIBOR + 7%, 1% Floor),1% PIK, Due 12/14/20) 12,256 12,256 12,256 4.6% Nth Degree, Inc. Business Services First Lien Debt (12.5% Cash (1month LIBOR + 11.5%, 1%Floor), 2% PIK, Due 12/14/20) 9,009 9,009 9,009 3.4% Nth Degree, Inc. Business Services Preferred Stock (10% PIKdividend)(6) 3,015 3,015 1.1% 24,280 24,280 9.1% Portrait Innovations, Inc. Professional and Personal DigitalImaging Subordinated Debt (12% Cash,Due 2/26/20) 15,000 15,000 15,000 5.6% 15,000 15,000 5.6% Sequoia Healthcare Management,LLC Healthcare Management First Lien Debt (12% cash, 4%PIK, due 7/17/19) 11,525 11,370 11,525 4.3% 11,370 11,525 4.3% Sierra Hamilton, LLC Oil & Gas Engineering andConsulting Services First Lien Debt (12.25% Cash,Due 12/15/18) 15,000 15,000 10,075 3.7% 15,000 10,075 3.7% Sparus Holdings, Inc. Energy Services First Lien Debt (12% Cash,Due 9/30/16)(1) 5,120 5,120 5,120 1.9% Sparus Holdings, Inc. Energy Services Subordinated Debt (12% Cash,Due 9/30/16)(1) 5,380 5,380 5,380 2.0% 10,500 10,500 3.9% Taylor Precision Products, Inc. Household Product Manufacturer Series C Preferred Stock (379shares) 758 758 0.3% 758 758 0.3% Tenere, Inc. Industrial Manufacturing First Lien Debt (11% Cash, 2%PIK, Due 12/15/17)(9) 3,582 3,582 3,582 1.3% 3,582 3,582 1.3% U.S. Well Services, LLC Oil & Gas Services First Lien Debt (12.0% Cash (1month LIBOR + 11.5%, 0.5%floor), Due 5/2/19) 14,189 14,133 14,189 5.3% 14,133 14,189 5.3% Velum Global Credit Management,LLC Financial Services First Lien Debt (15% PIK,Due 12/31/17)(1)(8) 9,069 9,069 9,069 3.4% 9,069 9,069 3.4% Vology, Inc. Information Technology Subordinated Debt (15% Cash(3 month LIBOR + 14%, 1%Floor), Due 1/24/21) 8,000 8,000 8,000 3.0% 8,000 8,000 3.0% Western Windows Systems, LLC Building Products First Lien Debt (12.2% Cash,Due 7/31/20)(3) 14,000 14,000 14,000 5.3% Western Windows Systems, LLC Building Products Membership units (39,860 units) 3,000 4,299 1.6% 17,000 18,299 6.9% Sub Total Non-control/non-affiliated investments $391,031 $404,513 150.5% See accompanying notes to consolidated financial statements.F-14  TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2015 Company(4),(5) Industry Type of Investment PrincipalAmount Cost Fair Value % ofNet AssetsAffiliate investments – 43.6% Burgaflex Holdings, LLC Automobile Part Manufacturer Subordinated Debt (14% Cash,Due 8/9/19) $3,000 $3,000 $3,000 1.1% Burgaflex Holdings, LLC Automobile Part Manufacturer Subordinated Debt (12% Cash,Due 8/9/19) 5,828 5,828 5,828 2.2% Burgaflex Holdings, LLC Automobile Part Manufacturer Common Stock (1,253,198shares) 1,504 3,080 1.1% 10,332 11,908 4.4% City Gear, LLC Footwear Retail Subordinated Debt (13% Cash,Due 9/28/17)(1) 8,231 8,231 8,231 3.1% City Gear, LLC Footwear Retail Preferred Membership Units(2.78% fully diluted, 9% Cashdividend)(6) 1,269 1,269 0.5% City Gear, LLC Footwear Retail Membership Unit Warrants(11.38% fully diluted) — 9,182 3.4% 9,500 18,682 7.0% GA Communications, Inc. Advertising & Marketing Services Series A-1 Preferred Stock(1,998 shares, 8% PIKdividend)(6) 2,413 2,764 1.0% GA Communications, Inc. Advertising & Marketing Services Series B-1 Common Stock(200,000 shares) 2 1,162 0.4% 2,415 3,926 1.4% J&J Produce Holdings, Inc. Produce Distribution Subordinated Debt (13% Cash,Due 7/16/18)(13) 5,182 5,182 5,182 1.9% J&J Produce Holdings, Inc. Produce Distribution Common Stock (8,182 shares) 818 — 0.0% J&J Produce Holdings, Inc. Produce Distribution Common Stock Warrants (4,506shares) — — 0.0% 6,000 5,182 1.9% LJS Partners, LLC QSR Franchisor Common Stock (1,500,000shares) 1,525 3,342 1.2% 1,525 3,342 1.2% MJC Holdings, LLC Specialty Clothing Series A Preferred Units(2,000,000 units) 1,000 4,696 1.7% 1,000 4,696 1.7% MMI Holdings, LLC Medical Device Distributor First Lien Debt (12% Cash,Due 1/31/17)(1) 2,600 2,600 2,600 1.0% MMI Holdings, LLC Medical Device Distributor Subordinated Debt (6% Cash,Due 1/31/17)(1) 400 388 400 0.1% MMI Holdings, LLC Medical Device Distributor Preferred Units (1,000 units, 6%PIK dividend)(6) 1,216 1,350 0.5% MMI Holdings, LLC Medical Device Distributor Common Membership Units (45units) — 319 0.1% 4,204 4,669 1.7% MTI Holdings, LLC Retail Display & Security Services Subordinated Debt (12% Cash,Due 11/1/18) 8,000 8,000 8,000 3.0% MTI Holdings, LLC Retail Display & Security Services Membership Units (2,000,000units) 2,000 13,917 5.3% 10,000 21,917 8.3% Source Capital ABUTEC, LLC Oil & Gas Services First Lien Debt (12% Cash, 3%PIK, Due 12/28/17)(2)(12) 5,741 5,404 2,247 0.8% Source Capital ABUTEC, LLC Oil & Gas Services Preferred Membership Units(10.5% fully diluted) 1,240 — 0.0% 6,644 2,247 0.8% Source Capital Penray, LLC Automotive Chemicals &Lubricants Subordinated Debt (13% Cash,Due 2/17/17) 2,500 2,500 2,500 0.9% Source Capital Penray, LLC Automotive Chemicals &Lubricants Common Stock Warrants(6.65% ownership) — 616 0.2% Source Capital Penray, LLC Automotive Chemicals &Lubricants Membership Units (11.3%ownership) 750 865 0.3% 3,250 3,981 1.4% See accompanying notes to consolidated financial statements.F-15  TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2015 Company(4),(5) Industry Type of Investment PrincipalAmount Cost Fair Value % ofNet AssetsSource Recycling, LLC Scrap Metal Recycler Subordinated Debt (13% Cash,Due 9/2/16)(2) $5,000 $5,000 $3,106 1.2% 5,000 3,106 1.2% STX Healthcare ManagementServices, Inc. Dental Practice Management Subordinated Debt (12.5% Cash,Due 7/31/18)(1) 6,425 6,425 6,398 2.4% STX Healthcare ManagementServices, Inc. Dental Practice Management Common Stock (1,200,000shares) 1,200 1,047 0.4% STX Healthcare ManagementServices, Inc. Dental Practice Management Common Stock Warrants(1,154,254 shares) 218 1,007 0.4% 7,843 8,452 3.2% TCE Holdings, Inc. Oil & Gas Services Subordinated Debt (12% Cash,2% PIK, Due 2/1/19)(2) 13,718 13,649 8,368 3.2% TCE Holdings, Inc. Oil & Gas Services Subordinated Debt (12% Cash,2% PIK, Due 2/1/19)(2) 10,931 10,876 6,668 2.5% TCE Holdings, Inc. Oil & Gas Services Class A Common Stock (3,600shares) 3,600 — 0.0% 28,125 15,036 5.7% V12 Holdings, Inc. Data Processing & DigitalMarketing First Lien Debt (15% PIK,Due 11/26/16) 471 471 1,047 0.4% V12 Holdings, Inc. Data Processing & DigitalMarketing Subordinated Debt (0% Cash,Due 11/26/16)(1) 663 361 663 0.2% V12 Holdings, Inc. Data Processing & DigitalMarketing Subordinated Debt (0% Cash,Due 11/26/16)(1) 81 44 81 0.0% V12 Holdings, Inc. Data Processing & DigitalMarketing Subordinated Debt (0% Cash,Due 11/26/16)(1) 3,563 2,369 3,563 1.3% V12 Holdings, Inc. Data Processing & DigitalMarketing Subordinated Debt (0% Cash,Due 11/26/16)(1) 299 207 299 0.1% V12 Holdings, Inc. Data Processing & DigitalMarketing Subordinated Debt (0% Cash,Due 11/26/16)(1) 2,750 — 2,750 1.0% V12 Holdings, Inc. Data Processing & DigitalMarketing Subordinated Debt (0% Cash,Due 11/26/16)(1) 243 — 243 0.1% V12 Holdings, Inc. Data Processing & DigitalMarketing Series A-1 Preferred Stock(255,102 shares) — 178 0.1% V12 Holdings, Inc. Data Processing & DigitalMarketing Series A-3 Preferred Stock(88,194 shares) — 55 0.0% V12 Holdings, Inc. Data Processing & DigitalMarketing Series A-5 Preferred Stock(20,530 shares) — 1,327 0.5% V12 Holdings, Inc. Data Processing & DigitalMarketing Common Stock Warrants(2,063,629 warrants) — — 0.0% 3,452 10,206 3.7% Sub Total Affiliate investments $99,290 $117,350 43.6% Control investments – 26.3% CableOrganizer Acquisition, LLC Computer Supply Retail First Lien Debt (12% Cash, 4%PIK, Due 5/24/18) $11,025 $11,025 $11,025 4.1% CableOrganizer Acquisition, LLC Computer Supply Retail Common Stock (1,125,000shares) 1,125 9 0.0% CableOrganizer Acquisition, LLC Computer Supply Retail Common Stock Warrants(570,000 shares) — 4 0.0% 12,150 11,038 4.1% Capitala Senior Liquid Loan Fund I,LLC Investment Fund Common Stock (80%ownership)(8) 20,000 17,867 6.6% 20,000 17,867 6.6% Micro Precision, LLC Conglomerate Subordinated Debt (10% Cash,Due 9/16/16) 1,862 1,862 1,862 0.7% Micro Precision, LLC Conglomerate Subordinated Debt (14% Cash,4% PIK, Due 9/16/16) 3,830 3,830 3,830 1.4% See accompanying notes to consolidated financial statements.F-16  TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2015 Company(4),(5) Industry Type of Investment PrincipalAmount Cost Fair Value % ofNet AssetsMicro Precision, LLC Conglomerate Series A Preferred Units (47units) $1,629 $1,629 0.6% 7,321 7,321 2.7% Navis Holdings, Inc. Textile Equipment Manufacturer First Lien Debt (15%, 2% PIK atCompany’s option,Due 10/30/20)(1)(10) $6,500 6,500 6,500 2.4% Navis Holdings, Inc. Textile Equipment Manufacturer Class A Preferred Stock (1,000shares, 10% Cash Dividend)(6) 1,000 1,000 0.4% Navis Holdings, Inc. Textile Equipment Manufacturer Common Stock (300,000shares) 1 5,354 2.0% 7,501 12,854 4.8% On-Site Fuel Services, Inc. Fuel Transportation Services Subordinated Debt (14% Cash,4% PIK, Due 12/19/16)(2) 8,539 8,448 4,425 1.6% On-Site Fuel Services, Inc. Fuel Transportation Services Series A Preferred Stock(32,782 shares) 3,278 — 0.0% On-Site Fuel Services, Inc. Fuel Transportation Services Series B Preferred Stock (23,648shares) 2,365 — 0.0% On-Site Fuel Services, Inc. Fuel Transportation Services Common Stock (33,107 shares) 33 — 0.0% 14,124 4,425 1.6% Print Direction, Inc. Printing Services First Lien Debt (10% Cash, 2%PIK, Due 2/24/19) 15,780 15,780 15,780 6.0% Print Direction, Inc. Printing Services Common Stock (18,543 shares) 2,990 1,253 0.5% Print Direction, Inc. Printing Services Common Stock Warrants (820shares) — 55 0.0% 18,770 17,088 6.5% Sub Total Control investments $79,866 $70,593 26.3% TOTAL INVESTMENTS – 220.4% $570,187 $592,456 220.4% (1)The maturity date of the original investment has been extended.(2)Non-accrual investment.(3)The cash rate equals the approximate current yield on our last-out portion of the unitranche facility.(4)All debt investments are income producing, unless otherwise noted. Equity and warrant investments are non-incomeproducing, unless otherwise noted.(5)Percentages are based on net assets of $268,802 as of December 31, 2015.(6)The equity investment is income producing, based on rate disclosed.(7)The equity investment has an exercisable put option.(8)Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of the InvestmentCompany Act of 1940, as amended. Qualifying assets must represent at least 70% of the Company’s total assets at the time ofacquisition of any additional non-qualifying assets. As of December 31, 2015, 7.3% of the Company’s total assets were non-qualifying assets.(9)The investment has a $0.6 million unfunded commitment.(10)The investment has a $1.0 million unfunded commitment.(11)The investment has a $2.8 million unfunded commitment.(12)Interest rate amended to 15% PIK through February 15, 2016.(13)Interest rate amended to 15% through June 30, 2016.(14)Interest rate was amended to zero. The Company is entitled to receive earn-out payments of up to $2.4 million in satisfaction ofthe debt. See accompanying notes to consolidated financial statements.F-17  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 1. OrganizationCapitala Finance Corp. (“Capitala Finance Corp.,” the “Company”, “we”, “us”, and “our”) is an externally managed non-diversified closed-end management investment company incorporated in Maryland that has elected to be regulated as a businessdevelopment company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company is an“emerging growth company” within the meaning of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and assuch, is subject to reduced public company reporting requirements. The Company commenced operations on May 24, 2013 andcompleted its initial public offering (“IPO”) on September 30, 2013. The Company is managed by Capitala Investment Advisors,LLC (the “Investment Advisor”), an investment adviser that is registered as an investment adviser under the Investment AdvisersAct of 1940, as amended (the “Advisers Act”), and Capitala Advisors Corp. (the “Administrator”) provides the administrativeservices necessary for the Company to operate. For U.S. federal income tax purposes, the Company has elected to be treated, andintends to comply with the requirements to continue to qualify annually, as a regulated investment company (“RIC”) underSubchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).The Company was formed for the purpose of (i) acquiring, through a series of transactions, an investment portfolio from thefollowing entities: CapitalSouth Partners Fund I Limited Partnership (“Fund I”); CapitalSouth Partners Fund II Limited Partnership(“Fund II”); CapitalSouth Partners Fund III, L.P. (“Fund III Parent”); CapitalSouth Partners SBIC Fund III, L.P. (“Fund III”) andCapitalSouth Partners Florida Sidecar Fund I, L.P. (“Florida Sidecar” and, collectively with Fund I, Fund II, Fund III and Fund IIIParent, the “Legacy Funds”); (ii) raising capital in the IPO and (iii) continuing and expanding the business of the Legacy Funds bymaking additional debt and equity investments in lower middle-market and traditional middle-market companies.The Company’s investment objective is to generate both current income and capital appreciation through debt and equityinvestments. Both directly and through our subsidiaries that are licensed by the U.S. Small Business Administration (“SBA”)under the Small Business Investment Company (“SBIC”) Act, the Company offers customized financing to business owners,management teams and financial sponsors for change of ownership transactions, recapitalizations, strategic acquisitions, businessexpansion and other growth initiatives. The Company invests in first lien, second lien and subordinated loans, and, to a lesserextent, equity securities issued by lower middle-market companies and traditional middle-market companies.On September 24, 2013, the Company acquired 100% of the limited partnership interests in Fund II, Fund III and FloridaSidecar and each of their respective general partners, as well as certain assets from Fund I and Fund III Parent, in exchange for anaggregate of 8,974,420 shares of the Company’s common stock (the “Formation Transactions”). Fund II, Fund III and FloridaSidecar became the Company’s wholly owned subsidiaries. Fund II and Fund III retained their SBIC licenses, continued to holdtheir existing investments at the time of the IPO and have continued to make new investments. The IPO consisted of the sale of4,000,000 shares of the Company’s common stock at a price of $20.00 per share, resulting in net proceeds to the Company of$74.25 million, after deducting underwriting fees and commissions totaling $4.0 million and offering expenses totaling $1.75million. The other costs of the IPO were borne by the limited partners of the Legacy Funds.Note 2. Summary of Significant Accounting PoliciesBasis of PresentationThe Company is considered an investment company as defined in Accounting Standards Codification (“ASC”) Topic946 — Financial Services — Investment Companies (“ASC 946”). The accompanying consolidated financial statements havebeen prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”)and pursuant to the requirements for reportingF-18  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 2. Summary of Significant Accounting Policies – (continued)on Form 10-K and Article 6 and Article 10 of Regulation S-X. The consolidated financial statements of the Company include theaccounts of the Company and its wholly owned subsidiaries as described in the Formation Transactions above.The Company’s financial statements as of December 31, 2016 and 2015 are presented on a consolidated basis. The effects ofall intercompany transactions between the Company and its consolidated subsidiaries (Fund II, Fund III, and the Florida Sidecar)have been eliminated in consolidation. All financial data and information included in these consolidated financial statementshave been presented on the basis described above. In the opinion of management, the consolidated financial statements reflect alladjustments that are necessary for the fair presentation of financial results as of and for the periods presented.Certain reclassifications have been made in the sub-classification of debt investments as of December 31, 2015 and for the twoyears in the period then ended in order to conform to current presentation.Use of Estimates in the Preparation of Financial StatementsThe preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to makeestimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.Actual results could differ from those estimates under different assumptions and conditions. The most significant estimates in thepreparation of the consolidated financial statements are investment valuation, revenue recognition, and income taxes.ConsolidationAs provided under Regulation S-X and ASC 946, the Company will generally not consolidate its investment in a companyother than a substantially wholly owned investment company subsidiary or a controlled operating company whose businessconsists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s whollyowned subsidiaries in its consolidated financial statements. The Company did not consolidate its interest in Capitala SeniorLiquid Loan Fund I, LLC (“CSLLF”) during the periods it was in existence because the investment was not considered asubstantially wholly owned investment company subsidiary. Further, CSLLF was a joint venture for which shared power existedrelating to the decisions that most significantly impacted the economic performance of the entity. See Note 4 to the consolidatedfinancial statements for description of the Company’s investment in CSLLF.SegmentsIn accordance with ASC Topic 280 — Segment Reporting (“ASC 280”), the Company has determined that it has a singlereporting segment and operating unit structure. While the Company invests in several industries and geographic locations, allinvestments share similar business and economic risks. As such, all investment activities have been aggregated into a singlesegment.Cash and Cash EquivalentsThe Company considers cash equivalents to be highly liquid investments with original maturities of three months or less at thedate of purchase. The Company deposits its cash in financial institutions and, at times, such balances may be in excess of theFederal Deposit Insurance Corporation (“FDIC”) insurance limits.Investment ClassificationIn accordance with the provisions of the 1940 Act, the Company classifies its investments by level of control. As defined inthe 1940 Act, “Control Investments” are investments in those companies that the Company is deemed to “Control.” “AffiliateInvestments” are investments in those companies that are “Affiliated Companies” of the Company, as defined in the 1940 Act,other than Control Investments.F-19  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 2. Summary of Significant Accounting Policies – (continued)“Non-Control/Non-Affiliate Investments” are those investments that are neither Control Investments nor Affiliate Investments.Generally under the 1940 Act, the Company is deemed to control a company in which it has invested if the Company owns morethan 25% of the voting securities of such company and/or has greater than 50% representation on its board or has the power toexercise control over management or policies of such portfolio company. The Company is deemed to be an affiliate of a companyin which the Company has invested if it owns between 5% and 25% of the voting securities of such company.Valuation of InvestmentsThe Company applies fair value accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic820 — Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework used tomeasure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, the Company hascategorized its financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fairvalue hierarchy as discussed in Note 4.In determining fair value, the Company’s board of directors (the “Board”) uses various valuation approaches, and engages athird-party valuation firm, which provides an independent valuation of certain investments. In accordance with U.S. GAAP, a fairvalue hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use ofunobservable inputs by requiring that the most observable inputs be used when available.Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtainedfrom sources independent of the Board. Unobservable inputs reflect the Board’s assumptions about the inputs market participantswould use in pricing the asset or liability developed based upon the best information available in the circumstances.The availability of valuation techniques and observable inputs can vary from security to security and is affected by a widevariety of factors including the type of security, whether the security is new and not yet established in the marketplace, and othercharacteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable orunobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarilyrepresent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonablydetermined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than thevalues that would have been used had a market for the securities existed. Accordingly, the degree of judgment exercised by theBoard in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fairvalue may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair valuehierarchy within which the fair value measurement in its entirety falls, is determined based on the lowest level input that issignificant to the fair value measurement.Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specificmeasure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflectthose that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices andinputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, theobservability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to alower level within the fair value hierarchy.F-20  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 2. Summary of Significant Accounting Policies – (continued)In estimating fair value of portfolio investments, the Company starts with the cost basis of the investment, which includesoriginal issue discount or premium and payment-in-kind (“PIK”) income, if any. The transaction price is typically the bestestimate of fair value at inception. When evidence supports a subsequent change to the carrying value from the originaltransaction price, adjustments are made to reflect the expected fair values.As a practical expedient, the Company used the net asset value (“NAV”) as the basis for the fair value of its investment inCSLLF. CSLLF recorded its underlying investments at fair value on a daily basis utilizing pricing information from third-partysources. Management may perform model-based analytical valuations in instances where an investment is considered illiquid orfor which pricing is not available from third-party sources.The following valuation methodologies are utilized by the Company in estimating fair value and are summarized as follows:Enterprise Value Waterfall ApproachThe enterprise value waterfall approach determines an enterprise value based on earnings before interest, tax, depreciation andamortization (“EBITDA”) multiples of publicly traded companies that are considered similar to the subject portfolio company.The Company considers a variety of items in determining a reasonable pricing multiple, including, but not limited to, operatingresults, budgeted projections, growth, size, risk, profitability, leverage, management depth, diversification, market position,supplier or customer dependence, asset utilization, liquidity metrics, and access to capital markets. EBITDA of the portfoliocompany is adjusted for non-recurring items in order to reflect a normalized level of earnings that is representative of futureearnings. In certain instances, the Company may also utilize revenue multiples to determine enterprise value. When available, theCompany may assign a pricing multiple or value its equity investments based on the value of recent investment transactions in thesubject portfolio company or offers to purchase the portfolio company. The enterprise value is adjusted for financial instrumentswith seniority to the Company’s ownership and for the effect of any instrument which may dilute the Company’s investment in theportfolio company. The adjusted enterprise value is then apportioned based on the seniority and privileges of the Company’sinvestments within the portfolio company.The enterprise value waterfall approach is primarily utilized to value the Company’s equity securities, including warrants.However, the Company may utilize the enterprise value waterfall approach to value certain debt securities.Income ApproachThe income approach utilizes a discounted cash flow methodology in which the Company estimates fair value based on thepresent value of expected cash flows discounted at a market rate of interest. The determination of a discount rate, or required rateof return, takes into account the portfolio company’s fundamentals and perceived credit risk. Because the majority of theCompany’s portfolio companies do not have a public credit rating, determining a discount rate often involves assigning animplied credit rating based on the portfolio company’s operating metrics compared to average metrics of similar publicly rateddebt. Operating metrics include, but are not limited to, EBITDA, interest coverage, leverage ratio, return of capital, and debt toequity ratios. The implied credit rating is used to assign a base discount rate range based on publicly available yields on similarlyrated debt securities. The Company may apply a premium to the discount rate utilized in determining fair value when performancemetrics and other qualitative information indicates that there is an additional level of uncertainty about collectability of cashflows.F-21  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 2. Summary of Significant Accounting Policies – (continued)Asset ApproachThe asset approach values an investment based on the value of the underlying collateral securing the investment. Thisapproach is used when the Company has reason to believe that it will not collect all principal and interest in accordance with thecontractual terms of the debt agreement.Revenue RecognitionThe Company’s revenue recognition policies are as follows:Interest income and paid-in-kind interest income: Interest income is recorded on the accrual basis to the extent that suchamounts are expected to be collected. The Company has loans in the portfolio that contain a PIK provision. The PIK interest,which represents contractually deferred interest added to the loan balance that is generally due at maturity, is recorded on anaccrual basis to the extent that such amounts are expected to be collected. PIK interest is not accrued if the Company does notexpect the issuer to be able to pay all principal and interest when due.Non-accrual investments: Generally, when interest and/or principal payments on a loan become 90 days or more past due, or ifthe Company otherwise does not expect the borrower to be able to service its debt and other obligations, the Company will placethe loan on non-accrual status, and will generally cease recognizing interest income and PIK interest on that loan for financialreporting purposes. Interest payments received on non-accrual loans may be recognized as income or applied to principaldepending upon management’s judgment. The Company writes off any previously accrued and uncollected interest when it isdetermined that interest is no longer considered collectible. The Company may elect to cease accruing PIK interest and continueaccruing interest income in cases where a loan is currently paying its interest income but, in management’s judgment, there is areasonable likelihood of principal loss on the loan. Non-accrual loans are returned to accrual status when the borrower’s financialcondition improves such that management believes current interest and principal payments are expected to be collected.Gains and losses on investment sales and paydowns: Realized gains and losses on investments are recognized using thespecific identification method.Dividend income and paid-in-kind dividends: Dividend income is recognized on the date dividends are declared. Dividendincome may be reversed in the event that a previously declared dividend is no longer expected to be paid by the portfoliocompany. The Company holds preferred equity investments in the portfolio that contain a payment-in-kind dividend (“PIKdividends”) provision. PIK dividends, which represent contractually deferred dividends added to the equity balance, are recordedon the accrual basis to the extent that such amounts are expected to be collected. The Company will typically cease accrual of PIKdividends when the fair value of the equity investment is less than the cost basis of the investment or when it is otherwisedetermined by management that PIK dividends are unlikely to be collected. If management determines that a decline in fair valueis temporary in nature and the PIK dividends are more likely than not to be collected, management may elect to continue accruingPIK dividends.Original issue discount/premiums: Discounts/premiums received to par on loans purchased are capitalized and accreted oramortized into income over the life of the loan. Any remaining discount/premium is accreted or amortized into income uponprepayment of the loan.Other income: Origination fees (to the extent services are performed to earn such income), amendment fees, consent fees, andother fees associated with investments in portfolio companies are recognized as income when the investment transaction closes.Prepayment penalties received by the Company for debt instruments repaid prior to maturity date are recorded as income uponreceipt.F-22  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 2. Summary of Significant Accounting Policies – (continued)Loan SalesThe Company follows the guidance in ASC Topic 860 — Transfers and Servicing (“ASC 860”) when accounting for loanparticipations and partial loan sales as it relates to concluding on sales accounting treatment for such transactions. Based on theCompany’s analysis of all loan participations and partial sales completed, the Company believes that all such transactions meetthe criterion required by ASC 860 to qualify for sales accounting treatment.General and Administrative ExpensesGeneral and administrative expenses are paid as incurred. The Company’s administrative expenses include personnel andoverhead expenses allocable to the Company paid by and reimbursed to the Administrator under an administration agreementbetween the Company and the Administrator (the “Administration Agreement”). Other operating expenses such as legal and auditfees, director fees, and director and officer insurance are generally paid directly by the Company.Deferred Financing FeesCosts incurred to issue the Company’s debt obligations are capitalized and are amortized over the term of the debt agreementsunder the effective interest method.Commitments and ContingenciesAs of December 31, 2016 and December 31, 2015, the Company had outstanding unfunded commitments related to debtinvestments in existing portfolio companies of $1.2 million (On-Site Fuel Services, Inc.) and $4.4 million ($0.6 million to Tenere,Inc, $1.0 million to Navis Holdings, Inc, and $2.8 million to Community Choice Financial Inc.), respectively.In the ordinary course of business, the Company may enter into contracts or agreements that contain indemnifications orwarranties. Future events could occur that lead to the execution of these provisions against the Company. Based on its history andexperience, management believes that the likelihood of such an event is remote.In the ordinary course of business, the Company may directly or indirectly be a defendant or plaintiff in legal actions withrespect to bankruptcy, insolvency or other types of proceedings. Such lawsuits may involve claims that could adversely affect thevalue of certain financial instruments owned by the Company or result in direct losses to the Company. In management’s opinion,no direct losses with respect to litigation contingencies were probable as of December 31, 2016 and December 31, 2015.Management is of the opinion that the ultimate resolution of such claims will not materially affect the Company’s business,financial position, results of operations or liquidity. Furthermore, in management’s opinion, it is not possible to estimate a rangeof reasonably possible losses with respect to other litigation contingencies.Income TaxesThe Company has elected to be treated for U.S. federal income tax purposes, and intends to comply with the requirements toqualify annually thereafter, as a RIC under Subchapter M of the Code and, among other things, intends to make the requisitedistributions to its stockholders which will relieve the Company from U.S. federal income taxes. Therefore, no provision has beenrecorded for U.S. federal income taxes.In order to qualify as a RIC, among other requirements, the Company is required to timely distribute to its stockholders at least90.0% of its investment company taxable income, as defined by the Code, for each fiscal tax year. The Company will be subject toa nondeductible U.S. federal excise tax of 4.0% on undistributed income if it does not distribute at least 98.0% of its ordinaryincome in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31.F-23  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 2. Summary of Significant Accounting Policies – (continued)Depending on the level of taxable income earned in an excise tax year, the Company may choose to carry forward taxableincome in excess of current year dividend distributions into the next excise tax year and pay a 4.0% excise tax on such income, asrequired. To the extent that the Company determines that its estimated current year annual taxable income will be in excess ofestimated current year dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excesstaxable income as taxable income is earned. Since the Company’s IPO, the Company has not accrued or paid excise tax.In accordance with certain applicable U.S. Treasury regulations and private letter rulings issued by the Internal RevenueService, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may electto receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation on the aggregate amount of cash tobe distributed to all stockholders, which limitation must be at least 20.0% of the aggregate declared distribution. If too manystockholders elect to receive cash, each stockholder electing to receive cash will receive a pro rata amount of cash (with thebalance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20.0% of hisor her entire distribution in cash. If these and certain other requirements are met, for U.S federal income tax purposes, the amountof the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. For income taxpurposes, the Company has paid distributions on its common stock from ordinary income in the amount of $24.5 million, $25.1million, and $18.3 million during the tax years ended August 31, 2016, 2015 and 2014, respectively.ASC Topic 740 — Income Taxes (“ASC 740”), provides guidance for how uncertain tax positions should be recognized,measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expectedto be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not”to be sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would berecorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related tounrecognized tax benefits as income tax expense in the consolidated statements of operations. As of December 31, 2016 andDecember 31, 2015, there were no uncertain tax positions.The Company is required to determine whether a tax position of the Company is more likely-than-not to be sustained uponexamination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on thetechnical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater thanfifty percent likely of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized could resultin the Company recording a tax liability that could negatively impact the Company’s net assets.U.S. GAAP provides guidance on thresholds, measurement, de-recognition, classification, interest and penalties, accounting ininterim periods, disclosure, and transition that is intended to provide better financial statement comparability among differententities.The Company’s activities since commencement of operations remain subject to examination by U.S. federal, state, and localtax authorities for the tax years ended August 31, 2016, 2015, and 2014. No interest expense or penalties have been assessed as ofDecember 31, 2016 and 2015. If the Company were required to recognize interest and penalties, if any, related to unrecognized taxbenefits this would be recognized as income tax expense in the consolidated statement of operations.DistributionsDistributions to common stockholders are recorded as payable on the declaration date. The amount to be paid out as adividend is determined by the Board. Net capital gains, if any, are generally distributed at least annually, although we may decideto retain such capital gains for reinvestment.F-24  