Capitala Group
Annual Report 2017

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, 2017 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 share5.75% Convertible Notes due 20226.00% Notes due 2022 The NASDAQ Global Select MarketThe NASDAQ Global Select MarketThe NASDAQ Global Select MarketSecurities 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, smaller reporting company, oran emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growthcompany” in Rule 12b-2 of the Exchange Act. (check one): Large accelerated filer o Accelerated filer xNon-accelerated filer o Smaller reporting company o Emerging growth company xIf an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying withany new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  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 $189.6 million based on the number ofshares held by non-affiliates of the registrant as of June 30, 2017, which was the last business day of the registrant’s most recently completed secondfiscal 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 February 26, 2018 was 15,958,511Documents 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 2018 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 64 Item 2.Properties 64 Item 3.Legal Proceedings 64 Item 4.Mine Safety Disclosures 64 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities 65 Item 6.Selected Consolidated Financial Data 68 Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations 69 Item 7A.Quantitative and Qualitative Disclosures About Market Risk 94 Item 8.Consolidated Financial Statements and Supplementary Data 95 Item 9.Changes in and Disagreements With Accountants on Accounting and FinancialDisclosure 96 Item 9A.Controls and Procedures 96 Item 9B.Other Information 96 PART III Item 10.Directors, Executive Officers and Corporate Governance 97 Item 11.Executive Compensation 97 Item 12.Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters 97 Item 13.Certain Relationships and Related Transactions, and Director Independence 97 Item 14.Principal Accountant Fees and Services 97 PART IV Item 15.Exhibits and Consolidated Financial Statement Schedules 98 Item 16.Form 10-K Summary 100 Signatures 101 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 Capitala InvestmentAdvisors, LLC (the “Investment Advisor”), an investment adviser that is registered as an investment adviser under the InvestmentAdvisers Act of 1940, as amended (the “Advisors Act”), and Capitala Advisors Corp. (the “Administrator”) provides theadministrative services necessary for us to operate. For U.S. federal income tax purposes, we have elected to be treated, and intendto comply with the requirements to continue to qualify annually, as a regulated investment company (“RIC”) under subchapter Mof the Internal Revenue Code of 1986, as amended (the “Code”).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 loans, second lien loans and subordinated loans, and, to a lesser extent, equity securities issuedby lower middle-market companies and traditional middle-market companies.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.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 at the time ofthe IPO and have continued to make new investments. The IPO consisted of the sale of 4,000,000 shares of our common stock at aprice of $20.00 per share resulting in net proceeds to us of $74.25 million, after deducting underwriting fees and commissionstotaling $4.0 million and offering expenses totaling $1.75 million. The other costs of the IPO were borne by the limited partners ofthe Legacy Funds.During the fourth quarter of 2017, Florida Sidecar transferred all of its assets to Capitala Finance Corp. and was legallydissolved as a standalone partnership.1  TABLE OF CONTENTSThe Company has formed and expects to continue to form certain consolidated taxable subsidiaries (the “TaxableSubsidiaries”), which are taxed as corporations for income tax purposes. These Taxable Subsidiaries allow the Company to makeequity investments in companies organized as pass-through entities while continuing to satisfy the requirements of a RIC underthe Code.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 amortization (“EBITDA”). We believe our focus on direct lending to privatecompanies enables us to receive higher interest rates and more substantial equity participation. As part of that strategy, we mayinvest in first lien loans, which have a first priority security interest in all or some of the borrower’s assets. In addition, our first lienloans may include positions in “stretch” senior secured loans, also referred to as “unitranche” loans, which combine characteristicsof traditional first lien senior secured loans and second lien loans, providing us with greater influence and security in the primarycollateral of a borrower and potentially mitigating loss of principal should a borrower default. We also may invest in second lienloans, which have a second priority security interest in all or substantially all of the borrower’s assets. In addition to first andsecond lien loans, we invest in subordinated loans, which may include mezzanine and other types of junior debt investments. Likesecond lien loans, our subordinated loans typically have a second lien on all or substantially all of the borrower’s assets; however,the principal difference between subordinated loans and second lien loans is that in a subordinated loan, we may be subject to theinterruption of cash interest payments, at the discretion of the first lien lender, upon certain events of default. In addition to debtsecurities, we may acquire equity or detachable equity-related interests (including warrants) from a borrower. Typically, the debtin which we invest is not initially rated by any rating agency; however, we believe that if such investments were rated, they wouldbe rated below investment grade. Below investment grade securities, which are often referred to as “high yield” or “junk,” havepredominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. We intend totarget investments that mature in four to six years from our 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, 2017, our Investment Advisor underwroteinvestments in 126 lower middle-market and traditional middle-market companies totaling more than $1.2 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 126 portfoliocompanies totaling more than $1.2 billion of invested capital from 2000 through December 31, 2017. 