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 2. Summary of Significant Accounting Policies – (continued)The Company has adopted an “opt out” dividend reinvestment plan (“DRIP”) for common stockholders. As a result, if theCompany declares a cash dividend or other distribution, each stockholder that has not “opted out” of the DRIP will have itsdividends automatically reinvested in additional shares of the Company’s common stock rather than receiving cash dividends.Stockholders who receive distributions in the form of shares of common stock will be subject to the same federal, state and localtax consequences as if they received cash distributions.Company Investment Risk, Concentration of Credit Risk, and Liquidity RiskThe Investment Advisor has broad discretion in making investments for the Company. Investments will generally consist ofdebt and equity instruments that may be affected by business, financial market or legal uncertainties. Prices of investments may bevolatile, and a variety of factors that are inherently difficult to predict, such as domestic or international economic and politicaldevelopments, may significantly affect the results of the Company’s activities and the value of its investments. In addition, thevalue of the Company’s portfolio may fluctuate as the general level of interest rates fluctuate.The value of the Company’s investments may be detrimentally affected to the extent, among other things, that a borrowerdefaults on its obligations, there is insufficient collateral and/or there are extensive legal and other costs incurred in collecting ona defaulted loan, observable secondary or primary market yields for similar instruments issued by comparable companies increasematerially or risk premiums required in the market between smaller companies, such as our borrowers, and those for which marketyields are observable increase materially.The Investment Advisor may attempt to minimize this risk by maintaining low debt-to-liquidation values with each debtinvestment and the collateral underlying the debt investment.The Company’s assets may, at any time, include securities and other financial instruments or obligations that are illiquid orthinly traded, making purchase or sale of such securities and financial instruments at desired prices or in desired quantitiesdifficult. Furthermore, the sale of any such investments may be possible only at substantial discounts, and it may be extremelydifficult to value any such investments accurately.Note 3. Recent Accounting PronouncementsIn August, 2014, the Financial Accounting Standards Board (“FASB”) released Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40) (“ASU 2014-15”). ASU 2014-15 requires theCompany to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about theentity’s ability to continue as a going concern within the one year period subsequent to the date that the financial statements areissued or within the one year period subsequent to the date that the financial statements are available to be issued. ASU 2014-15becomes effective for fiscal periods ending after December 15, 2016; however, early adoption is permitted. Management hasevaluated the Company’s ability to continue as a going concern under the guidance issued in ASU 2014-15 and believes thatthere are no conditions that raise substantial doubt about the Company’s ability to continue as a going concern. As such,additional disclosure is not required and the consolidated financial statements have been presented on the going concern basis ofaccounting.In April 2015, the FASB issued ASU No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying thePresentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debtliability be presented in the consolidated statements of assets and liabilities as a direct deduction from the carrying amount of thatdebt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affectedby the amendments in this ASU. ASU 2015-03 is effective for fiscal years that begin after December 15, 2015. Managementelected to early adopt this standard as of October 1, 2015 and the required disclosures are presented in the consolidatedF-25  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 3. Recent Accounting Pronouncements – (continued)financial statements. The adoption of the provisions of ASU 2015-03 did not materially impact the Company’s consolidatedfinancial position or results of operations.In May 2015, FASB issued ASU 2015-07, Fair Value Measurement (Topic 820) — Disclosures for Investments in CertainEntities That Calculate Net Asset Value per Share (“ASU 2015-07”). ASU 2015-07 permits a reporting entity, as a practicalexpedient, to measure the fair value of certain investments using the net asset value per share of the investment and providesguidance on required disclosures for such investments. The standard is effective for interim and annual reporting periods in fiscalyears that begin after December 15, 2015. The adoption of the provisions of ASU 2015-07 did not materially impact theCompany’s consolidated financial position or results of operations.In January 2016, FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition andMeasurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 retains many current requirements forthe classification and measurement of financial instruments; however, it significantly revises an entity’s accounting related to (1)the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes forfinancial liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements associated with the fair valueof financial instruments. This guidance is effective for annual and interim periods beginning after December 15, 2017, and earlyadoption is not permitted for public business entities. Management is currently evaluating the impact these changes will have onthe Company’s consolidated financial position or results of operations.Note 4. Investments and Fair Value MeasurementsThe Company’s investment objective is to generate both current income and capital appreciation through debt and equityinvestments. Both directly and through our subsidiaries that are licensed by the SBA under the SBIC Act, we offer customizedfinancing to business owners, management teams and financial sponsors for change of ownership transactions, recapitalizations,strategic acquisitions, business expansion and other growth initiatives. We invest in first lien, second lien and subordinated loans.Most of our debt investments are coupled with equity interests, whether in the form of detachable “penny” warrants or equity co-investments made pari-passu with our borrowers’ financial sponsors. As of December 31, 2016, our portfolio consisted ofinvestments in 53 portfolio companies with a fair value of approximately $541.6 million.Most of the Company’s debt investments are structured as first lien loans. First lien loans may contain some minimum amountof principal amortization, excess cash flow sweep feature, prepayment penalties, or any combination of the foregoing. First lienloans are secured by a first priority lien in existing and future assets of the borrower and may take the form of term loans or delayeddraw facilities. In some cases, first lien loans may be subordinated, solely with respect to the payment of cash interest, to an assetbased revolving credit facility.The Company also invests in debt instruments structured as second lien loans. Second lien loans are loans which have asecond priority security interest in all or substantially all of the borrower’s assets, and which are not subject to the blockage ofcash interest payments to us at the first lien lender’s discretion.In addition to first and second lien loans, the Company may also invest in subordinated loans. Subordinated loans typicallyhave second lien loans on all or substantially all of the borrower’s assets, and unlike second lien loans, may be subject to theinterruption of cash interest payments upon certain events of default, at the discretion of the first lien lender.During the year ended December 31, 2016, the Company made approximately $120.8 million of investments and hadapproximately $163.6 million in repayments and sales resulting in net repayments and sales of approximately $42.8 million forthe year. During the year ended December 31, 2015, the Company made approximately $260.6 million of investments and hadapproximately $142.7 million in repayments andF-26  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 4. Investments and Fair Value Measurements – (continued)sales resulting in net investments of approximately $117.9 million for the year. During the year ended December 31, 2014, theCompany made approximately $216.3 million of investments and had approximately $80.2 million in repayments and salesresulting in net investments of approximately $136.1 million for the year.On August 31, 2016, the Company sold a portion of 14 securities across 10 portfolio companies to CapitalSouth PartnersFlorida Sidecar Fund II, L.P. (“FSC II”), including granting an option to acquire a portion of the Company’s equity investment inEastport Holdings, LLC (the “Written Call Option”), in exchange for 100% of the partnership interests in FSC II. Concurrent withthe sale of these assets to FSC II, the Company received cash consideration of $47.6 million from an affiliated third-partypurchaser in exchange for 100% of the partnership interests of FSC II. These assets were sold to FSC II at their June 30, 2016 fairmarket values, resulting in a net realized gain of $0.1 million. The proceeds from the redemption of partnership interests in FSC IIare included in gross repayments and sales of investments received for the period. The Company’s Board pre-approved thistransaction pursuant to Section 57(f) of the 1940 Act.The Company collected and will periodically collect principal and interest payments related to certain of the securitiespurchased by FSC II. Such principal and interest payments will be remitted timely to FSC II based on its proportionate share of thesecurity. FSC II does not have any recourse to the Company related to the non-payment of principal or interest by the underlyingissuers of the securities.The Written Call Option granted FSC II the right to purchase up to 31.25% of the Company’s equity investment in EastportHoldings, LLC. The Written Call Option has a strike price of $1.5 million and a termination date of August 31, 2018. The fairvalue of the Written Call Option, which has been treated as a derivative liability and is recorded in the financial statement lineitem Written Call Option at fair value in our consolidated statements of assets and liabilities, was approximately $2.7 million as ofDecember 31, 2016. For purposes of determining the fair value of the Written Call Option, the Company calculated the differencein the fair value of the underlying equity investment in Eastport Holdings, LLC and the strike price of the Written Call Option, orintrinsic value. The time value of the Written Call Option as of December 31, 2016 was determined to be insignificant. TheWritten Call Option is classified as a Level 3 financial instrument. The Written Call Option was the only option contract grantedby the Company during the year ended December 31, 2016, and the Written Call Option remained outstanding as of December 31,2016.During the year ended December 31, 2016, the Company funded $2.8 million of previously committed capital to existingportfolio companies. During the year ended December 31, 2016, the Company funded $118.0 million of investments in portfoliocompanies for which it was not previously committed to fund. During the year ended December 31, 2015, the Company funded$52.4 million of previously committed capital to existing portfolio companies. During the year ended December 31, 2015, theCompany funded $208.2 million of investments in portfolio companies for which it was not previously committed to fund. Duringthe year ended December 31, 2014, the Company funded $1.5 million of previously committed capital to existing portfoliocompanies. During the year ended December 31, 2014, the Company funded $214.8 million of investments in portfolio companiesfor which it was not previously committed to fund. In addition to investing directly in portfolio companies, the Company mayassist portfolio companies in securing financing from other sources by introducing portfolio companies to sponsors or by leadinga syndicate of investors to provide the portfolio companies with financing. During the year ended December 31, 2016, theCompany did not lead any syndicates and did not assist any portfolio companies in obtaining indirect financing. During the yearended December 31, 2015, the Company assisted one company in securing financing from other sources as part of a loansyndication. During the year ended December 31, 2014, the Company assisted one portfolio company in securing financing fromother sources.F-27  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 4. Investments and Fair Value Measurements – (continued)The composition of our investments as of December 31, 2016, at amortized cost and fair value were as follows (dollars inthousands): Investments atAmortized Cost Amortized CostPercentage ofTotal Portfolio Investmentsat Fair Value Fair ValuePercentage ofTotal PortfolioFirst Lien Debt $244,647 47.6% $226,578 41.8% Second Lien Debt 74,559 14.5 71,483 13.2 Subordinated Debt 148,849 29.0 150,232 27.8 Equity and Warrants 45,721 8.9 93,346 17.2 Total $513,776 100.0% $541,639 100.0% The composition of our investments as of December 31, 2015, at amortized cost and fair value were as follows (dollars inthousands): Investments atAmortized Cost Amortized CostPercentage ofTotal Portfolio Investmentsat Fair Value Fair ValuePercentage ofTotal portfolioFirst Lien Debt $207,957 36.5% $199,843 33.8% Second Lien Debt 82,435 14.5 80,610 13.6 Subordinated Debt 205,480 36.0 194,485 32.8 Equity and Warrants 54,315 9.5 99,651 16.8 Capitala Senior Liquid Loan Fund I, LLC 20,000 3.5 17,867 3.0 Total $570,187 100.0% $592,456 100.0% As noted above, the Company values all investments in accordance with ASC 820. ASC 820 requires enhanced disclosuresabout assets and liabilities that are measured and reported at fair value. As defined in ASC 820, fair value is the price that would bereceived to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurementdate.ASC 820 establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability ofinputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including thetype of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or forwhich fair value can be measured from actively quoted prices generally will have a higher degree of market price observabilityand a lesser degree of judgment used in measuring fair value.Based on the observability of the inputs used in the valuation techniques, the Company is required to provide disclosures onfair value measurements according to the fair value hierarchy. The fair value hierarchy ranks the observability of the inputs used todetermine fair values. Investments carried at fair value are classified and disclosed in one of the following three categories:•Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has theability to access.•Level 2 — Valuations based on inputs other than quoted prices in active markets, which are either directly or indirectlyobservable.•Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.F-28  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 4. Investments and Fair Value Measurements – (continued)In addition to using the above inputs in investment valuations, the Company continues to employ the valuation policyapproved by the Board that is consistent with ASC 820 (see Note 2). Consistent with our Company’s valuation policy, we evaluatethe source of inputs, including any markets in which our investments are trading, in determining fair value.In estimating fair value of portfolio investments, the Company starts with the cost basis of the investment, which includesamortized original issue discount and PIK income, if any. The transaction price is typically the best estimate of fair value atinception. When evidence supports a subsequent change to the carrying value from the original transaction price, adjustments aremade to reflect the expected fair values.The following table presents fair value measurements of investments, by major class, as of December 31, 2016 (dollars inthousands), according to the fair value hierarchy: Fair Value Measurements Level 1 Level 2 Level 3 TotalFirst Lien Debt $ — $ — $226,578 $226,578 Second Lien Debt — — 71,483 71,483 Subordinated Debt — — 150,232 150,232 Equity and Warrants — — 93,346 93,346 Total $— $— $541,639 $541,639 The following table presents fair value measurements of the Written Call Option as of December 31, 2016 (dollars inthousands), according to the fair value hierarchy: Fair Value Measurements Level 1 Level 2 Level 3 TotalWritten Call Option $ — $ — $(2,736) $(2,736) Total $— $— $(2,736) $(2,736) The following table presents fair value measurements of investments, by major class, as of December 31, 2015 (dollars inthousands), according to the fair value hierarchy: Fair Value Measurements(1) Level 1 Level 2 Level 3 TotalFirst Lien Debt $— $ — $199,843 $199,843 Second Lien Debt — — 80,610 80,610 Subordinated Debt — — 194,485 194,485 Equity and Warrants 1,171 — 98,480 99,651 Total $1,171 $— $573,418 $574,589 (1)Excludes our $17.9 million investment in CSLLF, measured at NAV.F-29  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 4. Investments and Fair Value Measurements – (continued)The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs forthe year ended December 31, 2016 (dollars in thousands): First LienDebt Second LienDebt SubordinatedDebt EquityandWarrants TotalBalance as of January 1, 2016 $199,843 $80,610 $194,485 $98,480 $573,418 Repayments/sales (35,823) (12,750) (71,527) (22,410) (142,510) Purchases 72,702 4,850 37,406 5,886 120,844 Payment in-kind interest and dividendsaccrued 4,471 — 596 1,233 6,300 Accretion of original issue discount 364 191 2,219 1 2,775 Realized gain (loss) from investments (5,024) (168) (25,325) 7,078 (23,439) Net unrealized appreciation(depreciation) on investments (9,955) (1,250) 12,378 3,078 4,251 Balance as of December 31, 2016 $226,578 $71,483 $150,232 $93,346 $541,639 The following table provides a reconciliation of the beginning and ending balances for the Written Call Option that use Level3 inputs for the year ended December 31, 2016 (dollars in thousands): Written CallOptionBalance as of January 1, 2016 $— Net unrealized depreciation on Written Call Option (2,716) Proceeds from Written Call Option (20) Balance as of December 31, 2016 $(2,736) The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs forthe year ended December 31, 2015 (dollars in thousands): First LienDebt Second LienDebt SubordinatedDebt EquityandWarrants Total(1)Balance as of January 1, 2015 $134,214 $78,678 $155,722 $100,803 $469,417 Repayments/sales (38,694) (13,000) (46,250) (31,785) (129,729) Purchases 111,195 15,811 103,043 10,591 240,640 Payment in-kind interest and dividendsaccrued 2,820 — 1,374 890 5,084 Accretion of original issue discount 351 221 12 1 585 Realized gain (loss) from investments (3,990) — (15,321) 13,784 (5,527) Net unrealized appreciation(depreciation) on investments (6,053) (1,100) (4,095) 4,196 (7,052) Balance as of December 31, 2015 $199,843 $80,610 $194,485 $98,480 $573,418 (1)Excludes our $17.9 million investment in CSLLF, measured at NAV.The net change in unrealized appreciation (depreciation) on investments held as of December 31, 2016 and 2015 was $3.9million and $(5.0) million, respectively, and is included in net unrealized appreciation (depreciation) on investments in theconsolidated statements of operations.F-30  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 4. Investments and Fair Value Measurements – (continued)The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets and(liabilities) as of December 31, 2016 were as follows: Fair Value(in millions) Valuation Approach Unobservable Input Range (Weighted Average)First lien debt $173.3 Income Required Rate of ReturnLeverage RatioAdjusted EBITDA 9.5% – 18.0% (14.2%)2.0x – 6.4x (4.1x)$1.8 million – $166.0 million ($24.1 million) First lien debt $53.3 Enterprise ValueWaterfall andAsset(1) EBITDA MultipleAdjusted EBITDARevenue MultipleRevenue 4.5x – 9.0x (6.3x)$2.5 million – $34.3 million ($13.1 million)0.3x – 0.3x (0.3x)$88.1 million – $88.1 million ($88.1 million) Second lien debt $71.5 Income Required Rate of ReturnLeverage RatioAdjusted EBITDA 10.0% – 17.3% (13.3%)0.0x – 7.5x (5.0x)$8.1 million – $166.0 million ($76.5 million) Subordinated debt $114.6 Income Required Rate of ReturnLeverage RatioAdjusted EBITDA 11.5% – 20.0% (13.6%)1.5x – 6.7x (4.1x)$2.0 million – $63.7 million ($21.4 million) Subordinated debt $35.6 Enterprise ValueWaterfall andAsset(1) EBITDA MultipleAdjusted EBITDA 5.0x – 8.7x (6.3x)$1.8 million – $27.6 million ($15.7 million) Equity and warrants $93.3 Enterprise ValueWaterfall EBITDA MultipleAdjusted EBITDA 4.5x – 12.2x (7.6x)$1.8 million – $63.7 million ($17.5 million) Written Call Option $(2.7) Enterprise ValueWaterfall EBITDA MultipleAdjusted EBITDA 6.25x – 6.25x (6.25x)$27.6 million – $27.6 million ($27.6 million) (1)$2.5 million in subordinated debt and $2.6 million in first lien debt were valued using the asset approach.F-31  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 4. Investments and Fair Value Measurements – (continued)The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as ofDecember 31, 2015 were as follows: Fair Value(2)(in millions) Valuation Approach Unobservable Input Range (Weighted Average)First lien debt $185.5 Income Required Rate of ReturnLeverage RatioAdjusted EBITDA 8.0% – 60.0% (13.3%)1.0x – 6.2x (3.7x)$2.0 million – $162.1 million ($27.7 million) First lien debt $14.3 Enterprise ValueWaterfall andAsset(1) EBITDA MultipleAdjusted EBITDARevenue MultipleRevenue 4.5x – 4.5x (4.5x)$13.5 million – $13.5 million ($13.5 million)3.5x – 3.5x (3.5x)$22.8 million – $22.8 million ($22.8 million) Second lien debt $80.6 Income Required Rate of ReturnLeverage RatioAdjusted EBITDA 9.3% – 15.3% (11.7%)0.9x – 5.4x (4.2x)$12.8 million – $221.8 million ($98.0 million) Subordinated debt $162.1 Income Required Rate of ReturnLeverage RatioAdjusted EBITDA 11.0% – 15.0% (12.6%)0.6x – 5.2x (3.0x)$2.4 million – $69.8 million ($21.2 million) Subordinated debt $32.4 Enterprise ValueWaterfall andAsset(1) EBITDA MultipleAdjusted EBITDARevenue MultipleRevenue 6.0x – 7.5x (7.5x)$2.1 million – $5.4 million ($5.3 million)3.5x – 3.5x (3.5x)$22.8 million – $22.8 million ($22.8 million) Equity and warrants $6.3 Income Required Rate of ReturnLeverage RatioAdjusted EBITDA 12.0% – 12.0% (12.0%)2.0x – 2.0x (2.0x)$344.5 million – $344.5 million($344.5 million) Equity and warrants $92.2 Enterprise ValueWaterfall Revenue MultipleRevenue AdjustedEBITDA MultipleAdjusted EBITDA 3.5x – 3.5x (3.5x)$22.8 million – $22.8 million ($22.8 million)4.5x – 11.0x (7.3x)$2.0 million – $69.8 million ($18.6 million) (1)$9.3 million in subordinated debt and $3.2 million in first lien debt were valued using the asset approach.(2)Excludes our $17.9 million investment in CSLLF, measured at NAV.The significant unobservable inputs used in the valuation of the Company’s investments are required rate of return, adjustedEBITDA, EBITDA multiples, revenue, revenue multiples, and leverage ratios. Changes in any of these unobservable inputs couldhave a significant impact on the Company’s estimate of fair value. An increase (decrease) in the required rate of return or leveragewill result in a lower (higher) estimate of fair value while an increase (decrease) in adjusted EBITDA, EBITDA multiples, revenue,or revenue multiples will result in a higher (lower) estimate of fair value.Capitala Senior Liquid Loan Fund I, LLCOn March 24, 2015, Capitala and Trinity Universal Insurance Company (“Trinity”), a subsidiary of Kemper Corporation(“Kemper”), entered into a limited liability company agreement to co-manage CSLLF. The purpose and design of the joint venturewas to invest primarily in broadly syndicated senior secured loans to larger middle-market companies, which were purchased onthe secondary market. Capitala and Trinity have committed to provide $25.0 million of equity to CSLLF, with Capitala providing$20.0 million and Trinity providing $5.0 million, resulting in an 80%/20% economic ownership between the two parties. Theboard of directors and investment committee of CSLLF were split 50/50 between Trinity and Capitala, resulting inF-32  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 4. Investments and Fair Value Measurements – (continued)equal voting power between the two entities. In September 2016, the Company and Trinity elected to wind-down operations ofCSLLF. During the fourth quarter of 2016, CSLLF sold all referenced assets underlying the total return swap (“TRS”) and declaredfinal distributions, inclusive of dividends and return of capital, in December 2016.For the years ended December 31, 2016 and December 31, 2015, the Company received $1.8 million and $0.9 million,respectively, in dividend income from our equity interest in CSLLF. For the year ended December 31, 2016, CSLLF declared areturn of capital distribution to the Company in the amount of $20.0 million, which included $19.9 million in cash received inDecember 2016 and $0.1 million to be paid in the first quarter of 2017.On March 27, 2015, CSLLF entered into a TRS with Bank of America, N.A. (“Bank of America”) that was indexed to a basketof senior secured loans purchased by CSLLF. CSLLF obtained the economic benefit of the loans underlying the TRS, includingthe net interest spread between the interest income generated by the underlying loans and the interest expense type payment underthe TRS, the realized gain (loss) on liquidated loans, and the unrealized appreciation (depreciation) on the underlying loans.The terms of the TRS were governed by an ISDA 2002 Master Agreement, the Schedule thereto and Credit Support Annex tosuch Schedule, and the confirmation exchanged thereunder, between CSLLF and Bank of America, which collectively establishedthe TRS, and are collectively referred to herein as the “TRS Agreement.” Pursuant to the terms of the TRS Agreement, CSLLFselected a portfolio of loans with a maximum market value (determined at the time each such loan becomes subject to the TRS) of$100,000,000, which is also referred to as the maximum notional amount of the TRS. Each individual loan, and the portfolio ofloans taken as a whole, had to meet criteria described in the TRS Agreement. CSLLF received from Bank of America a periodicpayment on set dates that is based upon any coupons, both earned and accrued, generated by the loans underlying the TRS,subject to limitations described in the TRS Agreement as well as any fees associated with the loans included in the portfolio.CSLLF paid to Bank of America interest at a rate equal to LIBOR plus 1.25% per annum; the LIBOR option paid by CSLLF isdetermined on an asset by asset basis such that the tenor of the LIBOR option (1 month, 3 month, etc.) matched the tenor of theunderlying reference asset. In addition, upon the termination of any loan subject to the TRS or any repayment of the underlyingreference asset, CSLLF either received from Bank of America, the appreciation in the value of such loan, or paid to Bank ofAmerica any depreciation in the value of such loan.CSLLF was required to pay an unused facility fee of 1.25% on any amount of unused facility under the minimum facilityamount of $70,000,000 as outlined in the TRS Agreement. Such unused facility fees were not applied during the first 4 monthsand last 60 days of the term of the TRS. CSLLF also agreed to pay Bank of America customary fees and expenses in connectionwith the establishment and maintenance of the TRS.CSLLF was required to initially cash collateralize a specified percentage of each loan (generally 20% to 35% of the marketvalue of senior secured loans) included under the TRS in accordance with margin requirements described in the TRS Agreement.As of December 31, 2016 and December 31, 2015, CSLLF has posted $0.0 million and $19.1 million, respectively, in collateral toBank of America in relation to the TRS, which is recorded on CSLLF’s statements of assets and liabilities as cash held as collateralon total return swap. CSLLF may be required to post additional collateral as a result of a decline in the mark-to-market value of theportfolio of loans subject to the TRS. The $0.0 million and $19.1 million, respectively, in cash collateral represents CSLLF’smaximum credit exposure as of December 31, 2016 and December 31, 2015.In connection with the TRS, CSLLF has made customary representations and warranties and is required to comply with variouscovenants, reporting requirements and other customary requirements for similar transactions governed by an ISDA 2002 MasterAgreement. As of December 31, 2016 and December 31, 2015, CSLLF is in compliance with regards to any covenants orrequirements of the TRS.F-33  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 4. Investments and Fair Value Measurements – (continued)CSLLF’s receivable due on total return swap represents realized amounts from payments on underlying loans in the total returnswap portfolio. At December 31, 2016 and December 31, 2015, the receivable due on total return swap was $0.1 million and $0.5million, respectively, and is recorded on CSLLF’s statements of assets and liabilities below. CSLLF does not offset collateralposted in relation to the TRS with any unrealized appreciation or depreciation outstanding in the statements of assets andliabilities as of December 31, 2016 and December 31, 2015.Transactions in TRS contracts during the year ended December 31, 2016 resulted in $2.3 million in realized gains and $2.8million in unrealized appreciation which is recorded on CSLLF’s statements of operations below. Transactions in TRS contractsduring the year ended December 31, 2015 resulted in $1.4 million in realized gains and $(2.8) million in unrealized depreciationwhich is recorded on CSLLF’s statements of operations below.CSLLF only held one derivative position and the derivative held was subject to a netting arrangement as of December 31,2015. There were no derivative positions held as of December 31, 2016. The following table represents CSLLF’s gross and netamounts after offset under Master Agreements (“MA”) of the derivative assets and liabilities presented by the derivative type, netof the related collateral pledged by the CSLLF as of December 31, 2015 (dollars in thousands): Gross DerivativeAssets/(Liabilities)Subject to MA DerivativeAmountAvailable forOffset Net AmountPresented in theConsolidatedStatements ofAssets andLiabilities CashCollateralReceived Net Amount ofDerivativeAssets/(Liabilities)December 31, 2015 Total Return Swap(1) $(2,828) $— $(2,828) $— $(2,828) (1)Cash was posted for initial margin requirements for the total return swap as of December 31, 2015 and is reported on CSLLF’sstatements of assets and liabilities as cash collateral on total return swap.The following represents the volume of the CSLLF’s derivative transactions during the years ended December 31, 2016 andDecember 31, 2015 (dollars in thousands): For the year endedDecember 31, 2016 For the year endedDecember 31, 2015(1)Average notional par amount of contract $56,681 $61,306 (1)Average calculated from period of TRS inception, March 27, 2015 to December 31, 2015.Below is a summary of CSLLF’s portfolio of TRS reference assets as of December 31, 2015 (dollars in thousands): As ofDecember 31,2015Senior secured loans(1) $81,201 Weighted average current interest rate on senior secured loans 5.2% Number of borrowers in CSLLF 45 Largest portfolio company investment(1) $2,985 Total of five largest portfolio company investments(1) $13,424 (1)Based on principal amount outstanding at period end.F-34  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 4. Investments and Fair Value Measurements – (continued)The following is a summary of the TRS reference assets as of December 31, 2015 (dollars in thousands): Portfolio Company(4) Business Description Maturity Date CurrentInterest Rate(2)(6) Principal Cost FairValue(1) UnrealizedAppreciation/(Depreciation)21st Century Oncology, Inc. Healthcare, Education andChildcare April, 2022 6.5% (3 Month LIBOR+ 5.5%, 1% floor) $1,990 $1,970 $1,662 $(308) ABG Intermediate Holdings 2,LLC(5) Textiles and Leather May, 2021 5.5% (3 Month LIBOR+ 4.5%, 1% floor) 1,733 1,715 1,698 (17) American Rock Salt Company,LLC Mining, Steel, Iron and NonPrecious Metals May, 2021 4.75% (3 MonthLIBOR + 3.75%, 1%floor) 1,985 1,985 1,892 (93) Anchor Glass Container Corp Containers, Packaging and Glass July, 2022 4.5% (3 Month LIBOR+ 3.5%, 1% floor) 482 479 479 — Ardent Legacy Acquisitions,Inc. Healthcare, Education andChildcare August, 2021 6.5% (3 Month LIBOR+ 5.5%, 1% floor) 1,995 1,975 1,975 — Aspen Dental Management, Inc. Healthcare, Education andChildcare April, 2022 5.5% (3 Month LIBOR+ 4.5%, 1% floor) 1,493 1,485 1,487 2 Asurion, LLC Insurance August, 2022 5.0% (3 Month LIBOR+ 4.0%, 1% floor) 2,239 2,228 2,043 (185) Bass Pro Group, LLC Retail Stores June, 2020 4.0% (3 Month LIBOR+ 3.25%, .75% floor) 992 989 951 (38) Belk, Inc. Retail Stores December,2022 5.75% (1 MonthLIBOR + 4.75%, 1%floor) 2,000 1,780 1,758 (22) Bioplan USA, Inc. Diversified/Conglomerate Service September,2021 5.75% (1 MonthLIBOR + 4.75%, 1%floor) 992 843 831 (12) Blue Coat Systems, Inc. Electronics May, 2022 4.5% (2 Month LIBOR+ 3.5%, 1% floor) 2,000 2,000 1,928 (72) Brock Holdings III, Inc. Buildings and Real Estate March, 2017 6.0% (3 Month LIBOR+ 4.5%, 1.5% floor) 1,488 1,480 1,383 (97) CDS U.S. IntermediateHoldings, Inc. Leisure, Amusement,Entertainment July, 2022 5.0% (3 Month LIBOR+ 4.0%, 1% floor) 997 995 940 (55) Chelsea Petroleum Products ILLC Oil & Gas October, 2022 5.25% (1 MonthLIBOR + 4.25%, 1%floor) 500 498 485 (13) Communications Sales &Leasing, Inc. Finance October, 2022 5.0% (1 Month LIBOR+ 4.0%, 1% floor) 1,990 1,950 1,838 (112) Concordia Healthcare Corp Healthcare, Education andChildcare October, 2021 5.25% (3 MonthLIBOR + 4.25%, 1%floor) 1,000 945 958 13 Convatec Healthcare E S.A. Healthcare, Education andChildcare June, 2020 4.25% (6 MonthLIBOR + 3.25%, 1%floor) 1,990 1,988 1,951 (37) Emerging MarketsCommunications, LLC Telecommunications July, 2021 6.75% (3 MonthLIBOR + 5.75%, 1%floor) 2,487 2,450 2,332 (118) Eresearch Technology, Inc. Healthcare, Education andChildcare May, 2022 6.0% (3 Month LIBOR+ 5.0%, 1% floor) 2,487 2,475 2,434 (41) Genoa Healthcare Group, LLC Healthcare, Education andChildcare May, 2022 4.5% (3 Month LIBOR+ 3.5%, 1% floor) 1,990 1,980 1,930 (50) Hostess Brands, Inc. Beverage, Food and Tobacco August, 2022 4.5% (3 Month LIBOR+ 3.5%, 1% floor) 1,995 1,990 1,983 (7) IMG Worldwide, Inc. Leisure, Amusement,Entertainment May, 2021 5.25% (3 MonthLIBOR + 4.25%, 1%floor) 1,990 1,995 1,953 (42) Infiltrator Systems, Inc. Containers, Packaging and Glass May, 2022 5.25% (3 MonthLIBOR + 4.25%, 1%floor) 995 990 988 (2) Informatica Corporation Electronics August, 2022 4.5% (3 Month LIBOR+ 3.5%, 1% floor) 2,494 2,489 2,394 (95) Integra Telecom, Inc. Telecommunications August, 2020 5.25% (3 MonthLIBOR + 4.25%, 1%floor) 2,977 2,963 2,873 (90) JILL Holdings, LLC Retail Stores May, 2022 6.0% (3 Month LIBOR+ 5.0%, 1% floor) 1,995 1,985 1,905 (80) LPL Holdings, Inc Finance November,2022 4.75% (2 MonthLIBOR + 4.0%, .75%floor) 1,500 1,485 1,466 (19) LS Deco, LLC Buildings and Real Estate May, 2022 5.5% (3 Month LIBOR+ 4.5%, 1% floor) 1,375 1,361 1,334 (27) F-35  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 4. Investments and Fair Value Measurements – (continued) Portfolio Company(4) Business Description Maturity Date CurrentInterest Rate(2)(6) Principal Cost FairValue(1) UnrealizedAppreciation/(Depreciation)LTF Merger Sub, Inc. Leisure, Amusement,Entertainment June, 2022 4.25% (3 MonthLIBOR + 3.25%, 1%floor) $1,493 $1,488 $1,452 $(36) Mitel Networks Corp Telecommunications April, 2022 5.5% (3 Month LIBOR+ 4.5%, 1% floor) 2,985 2,955 2,951 (4) Mohegan Tribal GamingAuthority Leisure, Amusement,Entertainment November,2019 5.5% (3 Month LIBOR+ 4.5%, 1% floor) 1,929 1,927 1,881 (46) Navios Maritime MidstreamPartners, LP Cargo Transport June, 2020 5.5% (3 Month LIBOR+ 4.5%, 1% floor) 1,990 1,970 1,964 (6) Novelis, Inc. Mining, Steel, Iron and NonPrecious Metals June, 2022 4.0% (3 Month LIBOR+ 3.25%, .75% floor) 2,488 2,475 2,369 (106) Penn Products Terminals, LLC Cargo Transport April, 2022 4.75% (3 MonthLIBOR + 3.75%, 1%floor) 744 741 696 (45) Pharmaceutical ProductDevelopment Inc. Healthcare, Education andChildcare August, 2022 4.25% (3 MonthLIBOR + 3.25%, 1%floor) 1,990 1,980 1,930 (50) Securus Technologies, Inc. Telecommunications April, 2020 5.25% (3 MonthLIBOR + 4.25%, 1%floor) 2,000 1,980 1,425 (555) Skillsoft Corporation Electronics April, 2021 5.75% (6 MonthLIBOR + 4.75%, 1%floor) 1,990 1,970 1,672 (298) Sterigenics-Nordion Holdings,LLC Healthcare, Education andChildcare May, 2022 4.25% (3 MonthLIBOR + 3.25%, 1%floor) 1,995 1,990 1,935 (55) STG-Fairway Acquisitions, Inc Diversified/Conglomerate Service June, 2022 6.25% (3 MonthLIBOR + 5.25%, 1%floor) 2,486 2,449 2,430 (19) Tekni-Plex Incorporated Containers, Packaging and Glass June, 2022 4.5% (3 Month LIBOR+ 3.5%, 1% floor) 2,487 2,475 2,475 — Touchtunes Music Corp Electronics May, 2022 5.75% (3 MonthLIBOR + 4.75%, 1%floor) 1,493 1,485 1,448 (37) TWCC Holding Corp Broadcasting & Entertainment February, 2020 5.75% (1 MonthLIBOR + 5.0%, .75%floor) 1,985 1,965 1,983 18 US Renal Care, Inc.