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 investment2  TABLE OF CONTENTSmandates that are similar, in whole and in part, with ours. To the extent permitted by the 1940 Act and interpretation of the staff ofthe U.S. Securities and Exchange Commission (the “SEC”), the Investment Advisor and its affiliates may determine that aninvestment is appropriate for us and for one or more of those other funds. In such event, depending on the availability of suchinvestment and other appropriate factors, the Investment Advisor or its affiliates may determine that we should invest side-by-sidewith one or more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretivepositions of the SEC and its staff, and consistent with the Investment Advisor’s allocation procedures. We do not expect to makeco-investments, or otherwise compete for investment opportunities, with Fund IV because its focus and investment strategy differsfrom our own. However, we do expect to 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. On June 1,2016, the SEC issued an exemptive order (the “Order”), which permits the Company to co-invest in portfolio companies withcertain funds or entities managed by the Investment Advisor or its affiliates in certain negotiated transactions where co-investingwould otherwise be prohibited under the 1940 Act, subject to the conditions of the Order. Pursuant to the Order, the Company ispermitted to co-invest with its affiliates if a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Company’sindependent directors make certain conclusions in connection with a co-investment transaction, including, but not limited to, that(1) the terms of the potential co-investment transaction, including the consideration to be paid, are reasonable and fair to theCompany and its stockholders and do not involve overreaching in respect of the Company or its stockholders on the part of anyperson concerned, and (2) the potential co-investment transaction is consistent with the interests of the Company’s stockholdersand is consistent with its then-current objectives and strategies.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, M. Hunt Broyhill, a member of theBoard and a partner of our Investment Advisor, Stephen A. Arnall, our chief financial officer, and John F. McGlinn, our chiefoperating officer, secretary and treasurer, and a director of our Investment Advisor. Messrs. Alala, Broyhill and McGlinn serve asour Investment Advisor’s investment committee. They are assisted by Christopher B. Norton, Peter Sherman, Michael S. Marr,Richard Wheelahan, Adam Richeson, Randall Fontes, Eric Althofer, and Davis Hutchens, who each serve as directors of ourInvestment 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 borrower3  TABLE OF CONTENTSto pay an early termination fee. Collectively, these attributes have been, and are expected to be, important contributors to thereturns generated by our Investment Advisor’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.•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 between $4.5 million and $30 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.4  TABLE OF CONTENTSDebt 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, 2017, 64.5% of our debt investments were secured by a first lien on the assets of the portfolio company, and35.5% of our debt investments were secured by a second lien on the assets of the portfolio company. We expect our primary sourceof return to be the monthly cash interest we will collect on our debt investments. We also typically seek board observation rightswith each portfolio company and we offer (and have historically provided) managerial and strategic assistance to these companies.We seek to further protect invested principal by negotiating appropriate affirmative, negative and financial covenants in our debtdocuments that are conservative enough to represent a prudent cushion at closing or to budgeted projections, but that are flexibleenough to afford our portfolio companies and their financial sponsors sufficient latitude to allow them to grow their businesses.Typical covenants include default triggers and remedies (including penalties), lien protection, leverage and fixed charge coverageratios, change of control provisions and put rights. Most of our loans feature call protection to enhance our total return on debtinvestments that are repaid prior to maturity.Most of our debt investments are structured as first lien loans, and as of December 31, 2017, 64.5% 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.Unitranche debt, a form of first lien loan, typically involves issuing one debt security that blends the risk and return profiles ofboth senior secured and subordinated debt in one debt security, bifurcating the loan into a first-out tranche and last-out tranche.As of December 31, 2017, 13.7% of our first lien loans consisted of last-out loans. We believe that unitranche debt can beattractive for many lower middle-market and traditional middle-market businesses, given the reduced structural complexity, singlelender interface 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, 8.2% of our debtinvestments consisted of second lien loans as of December 31, 2017. 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, 27.3% of ourdebt investments consisted of subordinated loans as of December 31, 2017. Subordinated loans typically have a second lien on allor 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 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, 2017, our weighted average PIK yield, exclusive of the impact on non-accrual debt investments, is 1.5%. As ofDecember 31, 2017, the weighted average annualized cash yield on our debt portfolio was 11.3%, exclusive of the impact of non-accrual debt investments. In addition to yield in the form of current cash and PIK interest, some of our debt investments include anequity component, such as a warrant to purchase a common equity interest in the borrower for a nominal price.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 conjunction5  TABLE OF CONTENTSwith a loan transaction with a borrower. The Investment Advisor’s investment team generally seeks to structure our equityinvestments, such as direct equity co-investments, to provide us with minority rights provisions and, to the extent available,event-driven put rights. They also seek to obtain limited registration rights in connection with these investments, which mayinclude “piggyback” registration rights. In addition to warrants and equity co-investments, our debt investments in the future maycontain 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, M. Hunt Broyhill, apartner of our Investment Advisor, and John F. McGlinn, our chief operating officer, secretary and treasurer, and a director of ourInvestment Advisor. Peter Sherman serves as chief risk officer and a director of our Investment Advisor. Richard Wheelahan, ourchief compliance officer and general counsel, Christopher B. Norton, Michael S. Marr, Randall Fontes, Adam Richeson, EricAlthofer, and Davis Hutchens, serve as directors of our Investment Advisor, and Casey Swercheck, Danny Speake, ChristianMacCarron, and Jack Vander Leeuw each serve as vice presidents of our Investment Advisor. While the investment strategyinvolves a team approach, whereby potential transactions are screened by various members of the investment team, Mr. Alala andone other member of the investment committee of the Investment Advisor must approve investments in order for them to proceed.Messrs. Alala and McGlinn meet weekly and, together with Mr. Broyhill, on an as needed basis, depending on the nature andvolume of investment opportunities. The Investment Advisor’s investment committee has worked together for over fifteen years.The stages of our investment selection process 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 126 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, and Los Angeles offices cover significant territory that istraditionally 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;6  TABLE OF CONTENTS•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;•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, an7  TABLE OF CONTENTSeconomic downturn, adverse regulatory changes and other relevant stressors that we attempt to simulate in our quantitative andqualitative analyses. Further, we continually examine the effect of these scenarios on financial ratios 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.At 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 debt8  TABLE OF CONTENTSsecurities and (ii) loss of our debt principal, in the event of a default. In general, our internal rating system may also assist ourvaluation team in its determination of the estimated fair value of equity securities or equity-like securities. Our internal risk ratingsystem generally encompasses both qualitative and quantitative aspects of our portfolio companies.Our 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 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. The investment rating of a particular investment should not, however, be deemed to be a guarantee of the investment’sfuture performance.The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of December31, 2017 and December 31, 2016 (dollars in thousands): Investment Rating As ofDecember 31, 2017 As ofDecember 31, 2016 Investmentsat FairValue Percentageof TotalInvestments Investmentsat FairValue Percentageof TotalInvestments1 $191,204 38.2% $183,826 33.9% 2 186,445 37.3 215,058 39.7 3 97,309 19.5 125,381 23.2 4 24,981 5.0 17,374 3.2 5 — — — — Total $499,939 100.0% $541,639 100.0% 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 an administration agreement between us and the administrator (the “Administration Agreement”), and any interestexpense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee netinvestment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debtinstruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-incentive feenet investment income does not include any realized capital gains, computed net of all realized capital losses or unrealized capitalappreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets atthe end of the immediately preceding calendar quarter, is compared to a hurdle of 2.0% per quarter (8.0% annualized). Our netinvestment income used to calculate this part of the incentive fee10  TABLE OF CONTENTSis also included in the amount of our gross assets used to calculate the 1.75% base management fee. We pay the InvestmentAdvisor an incentive fee with respect to our pre-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).The Investment Advisor has voluntarily agreed to waive all or such portion of the quarterly incentive fees earned by theInvestment Advisor that would otherwise cause our quarterly net investment income to be less than the distribution paymentsdeclared by our Board. Quarterly incentive fees are earned by the Investment Advisor pursuant to the Investment AdvisoryAgreement. Incentive fees subject to the waiver cannot exceed the amount of incentive fees earned during the period, as calculatedon a quarterly basis. The Investment Advisor will not be entitled to recoup any amount of incentive fees that it waives. The waiverwas effective in the fourth quarter of 2015 and will continue unless otherwise publicly disclosed by the Company.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 net11  TABLE OF CONTENTSunrealized appreciation or depreciation during such period and (c) our net realized capital gains or losses during such period. Anydeferred incentive fees will be carried over for payment in subsequent calculation periods to the extent such payment is payableunder 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%.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%))*The hypothetical amount of pre-incentive fee net investment income shown is based on a percentage of total net assets.12  TABLE OF CONTENTSCatch-up = 2.5% – 2.0% = 0.5%Incentive 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%.(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 Investment Advisor with an incentive fee of 20% on all of CapitalaFinance’s pre-incentive fee net investment income as if a hurdle rate did not apply when its net investment income exceeds2.5% in any calendar quarter.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 million13  TABLE OF CONTENTS•Year 4: FMV of Investment B determined to be $24 million•Year 5: Investment B sold for $20 millionThe 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.(1)As illustrated in Year 3 of Alternative 2 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.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.14  TABLE OF CONTENTS Income RelatedIncentive FeeAccrued BeforeApplication ofDeferralMechanism Capital Gains RelatedIncentive FeeAccrued BeforeApplication ofDeferral Mechanism Incentive FeeCalculations Incentive Fees Paid andDeferredYear 1 $8.0 million ($40.0million multiplied by20%) None $8.0 million Incentive fees of $8.0million paid; noincentive fees deferredYear 2 $8.0 million ($40.0million multiplied by20%) $6.0 million (20% of$30.0 million) $14.0 million Incentive fees of $14.0million paid; noincentive fees deferredYear 3 $8.0 million ($40.0million multiplied by20%) None (20% ofcumulative net capitalgains of $25.0 million($30.0 million incumulative realizedgains less $5.0 millionin cumulativeunrealized capitaldepreciation) less $6.0million of capital gainsfee paidin Year 2) $7.0 million (20% of thesum 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 $7.0million paid; $8.0million of incentive feesaccrued but paymentrestricted to $7.0million; $1.0 million ofincentive fees deferredYear 4 $8.0 million ($40.0million multiplied by20%) $0.2 million (20% ofcumulative net capitalgains of $31.0 million($36.0 millioncumulative realizedcapital gains less $5.0million cumulativeunrealized capitaldepreciation) less $6.0million of capital gainsfee paidin Year 2) $8.2 million Incentive fees of $9.2million paid ($8.2million of incentive feesaccrued in 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 (the “1934 Act”), and other applicable federal and state securities laws, and ongoing stock exchange listingfees;•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 3, 2017. 