(3) Healthcare, Education andChildcare November,2022 5.25% (3 MonthLIBOR + 4.25%, 1%floor) 2,000 1,980 1,980 — USAGM Holdco LLC Diversified/Conglomerate Service July, 2022 4.75% (2 MonthLIBOR + 3.75%, 1%floor) 2,000 1,980 1,903 (77) Zep, Inc. Non Durable Consumer Products June, 2022 5.5% (3 Month LIBOR+ 4.5%, 1% floor) 995 990 989 (1) $81,201 $80,268 $77,334 $(2,934) Total accrued interest, net of expenses $106 Total unrealized depreciation on TRS $(2,828) (1)Represents the fair value determined in accordance with ASC Topic 820. The determination of fair value is outside the scope ofthe Board’s valuation process described herein.(2)All interest is payable in cash.(3)The referenced asset is unsettled as of December 31, 2015.(4)All referenced assets are senior secured loans.(5)The referenced asset has an unfunded commitment of $0.3 million.(6)The interest rate disclosed reflects the interest rate as of the last day of the period. The borrower has the election to change thetenor of LIBOR utilized at each maturity; as such, the tenor reflected herein may change in future periods.F-36  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 4. Investments and Fair Value Measurements – (continued)Below is certain summarized financial information for CSLLF as of December 31, 2016 and December 31, 2015 and for theyears ended December 31, 2016 and December 31, 2015 (dollars in thousands):Selected Statements of Assets and Liabilities: As ofDecember 31,2016 As ofDecember 31,2015ASSETS Cash held as collateral on Total Return Swap $— $19,145 Non-collateral cash and cash equivalents — 5,586 Receivable due on Total Return Swap 82 452 Total assets $82 $25,183 LIABILITIES Unrealized depreciation on Total Return Swap $— $2,828 Accrued expenses — 21 Distribution payable 82 — Total liabilities $82 $2,849 NET ASSETS Paid in capital $— $25,000 Undistributed realized income from operations — 162 Unrealized depreciation on Total Return Swap — (2,828) Total net assets $— $22,334 Total liabilities and net assets $82 $25,183 Selected Statements of Operations Information: For the YearEndedDecember 31,2016 For the period fromMarch 27, 2015 toDecember 31, 2015Administrative and legal expenses $(193) $(104) Net operating loss $(193) $(104) Net realized gain on Total Return Swap $2,306 $1,366 Net change in unrealized appreciation (depreciation) on TotalReturn Swap 2,828 (2,828) NET INCREASE (DECREASE) IN NET ASSETS RESULTINGFROM OPERATIONS $4,941 $(1,566) F-37  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 5. Fair Value of Financial InstrumentsFinancial Instruments Disclosed, But Not Carried, At Fair ValueThe following table presents the carrying value and fair value of the Company’s financial liabilities disclosed, but not carried,at fair value as of December 31, 2016, and the level of each financial liability within the fair value hierarchy (dollars inthousands): CarryingValue Fair Value Level 1 Level 2 Level 3SBA debentures $170,700 $175,581 $— $— $175,581 Notes 113,438 115,888 115,888 — — Credit Facility 44,000 43,927 — — 43,927 Total $328,138 $335,396 $115,888 $— $219,508 The following table presents the carrying value and fair value of the Company’s financial liabilities disclosed, but not carried,at fair value as of December 31, 2015, and the level of each financial liability within the fair value hierarchy (dollars inthousands): CarryingValue Fair Value Level 1 Level 2 Level 3SBA debentures $184,200 $184,951 $— $— $184,951 Notes 113,438 113,211 113,211 — — Credit Facility 70,000 69,932 — 69,932 Total $367,638 $368,094 $113,211 $— $254,883 The estimated fair value of the Company’s SBA debentures was based on future contractual cash payments discounted atmarket interest rates to borrow from the SBA as of the measurement date.In June 2014, the Company issued $113.4 million in aggregate principal amount of 7.125% fixed-rate notes due 2021 (the“Notes”). The estimated fair value of the Notes was based on the closing price as of the measurement date as the Notes are tradedon the New York Stock Exchange under the ticker “CLA.”The estimated fair value of the Company’s Credit Facility was based on future contractual cash payments discounted atestimated market interest rates for similar debt.F-38  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 6. Transactions With Affiliated CompaniesDuring the year ended December 31, 2016, the Company had investments in portfolio companies designated as affiliates underthe 1940 Act. Transactions with affiliates were as follows: Portfolio Company(4) Type of Investment Amount ofInterest Feesor DividendsCredited toIncome(1) December 31,2015Fair Value GrossAdditions(2) GrossReductions(3) RealizedGain (Loss) December 31,2016Fair ValueControl investments: Best In Class Class A Preferred Units $— $— $— $(145) $145 $— — — — (145) 145 — CableOrganizerAcquisition, LLC First Lien Debt (12% Cash, 4% PIK,Due 5/24/18) 1,402 11,025 857 — — 11,882 CableOrganizerAcquisition, LLC Common Stock (19.7% fully dilutedownership) — 9 269 (78) — 200 CableOrganizerAcquisition, LLC Common Stock Warrants (10% fullydiluted ownership) — 4 97 — — 101 1,402 11,038 1,223 (78) — 12,183 Capitala Senior LiquidLoan Fund I, LLC Common Stock (80% ownership) 1,814 17,867 2,133 (20,000) — — 1,814 17,867 2,133 (20,000) — — Eastport Holdings,LLC Subordinated Debt (13.9% Cash (3month LIBOR + 13%, 0.5% Floor), Due4/29/20) 5,901 — 24,000 (7,500) — 16,500 Eastport Holdings,LLC Membership Units (30.1% fully diluted) — — 13,395 — — 13,395 5,901 — 37,395 (7,500) — 29,895 Micro Precision, LLC Subordinated Debt (10% Cash, Due9/15/18) 186 1,862 — — — 1,862 Micro Precision, LLC Subordinated Debt (14% Cash, 4% PIK,Due 9/15/18) 555 3,830 159 — — 3,989 Micro Precision, LLC Series A Preferred Units (47 units) — 1,629 894 — — 2,523 741 7,321 1,053 — — 8,374 Navis Holdings, Inc. First Lien Debt (15% Cash, Due10/30/20) 992 6,500 — — — 6,500 Navis Holdings, Inc.(5) Class A Preferred Stock (1,000 shares,10% Cash Dividend) 100 1,000 — — — 1,000 Navis Holdings, Inc. Common Stock (300,000 shares) 500 5,354 280 — — 5,634 1,592 12,854 280 — — 13,134 On-Site Fuel Services,Inc. Subordinated Debt (14% Cash, 4% PIK,Due 12/19/17) — 4,425 5,878 — — 10,303 On-Site Fuel Services,Inc. Series A Preferred Stock (32,782 shares) — — — — — — On-Site Fuel Services,Inc. Series B Preferred Stock (23,648 shares) — — — — — — On-Site Fuel Services,Inc. Common Stock (33,107 shares) — — — — — — 4,425 5,878 — — 10,303 Print Direction, Inc. First Lien Debt (10% Cash, 2% PIK,Due 2/24/19) 1,682 15,780 1,536 (4,555) — 12,761 Print Direction, Inc. Common Stock (18,543 shares) — 1,253 — (1,253) — — Print Direction, Inc. Common Stock Warrants (820 shares) — 55 — (55) — — 1,682 17,088 1,536 (5,863) — 12,761 Total Control investments $13,132 $70,593 $49,498 $(33,586) $145 $86,650 F-39  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 6. Transactions With Affiliated Companies – (continued) Portfolio Company(4) Type of Investment Amount ofInterest Feesor DividendsCredited toIncome(1) December 31,2015Fair Value GrossAdditions(2) GrossReductions(3) RealizedGain (Loss) December 31,2016Fair ValueAffiliate investments: Burgaflex Holdings,LLC Subordinated Debt (14% Cash, Due8/9/19) $521 $3,000 $— $— $— $3,000 Burgaflex Holdings,LLC Subordinated Debt (12% Cash, Due8/9/19) 845 5,828 — — — 5,828 Burgaflex Holdings,LLC Common Stock (1,253,198 shares) — 3,080 — (1,832) — 1,248 1,366 11,908 — (1,832) — 10,076 Chef’n Corporation Common Stock — — — (93) 93 — — — — (93) 93 — City Gear, LLC Subordinated Debt (13% Cash, Due9/28/17) 1,088 8,231 — — — 8,231 City Gear, LLC(5) Preferred Membership Units (2.78%fully diluted, 9% Cash Dividend) 823 1,269 — — — 1,269 City Gear, LLC Membership Unit Warrants (11.38%fully diluted) — 9,182 554 — — 9,736 1,911 18,682 554 — — 19,236 Corporate Visions,Inc. Common Stock — — — (718) 718 — — — — (718) 718 — GA Communications,Inc.(5) Series A-1 Preferred Stock (1,998shares, 8% PIK Dividend) — 2,764 235 (135) — 2,864 GA Communications,Inc. Series B-1 Common Stock (200,000shares) — 1,162 — (116) — 1,046 — 3,926 235 (251) — 3,910 J&J Produce Holdings,Inc. Subordinated Debt (13% Cash, Due7/16/18) 774 5,182 1,000 — — 6,182 J&J Produce Holdings,Inc. Common Stock (8,182 shares) — — — — — — J&J Produce Holdings,Inc. Common Stock Warrants (6,369 shares) — — — — — — 774 5,182 1,000 — — 6,182 LJS Partners, LLC Common Stock (1,500,000 shares) — 3,342 5,155 — — 8,497 — 3,342 5,155 — — 8,497 MJC Holdings, LLC Series A Preferred Units (2,000,000units) — 4,696 315 — — 5,011 — 4,696 315 — — 5,011 MMI Holdings, LLC First Lien Debt (12% Cash, Due1/31/18) 316 2,600 — — — 2,600 MMI Holdings, LLC Subordinated Debt (6% Cash, Due1/31/18) 24 400 — — — 400 MMI Holdings,LLC(5) Preferred Units (1,000 units, 6% PIKdividend) — 1,350 83 — — 1,433 MMI Holdings, LLC Common Membership Units (45 units) — 319 — (91) — 228 340 4,669 83 (91) — 4,661 MTI Holdings, LLC Subordinated Debt (12% Cash, Due11/1/18) 581 8,000 — (8,000) — — MTI Holdings, LLC Membership Units (2,000,000 units) — 13,917 — (22,107) 8,727 537 581 21,917 — (30,107) 8,727 537 Source Capital SSCR,LLC Subordinated Debt (245) 245 — — — (245) 245 — Source CapitalABUTEC, LLC First Lien Debt (12% Cash, 3% PIK,Due 12/28/17) — 2,247 3,157 — (5,404) — F-40  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 6. Transactions With Affiliated Companies – (continued) Portfolio Company(4) Type of Investment Amount ofInterest Feesor DividendsCredited toIncome(1) December 31,2015Fair Value GrossAdditions(2) GrossReductions(3) RealizedGain (Loss) December 31,2016Fair ValueSource CapitalABUTEC, LLC Preferred Membership Units (10.5%fully diluted) $— $— $1,240 $— $(1,240) $— — 2,247 4,397 — (6,644) — Source Capital Penray,LLC Subordinated Debt (13% Cash, Due4/8/19) 337 2,500 — (1,075) — 1,425 Source Capital Penray,LLC Membership Units (11.3% ownership) — 865 — (60) — 805 Source Capital Penray,LLC Common Stock Warrants (6.65%ownership) — 616 — (1,191) 575 — 337 3,981 — (2,326) 575 2,230 Source Recycling,LLC Subordinated Debt (13% Cash, Due9/2/16) — 3,106 1,894 (2,500) (2,500) — Source Recycling,LLC Membership Units (68,656 units) — — — — — — Source Recycling,LLC Membership Unit Warrants (1% fullydiluted) — — — — — — — 3,106 1,894 (2,500) (2,500) — STX HealthcareManagementServices, Inc. Subordinated Debt (12.5% Cash,Due 7/31/18) 529 6,398 27 (6,425) — — STX HealthcareManagementServices, Inc. Common Stock (1,200,000 shares) — 1,047 262 (1,445) 245 109 STX HealthcareManagementServices, Inc. Common Stock Warrants (1,154,254shares) — 1,007 — (2,179) 1,172 — 529 8,452 289 (10,049) 1,417 109 TCE Holdings, Inc. Subordinated Debt (12% Cash, 2% PIK,Due 2/1/19) — 8,368 5,281 — (13,649) — TCE Holdings, Inc. Subordinated Debt (12% Cash, 2% PIK,Due 2/1/19) — 6,668 4,209 — (10,877) — TCE Holdings, Inc. Class A Common Stock (3,600 shares) — — 3,734 — (3,734) — — 15,036 13,224 — (28,260) — V12 Holdings First Lien Debt (15% PIK, Due11/26/16) — 1,047 68 (1,115) — — V12 Holdings Subordinated Debt (0% Cash, Due11/26/16) — 663 — (663) — — V12 Holdings Subordinated Debt (0% Cash, Due11/26/16) — 81 — (81) — — V12 Holdings Subordinated Debt (0% Cash, Due11/26/16) — 3,563 — (2,925) 377 1,015 V12 Holdings Subordinated Debt (0% Cash, Due11/26/16) — 299 — (299) — — V12 Holdings Subordinated Debt (0% Cash, Due11/26/16) — 2,750 — (3,830) 1,080 — V12 Holdings Subordinated Debt (0% Cash, Due11/26/16) — 243 — (243) — — V12 Holdings Series A-1 Preferred Stock (255,102shares) — 178 — (178) — — V12 Holdings Series A-3 Preferred Stock (88,194shares) — 55 — (55) — — V12 Holdings Series A-5 Preferred Stock (20,530shares) — 1,327 — (1,327) — — V12 Holdings Common Stock Warrants (2,063,629warrants) — — — — — — — 10,206 68 (10,716) 1,457 1,015 Total Affiliate Investments $5,838 $117,350 $27,214 $(57,872) $(24,172) $61,464 (1)Represents the total amount of interest, fees or dividends credited to income for the portion of the year an investment wasincluded in Control or Affiliate categories, respectively.(2)Gross additions include increases in the cost basis of investments resulting from new portfolio investment, follow-oninvestments and accrued PIK interest. Gross Additions also include net increases in unrealized appreciation.F-41  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 6. Transactions With Affiliated Companies – (continued)(3)Gross reductions include decreases in the total cost basis of investments resulting from principal or PIK repayments, sales andnet unrealized depreciation.(4)All debt investments are income producing. Equity and warrant investments are non-income producing, unless otherwisenoted.(5)The equity investment is income producing, based on rate disclosed.Note 7. AgreementsOn September 24, 2013, the Company entered into an investment advisory agreement (the “Investment Advisory Agreement”)with our Investment Advisor, which was initially approved by the Board on June 10, 2013. Unless earlier terminated in accordancewith its terms, the Investment Advisory Agreement will remain in effect if approved annually by the Board or by a majority of ouroutstanding voting securities, including, in either case, by a majority of our non-interested directors. The Investment AdvisoryAgreement was most recently re-approved by the Board, including by a majority of our non-interested directors, at an in-personmeeting, on August 4, 2016. Subject to the overall supervision of the Board, the Investment Advisor manages our day-to-dayoperations, and provides investment advisory and management services to us. Under the terms of the Investment AdvisoryAgreement, the Investment Advisor:•determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner ofimplementing such changes;•identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on ourprospective portfolio companies);•closes and monitors the investments we make; and•provides us with other investment advisory, research and related services as we may from time to time require.The Investment Advisor’s services under the Investment Advisory Agreement are not exclusive, and it is free to furnish similarservices to other entities so long as its services to us are not impaired.The Investment Advisory Agreement provides that, absent willful misfeasance, bad faith or negligence in the performance ofits duties or by reason of the reckless disregard of its duties and obligations, the Investment Advisor and its officers, managers,partners, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled toindemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees andamounts reasonably paid in settlement) arising from the rendering of our Investment Advisor’s services under the InvestmentAdvisory Agreement or otherwise as Investment Advisor for the Company.Pursuant to the Investment Advisory Agreement, the Company has agreed to pay the Investment Advisor a fee for investmentadvisory and management services consisting of two components — a base management fee and an incentive fee.The base management fee is calculated at an annual rate of 1.75% of the gross assets, which are the total assets reflected on theconsolidated statements of assets and liabilities and includes any borrowings for investment purposes. Although the Companydoes not anticipate making significant investments in derivative financial instruments, the fair value of any such investments,which will not necessarily equal their notional value, will be included in the calculation of gross assets. For services renderedunder the Investment Advisory Agreement, the base management fee is payable quarterly in arrears. The base management fee wasinitially calculated based on the value of the gross assets at the end of the first calendar quarter subsequent to the IPO,F-42  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 7. Agreements – (continued)and thereafter based on the average value of the gross assets at the end of the two most recently completed calendar quarters, andappropriately adjusted for any share issuances or repurchases during the current calendar quarter.The incentive fee consists of the following two parts:The first part of the incentive fee is calculated and payable quarterly in arrears based on the pre-incentive fee net investmentincome for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interestincome, dividend income and any other income (including any other fees (other than fees for providing managerial assistance),such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies)accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expensespayable under the Administration Agreement to our Administrator, and any interest expense and dividends paid on any issued andoutstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case ofinvestments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero couponsecurities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include anyrealized capital gains, computed net of all realized capital losses or unrealized capital appreciation or depreciation. Pre-incentivefee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately precedingcalendar quarter, is compared to a hurdle of 2.0% per quarter (8.0% annualized). The net investment income used to calculate thispart of the incentive fee is also included in the amount of the gross assets used to calculate the 1.75% base management fee. TheCompany pays the Investment Advisor an incentive fee with respect to the pre-incentive fee net investment income in eachcalendar quarter as follows:•no incentive fee in any calendar quarter in which the pre-incentive fee net investment income does not exceed the hurdleof 2.0%;•100% of the pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investmentincome, if any, that exceeds the hurdle but is less than 2.5% in any calendar quarter (10.0% annualized). The Companyrefers to this portion of the pre-incentive fee net investment income (which exceeds the hurdle but is less than 2.5%) as the“catch-up.” The “catch-up” is meant to provide the Investment Advisor with 20% of the pre-incentive fee net investmentincome as if a hurdle did