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 — Capitala Investment Advisors has the right toresign on 60 days’ notice and we may not be able to find a suitable replacement within such time, resulting in a disruption in ouroperations that could adversely affect our financial condition, business and results of operations.”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. The Administrator, pursuant to asub-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 3, 2017, 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 willalso reimburse 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 nineteen 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 Advisor 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, willconsider the 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.We 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 issue21  TABLE OF CONTENTSdiscount (such as debt instruments with PIK interest or, in certain cases, increasing interest rates or issued with warrants), we mustinclude in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless ofwhether cash representing such income is received by us in the same taxable year. We may also have to include in income otheramounts that we have not yet received in cash, such as PIK interest, deferred loan origination fees that are paid after origination ofthe loan or are paid in non-cash compensation such as warrants or stock, or certain income with respect to equity investments inforeign corporations. Because any original issue discount or other amounts accrued will be included in our investment companytaxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the AnnualDistribution Requirement, even though we will not 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 tax treatment as aRIC. We may have to request a waiver of the SBA’s restrictions for our SBIC subsidiaries to make certain distributions to maintainour RIC tax treatment. We cannot assure you that the SBA will grant such waiver. If our SBIC subsidiaries are unable to obtain awaiver, compliance with the SBA regulations may cause us to fail to qualify for tax treatment as a RIC, which would result in usbecoming subject to corporate-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 losses from such liquidations. In the event we realize net capital gains from such transactions, you mayreceive a larger capital gain distribution than you would have received in the absence of such transactions.22  TABLE OF CONTENTSInvestment 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 stockholders 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 to recognize suchbuilt-in gain as if a proportionate share of such Funds’ assets were sold at the time of the acquisition. We do not anticipate makingthis election at this time. Any corporate-level built-in gain tax is payable at the time the built-in gains are recognized (whichgenerally will be the years in which the built-in23  TABLE OF CONTENTSgain assets are sold in a taxable transaction). The amount of this tax will vary depending on the assets that are actually sold by usin this 10-year period (or shorter applicable period), the actual amount of net built-in gain or loss present in those assets as of theacquisition date and effective tax rates. The payment of any such corporate-level U.S. federal income tax on built-in gains will bea company expense that will be borne by all stockholders (not just any former corporate partners) and will reduce the amountavailable for distribution to stockholders.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, weare required to provide and maintain a bond issued by a reputable fidelity insurance company to protect the BDC. Furthermore, asa BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willfulmisfeasance, 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 our24  TABLE OF CONTENTSoutstanding senior securities, of at least 200% after each issuance of senior securities. We may also be prohibited under the 1940Act from knowingly participating in certain transactions with our affiliates without the prior approval of our directors who are notinterested persons and, in some cases, prior approval by the SEC. On June 1, 2016, the SEC issued the Order, which permits us andcertain of our affiliates to co-invest with one or more other affiliated investment funds, including future affiliated investmentfunds, where co-investing would otherwise be prohibited under the 1940 Act. Pursuant to the Order, the Company is permitted toco-invest with its affiliates if a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Company’s independentdirectors make certain conclusions in connection with a co-investment transaction, including, but not limited to, that (1) the termsof the potential co-investment transaction, including the consideration to be paid, are reasonable and fair to the Company and itsstockholders and do not involve overreaching in respect of the Company or its stockholders on the part of any person concerned,and (2) the potential co-investment transaction is consistent with the interests of the Company’s stockholders and is consistentwith its then-current investment objectives and strategies.We are generally not permitted 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 is to be issued and sold maynot be 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.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 principal categories of qualifying assets relevant to our proposed business are 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; and•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; or25  TABLE OF CONTENTS•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 significant managerial assistance means, among other things, any arrangement whereby the BDC,through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counselconcerning the 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 up to 5% of the valueof our gross assets for temporary or emergency purposes without regard to asset coverage. For a discussion of the risks associatedwith 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 atwww.Capitalagroup.com.26  TABLE OF CONTENTSCOMPLIANCE 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 (the “Sarbanes-Oxley Act”) imposes a wide variety of regulatory requirements on publicly-held companies and their insiders. Many of these requirements affect us. For example:•pursuant to Rule 13a-14 of the 1934 Act, our chief executive officer and chief financial officer must certify the accuracy ofthe 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 1934 Act, our management is required to prepare an annual report regarding its assessmentof our internal control over financial reporting. When we are no longer an emerging growth company under the JOBS Act,our independent registered public accounting firm will be required to audit our internal controls over financial reporting;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.These 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.27  TABLE OF CONTENTSOur 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 maintain physical, electronic and procedural safeguards designedto 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, 2017, investments in Fund II and Fund III accounted for approximately 11.2% and 51.7%, respectively, of our totalportfolio. As of December 31, 2017, 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, 2017.