not apply if this net investment income exceeds 2.5% in any calendar quarter; and•20% of the amount of the pre-incentive fee net investment income, if any, that exceeds 2.5% in any calendar quarter(10.0% annualized) is payable to the Investment Advisor (once the hurdle is reached and the catch-up is achieved, 20% ofall pre-incentive fee investment income thereafter is allocated to the Investment Advisor).As announced on January 4, 2016, the Investment Advisor has voluntarily agreed to waive all or such portion of the quarterlyincentive fees earned by the Investment Advisor that would otherwise cause the Company’s quarterly net investment income to beless than the distribution payments declared by the Board. Quarterly incentive fees are earned by the Investment Advisor pursuantto the Investment Advisory Agreement. Incentive fees subject to the waiver cannot exceed the amount of incentive fees earnedduring the period, as calculated on a quarterly basis. The Investment Advisor will not be entitled to recoup any amount ofincentive fees that it waives. The waiver was effective in the fourth quarter of 2015 and will continue unless otherwise publiclydisclosed by the Company.F-43  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 7. Agreements – (continued)The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upontermination of the Investment Advisory Agreement, as of the termination date), and will equal 20% of our realized capital gains, ifany, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses andunrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive feeswith respect to each of the investments in our portfolio.The Company will defer cash payment of the portion of any incentive fee otherwise earned by the Investment Advisor thatwould, when taken together with all other incentive fees paid to the Investment Advisor during the most recent 12 full calendarmonth period ending on or prior to the date such payment is to be made, exceed 20% of the sum of (a) the pre-incentive fee netinvestment income during such period, (b) the net unrealized appreciation or depreciation during such period and (c) the netrealized capital gains or losses during such period. Any deferred incentive fees will be carried over for payment in subsequentcalculation periods to the extent such payment is payable under the Investment Advisory Agreement. As of December 31, 2016and December 31, 2015, the Company had incentive fees payable to the Investment Advisor of $6.4 million and $1.7 million,respectively.For the years ended December 31, 2016, 2015 and 2014, the Company incurred $10.6 million, $10.6 million and $9.3 millionin base management fees, respectively. For the years ended December 31, 2016, 2015 and 2014, our Investment Advisor waivedmanagement fees of $0.0 million, $0.0 million and $0.2 million, respectively. The Company incurred $6.8 million, $6.0 million,and $2.8 million in incentive fees related to pre-incentive fee net investment income for the years ended December 31, 2016,2015, and 2014, respectively. For the years ended December 31, 2016, 2015 and 2014, our Investment Advisor waived incentivefees of $1.7 million, $1.1 million and $0.0 million, respectively.On September 24, 2013, the Company entered into the Administration Agreement pursuant to which the Administrator hasagreed to furnish the Company with office facilities, equipment and clerical, bookkeeping and record keeping services at suchfacilities. The Administrator also performs, or oversees the performance of the required administrative services, which include,among other things, being responsible for the financial records that the Company is required to maintain and preparing reports toour stockholders. In addition, the Administrator assists in determining and publishing the net asset value, oversees the preparationand filing of the tax returns and the printing and dissemination of reports to the stockholders, and generally oversees the paymentof the expenses and the performance of administrative and professional services rendered to the Company by others.Payments under the Administration Agreement are equal to an amount based upon the allocable portion of the Administrator’soverhead in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated withperforming compliance functions and the allocable portion of the compensation of the chief financial officer, chief complianceofficer and the allocable portion of the compensation of their respective administrative support staff. Under the AdministrationAgreement, the Administrator will also provide on the Company’s behalf, managerial assistance to those portfolio companies thatrequest such assistance. Unless terminated earlier in accordance with its terms, the Administration Agreement will remain in effectif approved annually by the Board. The Board most recently approved the renewal of the Administration Agreement on August 4,2016. To the extent that the Administrator outsources any of its functions, the Company will pay the fees associated with suchfunctions on a direct basis without any incremental profit to our Administrator. Stockholder approval is not required to amend theAdministration Agreement.F-44  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 7. Agreements – (continued)For the years ended December 31, 2016, 2015, and 2014, we paid the Administrator $1.1 million, $1.1 million, and $1.0million, respectively, for our allocable portion of the Administrator’s overhead.The Administration Agreement provides that, absent willful misfeasance, bad faith or negligence in the performance of itsduties or by reason of the reckless disregard of its duties and obligations, our Administrator and its officers, managers, partners,agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnificationfrom the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonablypaid in settlement) arising from the rendering of our Administrator’s services under the Administration Agreement or otherwise asAdministrator for the Company.Note 8. Related Party TransactionsAt December 31, 2016 and December 31, 2015, the Company had the following receivables from (payables to) related partiesrelating to certain management fees, incentive fees, reimbursable expenses, and other payments owed to related parties (dollars inthousands): December31,2016 December 31,2015CapitalSouth Corporation $182 $252 CapitalSouth Partners Florida Sidecar Fund II, L.P. (35) — Capitala Investment Advisors, LLC (6,426) (1,689) Total $(6,279) $(1,437) These amounts are reflected in the accompanying consolidated statements of assets and liabilities under the captions, “Duefrom related parties”, “Management and incentive fee payable” and “Due to related parties.”On August 31, 2016, the Company sold assets to FSC II in exchange for 100% of the partnership interests in FSC II.Concurrent with the sale of these assets to FSC II, the Company received cash consideration of $47.6 million from an affiliatedthird-party purchaser in exchange for 100% of the partnership interests of FSC II. The Company’s Board pre-approved thistransaction pursuant to Section 57(f) of the 1940 Act. Capitala Advisors Corp., the Company’s administrator, also serves as theadministrator to FSC II. See Note 4 for a further description of this transaction.Note 9. BorrowingsSBA DebenturesThe Company, through its two wholly owned subsidiaries, uses debenture leverage provided through the SBA to fund aportion of its investment portfolio. As of December 31, 2016, the Company has $170.7 million of SBA-guaranteed debenturesoutstanding. The Company has issued all SBA-guaranteed debentures that were permitted under each of the Legacy Funds’respective SBIC licenses (as applicable), and there are no unused SBA debenture commitments remaining. SBA-guaranteeddebentures are secured by a lien on all assets of Fund II and Fund III. As of December 31, 2016, Fund II and Fund III had totalassets of approximately $349.4 million. On June 10, 2014, the Company received an exemptive order from the SEC exempting theCompany, Fund II, and Fund III from certain provisions of the 1940 Act (including an exemptive order granting relief from theasset coverage requirements for certain indebtedness issued by Fund II and Fund III as SBICs) and from certain reportingrequirements mandated by the Securities Exchange Act of 1934, as amended, with respect to Fund II and Fund III. The Companyintends to comply with the conditions of the order.F-45  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 9. Borrowings – (continued)For the years ended December 31, 2016, 2015 and 2014 we recorded $6.9 million, $7.5 million and $7.8 million, respectively,in interest expense and annual charges and $0.6 million, $0.7 million and $0.7 million, respectively, of amortization of deferredfinancing costs related to SBA-guaranteed debentures. The weighted average interest rate for all SBA-guaranteed debentures as ofDecember 31, 2016 and December 31, 2015 was 3.29% and 3.45%, respectively. In addition to the stated interest rate, the SBAalso charges an annual fee on all SBA-guaranteed debentures issued, which is included in the Company’s interest expense. Theweighted average annual fee for all SBA-guaranteed debentures as of December 31, 2016 and December 31, 2015 was 0.43% and0.46%, respectively.As of December 31, 2016 and December 31, 2015, the Company’s issued and outstanding SBA-guaranteed debentures matureas follows (dollars in thousands): Maturity Date InterestRate SBA AnnualCharge December 31,2016 December 31,2015March 1, 2016 5.524% 0.871% $— $2,000 September 1, 2016 5.535% 0.941% — 11,500 March 1, 2019 4.620% 0.941% 5,000 5,000 September 1, 2020 3.215% 0.285% 19,000 19,000 March 1, 2021 4.084% 0.515% 15,700 15,700 March 1, 2021 4.084% 0.285% 46,000 46,000 March 1, 2022 2.766% 0.285% 10,000 10,000 March 1, 2022 2.766% 0.515% 50,000 50,000 March 1, 2023 2.351% 0.515% 25,000 25,000 $170,700 $184,200 NotesOn June 16, 2014, the Company issued $113.4 million in aggregate principal amount of 7.125% fixed-rate notes due 2021(the “Notes”). The Notes will mature on June 16, 2021, and may be redeemed in whole or in part at any time or from time to time atthe Company’s option on or after June 16, 2017 at a redemption price equal to 100% of the outstanding principal, plus accruedand unpaid interest. Interest was payable quarterly beginning September 16, 2014.For the year ended December 31, 2016, the Company recorded $8.1 million of interest expense and $0.6 million ofamortization of deferred financing costs related to the Notes. For the year ended December 31, 2015, the Company recorded $8.1million of interest expense and $0.5 million of amortization of deferred financing costs related to the Notes. For the year endedDecember 31, 2014, the Company recorded $4.4 million of interest expense and $0.3 million of amortization of deferred financingcosts related to the Notes.Credit FacilityOn October 17, 2014, the Company entered into a senior secured revolving credit agreement (the “Credit Facility”) with INGCapital, LLC, as administrative agent, arranger, and bookrunner, and the lenders party thereto. The Credit Facility currentlyprovides for borrowings up to $120.0 million and may be increased up to $150.0 million pursuant to its “accordion” feature. TheCredit Facility matures on October 17, 2018.Borrowings under the Credit Facility bear interest, at the Company’s election, at a rate per annum equal to (i) the one, two,three or six month LIBOR as applicable, plus 3.00% or (ii) 2.00% plus the highest of (A) a prime rate, (B) the Federal Funds rateplus 0.5% and (C) three month LIBOR plus 1.0%. The Company’s ability to elect LIBOR indices with various tenors (e.g., one,two, three or six month LIBOR) on which the interest rates for borrowings under the Credit Facility are based provides thecompany withF-46  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 9. Borrowings – (continued)increased flexibility to manage interest rate risks as compared to a borrowing arrangement that does not provide for suchoptionality. Once a particular LIBOR rate has been selected, the interest rate on the applicable amount borrowed will reset after theapplicable tenor period and be based on the then applicable selected LIBOR rate (e.g., borrowings for which the Company haselected the one month LIBOR rate will reset on the one month anniversary of the period based on the then selected LIBOR rate).For any given borrowing under the Credit Facility, the Company intends to elect what it believes to be an appropriate LIBOR ratetaking into account the Company’s needs at the time as well as the Company’s view of future interest rate movements. TheCompany will also pay an unused commitment fee at a rate of 2.50% per annum on the amount (if positive) by which 40% of theaggregate commitments under the Credit Facility exceeds the outstanding amount of loans under the Credit Facility and 0.50%per annum on any remaining unused portion of the Credit Facility.As of December 31, 2016 and 2015, the Company had $44.0 million and $70.0 million, respectively, outstanding under theCredit Facility. For the year ended December 31, 2016 the Company recorded $2.3 million of interest expense, $1.0 million ofamortization of deferred financing costs, and $0.3 million of unused commitment fees related to the Credit Facility. For the yearended December 31, 2015 the Company recorded $0.7 million of interest expense, $0.8 million of amortization of deferredfinancing costs, and $0.7 million of unused commitment fees related to the Credit Facility. For the year ended December 31, 2014the Company recorded $0.0 million of interest expense, $0.1 million of amortization of deferred financing costs, and $0.1 millionof unused commitment fees related to the Credit Facility.The Credit Facility is secured by investments and cash held by Capitala Finance Corp., exclusive of assets held at our twoSBIC subsidiaries. Assets pledged to secure the Credit Facility were $235.2 million at December 31, 2016. As part of the terms ofthe Credit Facility, the Company may not make cash distributions with respect to any taxable year that exceed 110% (125% if theCompany is not in default and our covered debt does not exceed 85% of the borrowing base) of the amounts required to bedistributed to maintain eligibility as a RIC and to reduce our tax liability to zero for taxes imposed on our investment companytaxable income and net capital gains.Note 10. Income TaxesThe Company has elected to be treated as a RIC under Subchapter M of the Code. As a RIC, the Company is not taxed on anyinvestment company taxable income or capital gains which it distributes to shareholders. The Company intends to make therequisite distributions to its stockholders which will relieve the Company from U.S. federal income taxes. Accordingly, noprovision for U.S. federal income tax has been made in the consolidated financial statements. The Company’s tax year-end isAugust 31.Dividends from net investment income and distributions from net realized capital gains are determined in accordance with U.S.federal tax regulations, which may differ from amounts in accordance with U.S. GAAP and those differences could be material.F-47  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 10. Income Taxes – (continued)Permanent differences between taxable income and net investment income for financial reporting purpose are reclassifiedamong the capital accounts in the financial statements to reflect their tax character. During the years ended December 31, 2016,2015, and 2014, the Company reclassified for book purposes amounts arising from permanent differences in the book and taxbasis of partnership investments sold and book and tax character of distributions paid. Such reclassifications are reported in “Taxreclassification of stockholders’ equity in accordance with generally accepted accounting principles” in the statements of changesin net assets for years ended December 31, 2016, 2015, and 2014, respectively.As of August 31, 2016, August 31, 2015 and August 31, 2014 the tax basis components of distributable earnings were asfollows (dollars in thousands): Tax yearendedAugust 31,2016 Tax yearendedAugust 31,2015 Tax yearendedAugust 31,2014Undistributed ordinary income $5,646 $— $683 Accumulated capital gains (losses) (44,296) 8,378 (7,566) Unrealized appreciation 47,837 25,269 62,726 Other temporary differences (2,570) (8,196) (1,568) Total $6,617 $25,451 $54,275 Taxable income generally differs from net increase (decrease) in net assets resulting from operations for financial reportingpurposes due to temporary and permanent differences in the recognition of income and expenses and generally excludesunrealized appreciation (depreciation) on investments as investment gains and losses are not included in taxable income untilthey are realized.Capital losses in excess of capital gains earned in a tax year may generally be carried forward and used to offset capital gains,subject to certain limitations. Under the Regulated Investment Company Modernization Act of 2010, capital losses incurred afterSeptember 30, 2011 will not be subject to expiration. As of August 31, 2016, the Company has a short-term capital loss carryforward of $4.4 million and a long-term capital loss carry forward of $39.9 million.The following table reconciles net increase in net assets resulting from operations to taxable income for the tax years endedAugust 31, 2016, August 31, 2015 and August 31, 2014 (dollars in thousands): Tax yearendedAugust 31,2016 Tax yearendedAugust 31,2015 Tax yearendedAugust 31,2014Net increase in net assets resulting from operations $10,291 $10,983 $9,894 Net change in unrealized (appreciation)/depreciation oninvestments and written call option (20,809) 35,557 2,658 Capital loss carryforward/(utilization) 44,296 (7,565) 3,458 Other deductions for book in excess of deductions for tax (3,654) 4,488 2,967 Total taxable income $30,124 $43,463 $18,977 F-48  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 10. Income Taxes – (continued)For income tax purposes, distributions paid to shareholders are reported as ordinary income, return of capital, long term capitalgains or a combination thereof. The tax character of distributions paid for the tax years ended August 31, 2016, 2015, and 2014(dollars in thousands): Tax yearendedAugust 31,2016 Tax yearendedAugust 31,2015 Tax yearendedAugust 31,2014Ordinary income $24,478 $25,063 $18,294 Long-term capital gains 8,378 10,705 — Return of capital — — — Total $32,856 $35,768 $18,294 For U.S federal income tax purposes, as of August 31, 2016, the aggregate