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.SBICs 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 small28  TABLE OF CONTENTSbusinesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. The SBAalso places certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs fromproviding funds for certain purposes or to businesses in a few prohibited industries. Compliance with SBA requirements may causeFund II and Fund III to forego attractive investment opportunities that are 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, 2017 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, 2017, 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.AVAILABLE 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 SEC. Information contained on ourwebsite is not incorporated by reference into this Annual Report on Form 10-K and you should not consider informationcontained on our website to be part of this Annual Report on Form 10-K or any other report we file with the SEC.29  TABLE OF CONTENTSThe 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 FACTORSInvesting in our securities involves a number of significant risks. Before you invest in our securities, you should be aware ofvarious risks, including those described below and elsewhere in this Annual Report on Form 10-K. You should carefully considerthese risk factors, together with all of the other information included in this Annual Report on Form 10-K, before you decidewhether to make an investment in our securities. The risks set out below are not the only risks we face. Additional risks anduncertainties not presently known to us or not presently deemed material by us may also impair our operations and performance.If any of the following events occur, our business, financial condition, results of operations and cash flows could be materiallyand adversely affected. In such case, our net asset value and the trading price of our securities could decline, and you may loseall or part of your investment. The risk factors described below are the principal risk factors associated with an investment in usas well as those factors generally associated with an investment company with investment objectives, investment policies, capitalstructure, or trading markets similar to ours.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.31  TABLE OF CONTENTSOur 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 services and our access to investments offeringacceptable terms. In addition to monitoring the performance of our existing investments, our Investment Advisor’s investmentteam may also be called upon, from time to time, to provide managerial assistance to some of our portfolio companies as well asother funds that they manage. These demands on their time may distract them or slow our rate of investment. See also “— Thereare 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, M. Hunt Broyhill and John F.McGlinn, who serve as the members of the investment committee of the Investment Advisor and lead the Investment Advisor’sinvestment team. Our success depends on the continued service of these individuals and the other senior investment professionalsavailable to the Investment Advisor. We cannot assure you that unforeseen business, medical, personal or other circumstanceswould not lead Messrs. Alala, Broyhill or McGlinn or any other such individual to terminate his relationship with us.Additionally, we cannot assure you that a reduction in revenue to the Investment Advisor, including as a result of fee waivers or adecrease in our assets, would not lead to a loss of investment professionals in the future. Such loss of members of the InvestmentAdvisor’s investment committee and other investment professionals could have a material adverse effect on our ability to achieveour investment objective as well as on our financial condition and results of operations. In addition, we can offer no assurance thatthe Investment Advisor will continue indefinitely as our investment adviser.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 our32  TABLE OF CONTENTSinvestments or may bear substantial risk of capital loss. We believe a significant part of our competitive advantage stems from thefact that the market for investments in lower and traditional middle-market companies is underserved by traditional commercialbanks and other financing sources. A significant increase in the number and/or the size of our competitors in this target marketcould force us to accept less attractive investment terms. Furthermore, many of our potential competitors have greater experienceoperating under, or will not be subject to, the regulatory restrictions that the 1940 Act impose on us as a BDC.Any 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. We cannot assure you that a reduction in revenue to the Investment Advisor, including as a result offee waivers or a decrease in our assets, would not lead to a loss of investment professionals in the future.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.33  TABLE OF CONTENTSIn 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 in part to ours. To the extentpermitted by the 1940 Act and interpretation of the SEC staff, the Investment Advisor and its affiliates may determine that aninvestment is appropriate for us and for one or more of those other funds. In such event, depending on the availability of suchinvestment and other appropriate factors, the Investment Advisor or its affiliates may determine that we should invest side-by-sidewith one or more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretivepositions of the SEC and its staff, and consistent with the Investment Advisor’s allocation procedures. We do not expect to makeco-investments, or otherwise compete for investment opportunities, with Fund IV because its focus and investment strategy differfrom our own. However, we do expect to make co-investments with Fund V given its similar investment strategy.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,34  TABLE OF CONTENTSthe ultimate determination of fair value is made by our Board, including our interested directors, and not by such third-partyvaluation firm. The participation of the Investment Advisor’s investment professionals in our valuation process could result inconflicts of interest as the Investment Advisor’s management fee is based, in part, on the value of our gross assets, and its incentivefees will be based, in part, on realized and unrealized gains and depreciation.The 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 where35  TABLE OF CONTENTSattributable to gross negligence, willful misfeasance, bad faith or reckless disregard of such person’s duties under the InvestmentAdvisory Agreement. These protections may lead the Investment Advisor to act in a riskier manner when acting on our behalf thanit would when acting for its own account.A 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 gross36  TABLE OF CONTENTSassets in specified types of securities, primarily in private companies or thinly traded U.S. public companies, cash, cashequivalents, U.S. government securities and other high quality debt investments that mature in one year or less. Furthermore, anyfailure to comply with the requirements imposed on BDCs by the 1940 Act could cause the SEC to bring an enforcement actionagainst us and/or expose us to claims of private litigants. In addition, upon approval of a majority of our stockholders, we mayelect to withdraw our status as a BDC. If we decide to withdraw our election, or if we otherwise fail to qualify, or maintain ourqualification, as a BDC, we may be subject to the substantially greater regulation under the 1940 Act as a closed-end investmentcompany. Compliance with such regulations would significantly decrease our operating flexibility and could significantlyincrease 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, 2017, we had $170.7 million of outstanding SBA-guaranteed debentures, $75.0 million of 6.0% fixed ratenotes due May 31, 2022 (the “2022 Notes”) outstanding, $52.1 million of 5.75% fixed rate convertible notes due May 31, 2022(the “2022 Convertible Notes”) outstanding, and $9.0 million outstanding under the Credit Facility that provides for borrowingsof up to $114.5 million on a revolving basis and may be increased up to $200.0 million pursuant to its “accordion” feature. Wehave received an exemptive order from the SEC granting relief from the asset coverage requirements for certain indebtednessissued by Fund II and Fund III as SBICs. If we issue preferred stock, the preferred stock would rank “senior” to common stock inour capital structure, preferred stockholders would have separate voting rights on certain matters and might have other rights,preferences, or privileges more favorable than those of our common stockholders, and the issuance of preferred stock could havethe effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for holdersof 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 2017 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, 2017 and expiring on the earlier of the one year anniversary of the date of the 2017 AnnualStockholders Meeting and the date of our 2018 Annual Stockholders Meeting, which is expected to be held in April 2018.37  TABLE OF CONTENTSIn 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 for the rights; and (3) the ratio of the offering does not exceed onenew share for each three rights held. If we raise additional funds by issuing more common stock or senior securities convertibleinto, or exchangeable for, our common stock, the percentage ownership of our stockholders at that time would decrease and theymay experience dilution. Moreover, we can offer no assurance that we will be able to issue and sell additional equity securities inthe 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 2022 Notes, the 2022 ConvertibleNotes and the Credit Facility, we may borrow from and issue senior debt securities to banks, insurance companies and otherlenders in the future. Holders of these senior securities will have fixed dollar claims on our assets that are superior to the claims ofour common stockholders, and we would expect such lenders to seek recovery against our assets in the event of a default. If thevalue of our assets decreases, leverage would cause net asset value to decline more sharply than it otherwise would have had wenot been leveraged. Similarly, any decrease in our income would cause net income to decline more sharply than it would have hadwe not borrowed. Such a decline could also negatively affect our ability to make distributions on our common stock. Leverage isgenerally considered a speculative investment technique. Our ability to service any debt that we incur will depend largely on ourfinancial performance and will be subject to prevailing economic conditions and competitive pressures. Moreover, as themanagement fee payable to our Investment Advisor will be payable based on our gross assets, including those assets acquiredthrough the use of leverage, our Investment Advisor will have a financial incentive to incur leverage that may not be consistentwith our stockholders’ interests. In addition, our common stockholders will bear the burden of any increase in our expenses as aresult of leverage, including any increase in the management 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 tax treatment 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.38  TABLE OF CONTENTSA 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.In the past, the capital markets and the credit markets have experienced periods of extreme volatility and disruption and,accordingly, there has been and may continue to be uncertainty in the financial markets in general. Continuing U.S. debt ceilingand budget deficit concerns, including automatic spending cuts stemming from sequestration, together with signs of 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, 2017. Wealso had approximately $75.0 million and $52.1 million, respectively, of the 2022 Notes and 2022 Convertible Notes outstandingas of December 31, 2017. In addition, as of December 31, 2017, we had approximately $9.0 million outstanding under the CreditFacility that provides for borrowings of up to $114.5 million on a revolving basis and may be increased up to $200.0 millionpursuant to its “accordion” feature. If we are unable to secure additional debt financing on commercially reasonable terms, ourliquidity could be reduced significantly. If we are unable to repay amounts outstanding under any debt facilities we may obtainand are declared in default or are unable to renew or refinance these facilities, we may not be able to operate our business in thenormal course. These situations may arise due to circumstances that we may be unable to control, such as lack of access to thecredit markets, a severe decline in the value of the U.S. dollar, another economic downturn