net unrealized appreciation for all securities was$47.8 million. As of August 31, 2016, gross unrealized appreciation was $74.2 million and gross unrealized depreciation was$26.4 million. The aggregate cost of securities for U.S. federal income tax purposes was $486.3 million.Note 11. Directors FeesOur independent directors receive an annual fee of $50,000. They also receive $5,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each Board meeting, and also receive $5,000 plus reimbursement ofreasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman ofthe audit committee receives an annual fee of $10,000 and each chairman of any other committee receives an annual fee of $5,000for their additional services, if any, in these capacities. For the years ended December 31, 2016, 2015 and 2014, the Companyrecognized director fee expense of $0.4 million, $0.4 million and $0.4 million, respectively. No compensation is expected to bepaid to directors who are “interested persons” of the Company, as such term is defined in Section 2(a)(19) of the 1940 Act.Note 12. Stockholders’ EquityOn September 24, 2013, we issued 8,974,420 shares of common stock to the limited partners of the Legacy Funds, in exchangefor 100% of their membership interests or certain investment assets of such Legacy Funds, as the case may be. On September 30,2013, we issued 4,000,000 shares of common stock in connection with the closing of our IPO. The shares issued in the IPO werepriced at $20.00 per share. We received proceeds of $74.25 million in the IPO, net of underwriters’ discounts and commissions of$5.75 million.On April 13, 2015, the Company completed an underwritten offering of 3,500,000 shares of its common stock at a publicoffering price of $18.32 per share. The total proceeds received in the offering net of underwriting discounts and offering costs wereapproximately $61.7 million. As of December 31, 2016, the Company had 15,868,045 shares of common stock outstanding.Note 13. Summarized Financial Information of Our Unconsolidated SubsidiariesThe Company holds a control interest, as defined by the 1940 Act, in five portfolio companies that are considered significantsubsidiaries under the guidance in Regulation S-X, but are not consolidated in the Company’s consolidated financial statements.Below is a brief description of each such portfolio company, along with summarized financial information as of December 31,2016 and December 31, 2015 and for the three years in the period then ended.F-49  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 13. Summarized Financial Information of Our Unconsolidated Subsidiaries – (continued)Print Direction, Inc.Print Direction, Inc., incorporated in Georgia on May 11, 2006, is a professional printing services firm serving customers,particularly fast food, retail, and other similar chains, throughout the U.S. Print Direction, Inc. also provides warehousing anddistribution services for these customers. The income (loss) the Company generated from Print Direction, Inc., which includes allinterest, dividends, PIK interest and dividends, fees, and unrealized appreciation (depreciation), was $(3.8) million, $(1.1) million,and $2.6 million for the years ended December 31, 2016, December 31, 2015 and December 31, 2014, respectively.Navis Holdings, Inc.Navis Holdings, Inc., incorporated in Delaware on December 21, 2010, designs and manufactures leading machinery for theglobal knit and woven finishing textile industries. The income the Company generated from Navis Holdings, Inc., which includesall interest, dividends, PIK interest and dividends, fees, and unrealized appreciation (depreciation), was $1.9 million, $4.2 millionand $4.2 million for the years ended December 31, 2016, December 31, 2015 and December 31, 2014, respectively.On-Site Fuel Service, Inc.On-Site Fuel Service, Inc. is a 100% owned subsidiary of On-Site Fuel Holdings, Inc., which was incorporated in Delaware onDecember 19, 2011. On-Site Fuel Service, Inc. provides fueling services for commercial and government vehicle fleets throughoutthe southeast U.S. The income (loss) the Company generated from On-Site Fuel Service, Inc., which includes all interest,dividends, PIK interest and dividends, fees, and unrealized appreciation (depreciation), was $4.5 million, $(3.2) million, and $(4.8)million for the years ended December 31, 2016, December 31, 2015, and December 31, 2014, respectively.CableOrganizer Holdings, LLCCableOrganizer Holdings, LLC, a Delaware limited liability company that began operations on April 23, 2013, is a leadingonline provider of cable and wire management products. The income the Company generated from CableOrganizer Holdings,LLC, which includes all interest, dividends, PIK interest and dividends, fees, and unrealized appreciation (depreciation), was $1.9million, $0.4 million, and $2.9 million for the years ended December 31, 2016, December 31, 2015 and December 31, 2014,respectively.Eastport Holdings, LLCEastport Holdings, LLC, an Ohio limited liability company organized on November 1, 2011, is a holding company consistingof marketing and advertising companies located across the U.S. The income the Company generated from Eastport Holdings, LLC,which includes all interest, dividends, PIK interest and dividends, fees, and unrealized appreciation (depreciation), was $14.3million for the year ended December 31, 2016. The Company invested in the portfolio company in January 2016. As such,comparative financial information for the prior periods is not presented.F-50  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 13. Summarized Financial Information of Our Unconsolidated Subsidiaries – (continued)The summarized financial information of our unconsolidated subsidiaries was as follows (dollars in thousands): As ofBalance Sheet – Print Direction, Inc. December31,2016 December 31,2015Current assets $3,596 $4,934 Noncurrent assets 5,023 4,805 Total assets $8,619 $9,739 Current liabilities $3,467 $2,997 Noncurrent liabilities 14,856 14,602 Total liabilities $18,323 $17,599 Total deficit $(9,704) $(7,860) For the year endedStatements of Operations – Print Direction, Inc. December 31,2016 December 31,2015 December 31,2014Net sales $16,357 $17,637 $22,553 Cost of goods sold 7,221 7,428 8,994 Gross profit $9,136 $10,209 $13,559 Other expenses $12,315 $11,544 $13,455 Income (loss) before income taxes (3,179) (1,335) 104 Income tax provision (benefit) (1,335) (772) 36 Net income (loss) $(1,844) $(563) $68 As ofBalance Sheet – Navis Holdings, Inc. December31,2016 December 31,2015Current assets $5,006 $5,000 Noncurrent assets 3,448 3,963 Total assets $8,454 $8,963 Current liabilities $2,458 $3,076 Noncurrent liabilities 7,017 6,926 Total liabilities $9,475 $10,002 Total deficit $(1,021) $(1,039) For the year endedStatements of Operations – Navis Holdings, Inc. December31,2016 December 31,2015 December 31,2014Net sales $17,803 $17,076 $16,114 Cost of goods sold 10,933 11,087 10,444 Gross profit $6,870 $5,989 $5,670 Other expenses $4,988 $5,414 $4,973 Income before income taxes 1,882 575 697 Income tax provision 739 343 277 Net income $1,143 $232 $420 F-51  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 13. Summarized Financial Information of Our Unconsolidated Subsidiaries – (continued) As ofBalance Sheet – On-Site Fuel Service, Inc. December31,2016 December 31,2015Current assets $12,151 $8,112 Noncurrent assets 17,644 16,036 Total assets $29,795 $24,148 Current liabilities $17,911 $9,252 Noncurrent liabilities 17,929 16,906 Total liabilities $35,840 $26,158 Total deficit $(6,045) $(2,010) For the year endedStatements of Operations – On-Site Fuel Service, Inc. December 31,2016 December 31,2015 December 31,2014Net sales $107,776 $114,137 $189,778 Cost of goods sold 102,679 106,668 180,528 Gross profit $5,097 $7,469 $9,250 Other expenses $9,132 $13,592 $14,589 Loss before income taxes (4,035) (6,123) (5,339) Income tax provision (benefit) — 1,967 (1,826) Net loss $(4,035) $(8,090) $(3,513) As ofBalance Sheet – CableOrganizer Holdings, LLC December31,2016 December 31,2015Current assets $5,837 $3,850 Noncurrent assets 11,402 11,385 Total assets $17,239 $15,235 Current liabilities $4,437 $2,834 Noncurrent liabilities 12,134 11,285 Total liabilities $16,571 $14,119 Total equity $668 $1,116 For the year endedStatements of Operations – CableOrganizer Holdings, LLC December 31,2016 December 31,2015 December 31,2014Net sales $23,277 $25,315 $20,887 Cost of goods sold 15,716 16,874 13,486 Gross profit $7,561 $8,441 $7,401 Other expenses $9,021 $10,012 $8,694 Loss before income taxes (1,460) (1,571) (1,293) Income tax provision — — — Net loss $(1,460) $(1,571) $(1,293) F-52  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 13. Summarized Financial Information of Our Unconsolidated Subsidiaries – (continued) Balance Sheet – Eastport Holdings, LLC As ofDecember 31,2016Current assets $106,388 Noncurrent assets 148,704 Total assets $255,092 Current liabilities $157,393 Noncurrent liabilities 52,044 Total liabilities $209,437 Total equity $45,655 Statement of Operations – Eastport Holdings, LLC‘ For the yearendedDecember 31,2016Net sales $552,004 Cost of goods sold 429,089 Gross profit $122,915 Other expenses $108,822 Income before income taxes 14,093 Income tax provision 2,791 Net income $11,302 Note 14. Earnings Per ShareIn accordance with the provisions of ASC Topic 260, Earnings per Share (“ASC 260”), basic earnings per share is computedby dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period.Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per shareon a diluted basis. As of December 31, 2016, 2015, and 2014, there were no dilutive shares.The following information sets forth the computation of the weighted average basic and diluted net increase in net assets pershare from operations for the years ended December 31, 2016, 2015 and 2014 (dollars in thousands except share and per sharedata): For the year endedBasic and diluted December 31,2016 December 31,2015 December 31,2014Net increase (decrease) in net assets from operations $9,152 $13,850 $(3,440) Weighted average common shares outstanding 15,819,175 15,210,577 12,974,420 Net increase (decrease) in net assets per share fromoperations-basic and diluted $0.58 $0.91 (0.27) Note 15. DistributionsThe Company’s distributions are recorded as payable on the declaration date. Shareholders have the option to receive paymentof the distribution in cash, shares of common stock, or a combination of cash and common stock.F-53  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 15. Distributions – (continued)The following tables summarize the Company’s distribution declarations during the years ended December 31, 2016, 2015and 2014 (in thousands, except share and per share data): Date Declared Record Date Payment Date AmountPer Share CashDistribution DRIPSharesIssued DRIPShareValueJanuary 4, 2016 January 22, 2016 January 28, 2016 $0.1567 $2,392 8,135 $80 January 4, 2016 February 19, 2016 February 26, 2016 0.1567 2,405 7,076 70 January 4, 2016 March 22, 2016 March 30, 2016 0.1567 2,397 7,079 77 April 1, 2016 April 22, 2016 April 28, 2016 0.1567 2,392 6,625 85 April 1, 2016 May 23, 2016 May 30, 2016 0.1567 2,372 8,147 104 April 1, 2016 June 21, 2016 June 29, 2016 0.1567 2,369 8,229 108 July 1, 2016 July 22, 2016 July 29, 2016 0.1567 2,382 7,025 98 July 1, 2016 August 22, 2016 August 30, 2016 0.1567 2,391 6,256 90 July 1, 2016 September 22, 2016 September 29, 2016 0.1567 2,380 8,242 101 September 22, 2016 October 21, 2016 October 28, 2016 0.1300 1,977 6,619 82 September 22, 2016 November 21, 2016 November 29, 2016 0.1300 1,926 11,384 136 September 22, 2016 December 21, 2016 December 29, 2016 0.1300 1,989 5,883 73 Total Distributions Declared and Distributed for Fiscal 2016 $1.80 $27,372 90,700 $1,103 Date Declared Record Date Payment Date AmountPer Share CashDistribution DRIPSharesIssued DRIPShareValueJanuary 2, 2015 January 22, 2015 January 29, 2015 $0.1567 $2,033 — $— January 2, 2015 February 20, 2015 February 26, 2015 0.1567 2,033 — — January 2, 2015 March 23, 2015 March 30, 2015 0.1567 1,994 2,139 38 February 26, 2015 March 23, 2015(1) March 30, 2015 0.0500 635 683 12 February 26, 2015 April 23, 2015(1) April 29, 2015 0.0500 824 — — February 26, 2015 May 21, 2015(1) May 28, 2015 0.0500 808 998 16 February 26, 2015 June 22, 2015(1) June 29, 2015 0.0500 793 1,361 20 February 26, 2015 July 23, 2015(1) July 30, 2015 0.0500 783 1,600 23 February 26, 2015 August 21, 2015(1) August 28, 2015 0.0500 776 1,819 24 February 26, 2015 September 23, 2015(1) September 29, 2015 0.0500 739 4,475 53 February 26, 2015 October 23, 2015(1) October 29, 2015 0.0500 750 2,974 38 February 26, 2015 November 20, 2015(1) November 27, 2015 0.0500 753 2,694 35 February 26, 2015 December 22, 2015(1) December 30, 2015 0.0500 764 2,216 25 April 1, 2015 April 23, 2015 April 29, 2015 0.1567 2,581 — — April 1, 2015 May 21, 2015 May 28, 2015 0.1567 2,529 3,126 52 April 1, 2015 June 22, 2015 June 29, 2015 0.1567 2,483 4,266 63 July 1, 2015 July 23, 2015 July 30, 2015 0.1567 2,454 5,016 74 July 1, 2015 August 21, 2015 August, 28, 2015 0.1567 2,434 5,701 74 July 1, 2015 September 23, 2015 September 29, 2015 0.1567 2,320 14,026 168 October 1, 2015 October 23, 2015 October 29, 2015 0.1567 2,349 9,317 119 October 1, 2015 November 20, 2015 November 27, 2015 0.1567 2,358 8,443 111 October 1, 2015 December 22, 2015 December 30, 2015 0.1567 2,392 6,929 79 Total Distributions Declared and Distributed for Fiscal 2015 $2.38 $35,585 77,783 $1,024 (1)On February 26, 2015, the Company’s Board declared a special distribution of $0.50 per share of the Company’s commonstock, to be paid monthly over the remainder of 2015.F-54  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 15. Distributions – (continued) Date Declared Record Date Payment Date AmountPer ShareFebruary 27, 2014 March 14, 2014 March 26, 2014 $0.4700 May 8, 2014 June 9, 2014 June 26, 2014 0.4700 August 7, 2014 September 12, 2014 September 26, 2014 0.4700 October 2, 2014 October 22, 2014 October 30, 2014 0.1567 October 2, 2014 November 21, 2014 November 28, 2014 0.1567 October 2, 2014 December 19, 2014 December 30, 2014 0.1567 Total Distributions Declared and Distributedfor Fiscal 2014 $1.88 Note 16. Share Repurchase ProgramOn February 26, 2015, the Company’s Board authorized a program for the purpose of repurchasing up to $12.0 million worthof its common stock. Under the repurchase program, the Company could have, but was not obligated to, repurchase its outstandingcommon stock in the open market from time to time provided that the Company complied with the prohibitions under its InsiderTrading Policies and Procedures and the guidelines specified in Rule 10b-18 of the Securities Exchange Act of 1934, as amended,including certain price, market volume and timing constraints. The repurchase program was in place until the earlier of March 31,2016 or until $12.0 million of the Company’s outstanding shares of common stock had been repurchased. As of December 31,2016, the repurchase program has expired and has not been extended by the Board.During the year ended December 31, 2016, no shares were repurchased under the repurchase program. Since the approval of therepurchase program, the Company repurchased 774,858 shares of common stock in open market transactions for an aggregate cost(including transaction costs) of $12.0 million, utilizing the maximum amount available under the repurchase program. TheCompany is incorporated in Maryland and under the laws of the state, shares repurchased are considered retired (repurchasedshares become authorized but unissued shares) rather than treasury stock. As a result, the cost of the stock repurchased is recordedas a reduction to capital in excess of par value on the consolidated statement of changes in net assets.F-55  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 17. Financial HighlightsThe following is a schedule of financial highlights for the years ended December 31, 2016, 2015, 2014, and 2013 (dollars inthousands, except share and per share data): Year EndedDecember 31,2016 Year EndedDecember 31,2015 Year EndedDecember 31,2014 Year EndedDecember 31,2013Per share data: Net asset value at beginning of period $17.04 $18.56 $20.71 $17.61 Net investment income(1) 1.84 1.67 1.54 1.50 Net realized gain (loss) on investments(1) (1.44) 0.35 0.06 0.17 Net unrealized appreciation (depreciation) oninvestments and on Written Call Option(1) 0.18 (1.11) (1.87) 0.55 Distributions declared from net investmentincome (1.80) (1.88) (1.88) (0.47) Distributions declared from net realized gains — (0.50) — — Partners’ capital contribution — — — 1.92 Distribution to partners — — — (0.57) Issuance of common stock — (0.15) — — Accretive impact of stock repurchase — 0.13 — — Other(7) (0.03) (0.03) — — Net asset value at end of period $15.79 $17.04 $18.56 $20.71 Net assets at end of period $250,582 $268,802 $240,837 $268,670 Shares outstanding at end of period 15,868,045 15,777,345 12,974,420 12,974,420 Per share market value at end of period $12.93 $12.08 $17.87 $19.90 Total return based on market value(2) 24.07% (20.43)% (0.85)% 1.88% Ratio/Supplemental data: Ratio of net investment income to average netassets 11.32% 9.55% 7.78% 7.68% Ratio of incentive fee, net of incentive feewaiver, to average net assets(6) 2.01% 1.88% 1.11% 0.60% Ratio of debt related expenses to average netassets 7.68% 7.17% 5.21% 3.30% Ratio of other operating expenses to average netassets 5.61% 5.52% 5.20% 2.38% Ratio of total expenses, net of fee waivers toaverage net assets(6) 15.31% 14.57% 11.52% 6.28% Portfolio turnover rate(3) 21.33% 25.99% 18.62% 16.77% Average debt outstanding(4) $356,758 $324,824 $255,268 $198,159 Average debt outstanding per common share $22.48 $20.59 $19.67 $15.27 Asset coverage ratio per unit(5) $2,592 $2,465 $1,788 $2,376 (1)Based on daily weighted average balance of shares outstanding during the period.(2)Total investment return is calculated assuming a purchase of common shares at the current market value on the first day and asale at the current market value on the last day of the period reported. Dividends and distributions, if any, are assumed forpurposes of this calculation to be reinvested at prices obtained under the Company’s DRIP. Total investment return does notreflect brokerage commissions.F-56  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 17. Financial Highlights – (continued)(3)Portfolio turnover rate is calculated using the lesser of year-to-date sales or year-to-date purchases over the average of theinvested assets at fair value.