or an operational problem that affectsthird 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 in39  TABLE OF CONTENTSEurope, triggered by high budget deficits and rising direct and contingent sovereign debt, which created concerns about theability of certain nations to continue to service their sovereign debt obligations. Risks resulting from such debt crisis, includingany austerity 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, the U.K. Parliamentvoted in favor of allowing the U.K. government to begin the formal process of Brexit. The initial negotiations on Brexitcommenced in June 2017. Brexit created political and economic uncertainty and instability in the global markets (includingcurrency and credit markets), and especially in the United Kingdom and the European Union, and this uncertainty and instabilitymay last indefinitely. Because of the election results in the U.K. in June 2017, there is increased uncertainty on the timing ofBrexit. There is continued concern about national-level support for the Euro and the accompanying coordination of fiscal andwage policy among European Economic and Monetary Union member countries. In addition, the fiscal and monetary policies offoreign nations, such as Russia and China, may have 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. 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.40  TABLE OF CONTENTSOur 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.We will be subject to corporate-level U.S. federal income tax if we are unable to qualify or maintain our RIC tax treatmentunder 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 RIC tax treatment under the Code. To continue to maintainour RIC tax treatment under the Code, we must meet the following source-of-asset diversification, and distribution requirements.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 RIC taxtreatment under the Code. Because most of our investments will be in private companies, and therefore will be relatively illiquid,any such 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 for taxtreatment as a RIC under the Code.If we fail to qualify for tax treatment as a RIC under the Code for any reason and remain or become subject to corporate-levelU.S. federal income tax on all of our income, the resulting corporate taxes could substantially reduce our net assets, the amount ofincome available for distribution or reinvestment and the amount of our distributions.We cannot predict how tax reform legislation will affect us, our investments, or our stockholders, and any such legislation couldadversely affect our business.Legislative or other actions relating to taxes could have a negative effect on us. The rules dealing with U.S. federal incometaxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. TreasuryDepartment. The U.S. House of Representatives and U.S. Senate recently passed tax reform legislation, which the Presidentrecently signed into law. Such legislation will make many changes to the Internal Revenue Code, including significant changes tothe taxation of business entities, the deductibility of interest expense, and the tax treatment of capital investment. We cannotpredict with certainty how any changes in the tax laws might affect us, our stockholders, or our portfolio investments. Newlegislation and any U.S. Treasury regulations, administrative interpretations or court decisions interpreting such legislation couldsignificantly and negatively affect our ability to qualify for tax treatment as a RIC or the U.S. federal income tax consequences tous and our stockholders of such qualification, or could have other adverse consequences. Stockholders are urged to consult withtheir tax advisor regarding tax legislative, regulatory, or administrative developments and proposals and their potential effect onan investment in our securities.41  TABLE OF CONTENTSWe 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 stockholder’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 income before we receive any corresponding cash payments. We also may be required toinclude in our taxable income certain other amounts 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 RIC tax treatment 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 for tax treatment under the Code and thus become subject tocorporate-level U.S. federal income tax.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 guidance issued by the Internal Revenue Service (“IRS”), a RIC may treat a distribution of its own stock asfulfilling the RIC distribution requirements if each stockholder may42  TABLE OF CONTENTSelect to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount ofcash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholderselect to receive cash, the cash available for distribution must be allocated among the stockholders electing to receive cash (withthe balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive the lesser of (a) theportion of the distribution such stockholder has elected to receive in cash or (b) an amount equal to his or her entire distributiontimes the percentage limitation on cash available for distribution. If these and certain other requirements are met, for U.S. federalincome tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been receivedinstead of stock. Taxable stockholders receiving such dividends (whether received in cash, our stock, or a combination thereof)will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain to the extent suchdistribution is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profits forU.S. federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends inexcess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceedsmay be less than the amount included in income with respect to the dividend, depending on the market price of our stock at thetime of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to suchdividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number ofour stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure onthe 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, or the subsequent testing by ourindependent registered public accounting firm (when undertaken, as noted below), may reveal deficiencies in our internal controlsover financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to ourconsolidated financial statements or identify other areas for further attention or improvement. Inferior internal controls could alsocause investors to lose confidence in our reported financial information, which could have a negative effect 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.43  TABLE OF CONTENTSNew 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). The adoption of either the Financial CHOICE Act of 2017,which was passed by the U.S House of Representatives in June 2017, or the Small Business Credit Availability Act, which