(4)Based on daily weighted average balance of debt outstanding during the period.(5)Asset coverage per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtness notrepresented by senior securities, to the aggregate amount of senior securities representing indebtness. We have excluded ourSBA-guaranteed debentures from the asset coverage calculation as of December 31, 2016 pursuant to the exemptive reliefgranted by the SEC in June 2014 that permits us to exclude such debentures from the definition of senior securities in the200% asset coverage ratio we are required to maintain under the 1940 Act. Asset coverage per unit is expressed in terms ofdollar amounts per $1,000 of indebtness.(6)The ratio of waived fees to average net assets was 0.65%, 0.40%, 0.09% and 0.13% for the years ended December 31, 2016,2015, 2014 and 2013, respectively.(7)Includes the impact of different share amounts used in calculating per share data as a result of calculating certain per share databased on weighted average shares outstanding during the period and certain per share data based on shares outstanding as of aperiod end or transaction date.Note 18. Selected Quarterly Financial Data (Unaudited) For the quarter ended(Dollars in thousands, except per share data) December31,2016 September30,2016 June 30,2016 March 31,2016Total investment income $16,515 $17,357 $16,991 $17,449 Net investment income $6,747 $7,441 $7,431 $7,421 Net increase (decrease) in net assets from operations $8,097 $(2,013) $7,257 $(4,189) Net investment income per share(1) $0.43 $0.47 $0.47 $0.47 Net increase (decrease) in net assets from operationsper share(1) $0.51 $(0.13) $0.46 $(0.27) Net asset value per share at end of period $15.79 $15.68 $16.28 $16.29 For the quarter ended(Dollars in thousands, except per share data) December31,2015 September30,2015 June 30,2015 March 31,2015Total investment income $16,547 $18,304 $15,084 $14,041 Net investment income $7,406 $7,787 $5,317 $4,817 Net increase (decrease) in net assets from operations $(8,917) $7,958 $4,942 $9,867 Net investment income per share(1) $0.47 $0.48 $0.33 $0.37 Net increase (decrease) in net assets from operationsper share(1) $(0.57) $0.49 $0.31 $0.76 Net asset value per share at end of period $17.04 $18.04 $17.95 $18.35 (1)Calculated based on weighted average shares outstanding during the quarter.F-57  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016Note 19. Subsequent EventsManagement has evaluated subsequent events through the date of issuance of the consolidated financial statements includedherein. There have been no subsequent events that occurred during such period that would be required to be recognized in theconsolidated financial statements as of and for the year ended December 31, 2016.DistributionsOn January 3, 2017, the Company’s Board declared normal monthly distributions for January, February and March of 2017 asset forth below: Date Declared Record Date Payment Date DistributionsPer ShareJanuary 3, 2017 January 20, 2017 January 30, 2017 $0.1300 January 3, 2017 February 20, 2017 February 27, 2017 0.1300 January 3, 2017 March 23, 2017 March 30, 2017 0.1300 Total Distributions Declared for Fiscal 2017 $0.39 Portfolio ActivityOn January 3, 2017, the Company exited its investment in Medical Depot Inc., receiving $14.7 million in cash for itssubordinated debt investment repaid at par and $6.3 million in cash related to its equity investment. The equity realizationresulted in a $5.0 million realized gain.On January 9, 2017, the Company received $5.0 million in cash repayment for its second lien debt investment in EmergingMarkets Communications, LLC, repaid at par.On January 20, 2017, the Company invested $16.0 million in first lien debt and $2.0 million in membership units of CurrencyCapital, LLC. The debt investment has a yield of LIBOR + 11.0%, with a 0.5% floor.On February 2, 2017, the Company restructured its investment in US Well Services, LLC, exchanging its $15.3 million firstlien debt investment for an $8.5 million first lien debt investment, yielding LIBOR + 9.0% or LIBOR + 11.0% if paid in kind, andan initial 4.9% equity ownership in USWS Holdings, LLC. In addition, the Company committed $2.1 million in a first lienrevolving credit facility to US Well Services, LLC, yielding LIBOR + 6.0% and obtained an initial 0.4% equity ownership inUSWS Holdings, LLC.On February 21, 2017, the Company received $4.8 million in cash repayment for its second lien debt investment in BrockHoldings III, Inc.F-58  TABLE OF CONTENTSITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURES(a) Evaluation of Disclosure Controls and ProceduresAs of December 31, 2016 (the end of the period covered by this report), we, including our Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined inRule 13a-15(e) of the Securities Exchange Act of 1934, as amended). Based on that evaluation, our management, including theChief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective andprovided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulatedand communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance ofachieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.(b) Report of Management on Internal Control Over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting, and forperforming an assessment of the effectiveness of internal control over financial reporting. Internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with U.S. GAAP. The Company’s internal control over financial reportingincludes those policies and procedures that (i) pertain to assets of the Company; (ii) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts andexpenditures of the Company are being made only in accordance with authorizations of management and directors of theCompany; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the Company’s assets that could have a material effect on the financial statements.Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as ofDecember 31, 2016 based upon the criteria in the 2013 Internal Control — Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission. Based on management’s assessment, management determined that theCompany’s internal control over financial reporting was effective as of December 31, 2016.Due to the Company’s status as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, theCompany was not required to obtain an attestation report from the Company’s independent registered public accounting firm onthe Company’s internal control over financial reporting as of December 31, 2016.(c) Changes in Internal Controls Over Financial ReportingManagement has not identified any change in the Company’s internal control over financing reporting that occurred duringthe fourth quarter of 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controlover financial reporting.ITEM 9B. OTHER INFORMATIONNone.97  TABLE OF CONTENTSPART IIIWe will file a definitive Proxy Statement for our 2017 Annual Meeting of Stockholders with the Securities and ExchangeCommission (the “SEC”), pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certaininformation required by Part III has been omitted under General Instruction G(3) to Form 10-K. Only those sections of ourdefinitive Proxy Statement that specifically address the items set forth herein are incorporated by reference.ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by Item 10 is hereby incorporated by reference from our definitive Proxy Statement relating to our2017 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.ITEM 11. EXECUTIVE COMPENSATIONThe information required by Item 11 is hereby incorporated by reference from our definitive Proxy Statement relating to our2017 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERSThe information required by Item 12 is hereby incorporated by reference from our definitive Proxy Statement relating to our2017 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by Item 13 is hereby incorporated by reference from our definitive Proxy Statement relating to our2017 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by Item 14 is hereby incorporated by reference from our definitive Proxy Statement relating to our2017 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.98  TABLE OF CONTENTSPART IVITEM 15. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULESa. The following documents are filed as part of this Annual Report:The following consolidated financial statements are set forth in Item 8:INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firms F-1 Audited Financial Statements: Consolidated Statements of Assets and Liabilities as of December 31, 2016 and December 31,2015 F-2 Consolidated Statements of Operations for the years ended December 31, 2016, December 31, 2015and December 31, 2014 F-3 Consolidated Statements of Changes in Net Assets for the years ended December 31, 2016, December31, 2015 and December 31, 2014 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2016, December 31, 2015and December 31, 2014 F-5 Consolidated Schedules of Investments as of December 31, 2016 and December 31, 2015 F-6 Notes to Consolidated Financial Statements F-18 99  TABLE OF CONTENTSb. Exhibits ExhibitNumber Description of Document 3.1 Articles of Amendment and Restatement(1) 3.2 Certificate of Limited Partnership of CapitalSouth Partners Fund II Limited Partnership(2) 3.3 Certificate of Limited Partnership of CapitalSouth Partners SBIC Fund III, L.P.(2) 3.4 Bylaws(1) 3.5 Form of Amended and Restated Limited Partnership Agreement of CapitalSouth Partners Fund IILimited Partnership(3) 3.6 Form of Amended and Restated Agreement of Limited Partnership of CapitalSouth Partners SBICFund III, L.P.(3) 4.1 Form of Common Stock Certificate(1) 4.2 Form of Base Indenture(4) 4.3 Form of First Supplemental Indenture(4) 4.4 Form of Global Note (included as Exhibit A to the Form of First Supplemental Indenture)(4)10.1 Form of Dividend Reinvestment Plan(1)10.2 Form of Investment Advisory Agreement by and between Registrant and Capitala InvestmentAdvisors, LLC(1)10.3 Form of Custodian Agreement(1)10.4 Form of Administration Agreement by and between Registrant and Capitala Advisors Corp.(1)10.5 Form of Indemnification Agreement by and between Registrant and each of its directors(1)10.6 Form of Trademark License Agreement by and between Registrant and Capitala Investment Advisors,LLC(1)10.7 Form of Senior Secured Revolving Credit Agreement dated October 17, 2014, among CapitalaFinance Corp., as Borrower, the lenders party thereto, and ING Capital LLC, as Administrative Agent,Arranger and Bookrunner(5)10.8 Form of Guarantee, Pledge and Security Agreement dated October 17, 2014, among Capitala FinanceCorp., as Borrower, the subsidiary guarantors party thereto, ING Capital LLC, as RevolvingAdministrative Agent for the Revolving Lenders and as Collateral Agent, and each Financing Agentand Designated Indebtedness Holder party thereto(5)10.9 Form of Incremental Assumption Agreement, dated January 6, 2015, relating to the Senior SecuredRevolving Credit Agreement, dated as of October 17, 2014, among Capitala Finance Corp., asborrower, the lenders from time to time party thereto, and ING Capital LLC, as administrative agent,arranger and bookrunner(6) 10.10 First Amended and Restated Limited Liability Company Agreement of Capitala Senior Liquid LoanFund I, LLC, dated March 24, 2015(7) 10.11 Form of Incremental Assumption Agreement, dated August 19, 2015, relating to the Senior SecuredRevolving Credit Agreement, dated as of October 17, 2014, among Capitala Finance Corp., asborrower, the lenders from time to time party thereto, and ING Capital LLC, as administrative agent,arranger and bookrunner(8)11.1 Computation of Per Share Earnings (included in the notes to the consolidated financial statementscontained in this report)14.1 Code of Business Conduct(1)14.2 Code of Ethics(2)21.1 List of Subsidiaries (filed herewith)100  TABLE OF CONTENTS ExhibitNumber Description of Document31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)32.1 Certification of Chief Executive Officer 18 U.S.C. Section 1350, as adopted pursuant to section 906 ofthe Sarbanes-Oxley Act of 2002 (filed herewith)32.2 Certification of Chief Financial Officer 18 U.S.C. Section 1350, as adopted pursuant to section 906 ofthe Sarbanes-Oxley Act of 2002 (filed herewith)(1)Previously filed in connection with the Pre-Effective Amendment No. 1 to Capitala Finance Corp.’s registration statement onForm N-2 (File No. 333-188956) filed on September 9, 2013.(2)Previously filed in connection with Pre-Effective Amendment No. 2 to Capitala Finance Corp.’s registration statement on FormN-2 (File No. 333-188956) filed on September 16, 2013.(3)Previously filed in connection with Pre-Effective Amendment No. 5 to Capitala Finance Corp.’s registration statement on FormN-2 (File No. 333-188956) filed on September 24, 2013.(4)Previously filed in connection with Pre-Effective Amendment No. 2 to Capitala Finance Corp.’s registration statement on FormN-2 (File No. 333-193374) filed on May 21, 2014.(5)Previously filed in connection with Capitala Finance Corp.’s report on Form 8-K filed on October 21, 2014.(6)Previously filed in connection with Capitala Finance Corp.’s report on Form 8-K filed on January 8, 2015.(7)Previously filed in connection with Capitala Finance Corp.’s report on Form 8-K filed on March 24, 2015.(8)Previously filed in connection with Capitala Finance Corp.’s report on Form 8-K filed on August 25, 2015.c. Consolidated Financial Statement SchedulesNo consolidated financial statement schedules are filed herewith because (1) such schedules are not required or (2) theinformation has been presented in the aforementioned consolidated financial statements.ITEM 16. FORM 10-K SUMMARYNone.101  TABLE OF CONTENTSSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused thisAnnual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. Capitala Finance Corp.Date: March 7, 2017 By/s/ Joseph B. Alala IIIJoseph B. Alala IIIChief Executive Officer(Principal Executive Officer)Capitala Finance Corp.Date: March 7, 2017 By/s/ Stephen A. ArnallStephen A. ArnallChief Financial Officer(Principal Financial and Accounting Officer)Capitala Finance Corp.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date/s/ Joseph B. Alala IIIJoseph B. Alala III Chief Executive Officer, President and Chairman of theBoard of Directors(Principal Executive Officer) March 7, 2017/s/ Stephen A. ArnallStephen A. Arnall Chief Financial Officer(Principal Financial and Accounting Officer) March 7, 2017/s/ M. Hunt BroyhillM. Hunt Broyhill Director March 7, 2017/s/ R. Charles MoyerR. Charles Moyer Director March 7, 2017/s/ Larry W. CarrollLarry W. Carroll Director March 7, 2017/s/ H. Paul ChapmanH. Paul Chapman Director March 7, 2017102Exhibit 21.1List of SubsidiariesCapitalSouth Partners Florida Sidecar Fund I, L.P. (Delaware)CSP-Florida Mezzanine Fund I, LLC (North Carolina)CapitalSouth Partners Fund II Limited Partnership (North Carolina)CapitalSouth Partners F-II, LLC (North Carolina)CapitalSouth Partners SBIC Fund III, L.P. (Delaware)CapitalSouth Partners SBIC F-III, LLC (North Carolina)Exhibit 31.1CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Joseph B. Alala III, certify that:1.I have reviewed this Annual Report on Form 10-K of Capitala Finance Corp.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary 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 consolidated financial statements, and other financial information included in this report,fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this report;4.The registrant’s other certifying officer(s) 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, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles;(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;(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that hasmaterially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or personsperforming 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 and reportfinancial 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: March 7, 2017/s/ Joseph B. Alala IIIJoseph B. Alala IIIChief Executive Officer(Principal Executive Officer)Capitala Finance Corp.Exhibit 31.2CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Stephen A. Arnall, certify that:1.I have reviewed this Annual Report on Form 10-K of Capitala Finance Corp.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary 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 consolidated financial statements, and other financial information included in this report,fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this report;4.The registrant’s other certifying officer(s) 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, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles;(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;(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that hasmaterially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or personsperforming 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 and reportfinancial 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: March 7, 2017/s/ Stephen A. ArnallStephen A. ArnallChief Financial Officer(Principal Financial and Accounting Officer)Capitala Finance Corp.Exhibit 32.1CERTIFICATION OF CHIEF EXECUTIVE OFFICER18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Capitala Finance Corp. (the “Company”) for the annual period endedDecember 31, 2016, as filed with the Securities Exchange Commission on the date hereof (the “Report”), I, Joseph B. Alala III,Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, asamended; and2.The information contained in the Report fairly presents, in all material respects, the financial condition and results ofoperations of the Company.Date: March 7, 2017/s/ Joseph B. Alala IIIJoseph B. Alala IIIChief Executive Officer(Principal Executive Officer)Capitala Finance Corp.Exhibit 32.2CERTIFICATION OF CHIEF FINANCIAL OFFICER18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Capitala Finance Corp. (the “Company”) for the annual period endedDecember 31, 2016, as filed with the Securities Exchange Commission on the date hereof (the “Report”), I, Stephen A. Arnall,Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, asamended; and2.The information contained in the Report fairly presents, in all material respects, the financial condition and results ofoperations of the Company.Date: March 7, 2017/s/ Stephen A. ArnallStephen A. ArnallChief Financial Officer(Principal Financial and Accounting Officer)Capitala Finance Corp.

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