waspassed by the Financial Services Committee of the U.S. House of Representatives in November 2017, would modify this section ofthe 1940 Act and increase the amount of debt that BDCs may incur by modifying the asset coverage percentage from 200% to150%. As a result, we may be able to incur additional indebtedness in the future and therefore your risk of an investment in us mayincrease. In addition, in December 2015, the 2016 omnibus spending bill approved by Congress and signed into law by thePresident increased the amount of SBA-guaranteed debentures that affiliated SBIC funds can have outstanding from $225.0million to $350.0 million, subject to SBA approval. This new legislation may allow us to issue additional SBIC debentures abovethe $225.0 million of SBA-guaranteed debentures previously permitted pending application for and receipt of additional SBIClicenses. If we incur this additional indebtedness in the future, your risk of an investment in our securities 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 will be implemented or what form they will take,increased regulation of non-bank credit extension could negatively impact our operations, cash flows or financial condition,impose additional costs on us, intensify the regulatory supervision of us or otherwise adversely affect our businessTwo 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, 2017, Fund II and Fund III portfolio companiesaccounted for 62.9% 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 $19.5 million and an average annual net income after U.S. federal income taxes not exceeding $6.5 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 recent44  TABLE OF CONTENTSfiscal years. The SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on theindustry in which the business is engaged and are based on factors such as the number of employees and gross sales. The SBAregulations permit licensed SBICs to make long term loans to small businesses, invest in the equity securities of such businessesand provide them with consulting and advisory services. The SBA also places certain limitations on the financing terms ofinvestments by SBICs in portfolio companies and prohibits SBICs from providing funds for certain purposes or to businesses in afew prohibited industries. Compliance with SBA requirements may cause a Legacy Fund to forego attractive investmentopportunities 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, 2017 as a result of having sufficient capital as defined under the SBA regulations.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 1934 Act with respect to Fund II andFund 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.Our wholly owned SBIC subsidiaries may be unable to make distributions to us that will enable us to meet or maintain RIC taxtreatment, 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 under the Code and to minimize corporate-level U.S. federal incometaxes, we will be required to distribute substantially all of our net ordinary income and net capital gain income, including incomefrom certain of our subsidiaries, which includes the income from our SBIC subsidiaries. We will be partially dependent on ourSBIC subsidiaries for cash distributions to enable us to meet the RIC distribution requirements. Our SBIC subsidiaries may belimited by the Small Business Investment Act of 1958, and SBA regulations governing SBICs, from making certain distributionsto us that may be necessary to maintain our status as a RIC. We may have to request a waiver of the SBA’s restrictions for our SBICsubsidiaries to make certain distributions to maintain our RIC status. We cannot assure you that the SBA will grant such waiverand if our SBIC subsidiaries are unable to obtain a waiver, compliance with the SBA regulations may result in loss of RIC taxtreatment and a consequent imposition of a corporate-level U.S. federal income tax on all of our income.Our 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 1934 Act, or the Exchange Act, as wellas additional corporate governance requirements, including requirements under the Sarbanes Oxley Act, and other rulesimplemented by the SEC. Also, we are subject to changing rules and regulations of federal and state government as well as thestock exchange on which our common stock is listed. These entities, including the Public Company Accounting Oversight Board,the SEC and the NASDAQ Stock Market, have issued a significant number of new and increasingly complex requirements andregulations over the course of the last several years and continue to develop additional regulations and requirements in responseto laws enacted by Congress. Our efforts to comply with these existing requirements, or any revised or amended requirements,have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from otherbusiness activities.45  TABLE OF CONTENTSWe 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.Internal and external cyber threats, as well as other disasters, could impair our ability to conduct business effectively.The occurrence of a disaster, such as a cyber-attack against us or against a third-party that has access to our data or networks, anatural catastrophe, an industrial accident, failure of our disaster recovery systems, or consequential employee error, could have anadverse effect on our ability to communicate or conduct business, negatively impacting our operations and financial condition.This adverse effect can become particularly acute if those events affect our electronic data processing, transmission, storage, andretrieval systems, or impact the availability, integrity, or confidentiality of our data.We depend heavily upon computer systems to perform necessary business functions. Despite our implementation of a varietyof security measures, our computer systems, networks, and data, like those of other companies, could be subject to cyber-attacksand unauthorized access, use, alteration, or destruction, such as from physical and electronic break-ins or unauthorized tampering.If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary, and other informationprocessed, stored in, and transmitted through our computer systems and networks. Such an attack could cause interruptions ormalfunctions in our operations, which could result in financial losses, litigation, regulatory penalties, client dissatisfaction or loss,reputational damage, and increased costs associated with mitigation of damages and remediation.Third parties with which we do business may also be sources of cybersecurity or other technological risk. We outsource certainfunctions and these relationships allow for the storage and processing of our information, as well as client, counterparty,employee, and borrower information. While we engage in actions to reduce our exposure resulting from outsourcing, ongoingthreats may result in unauthorized access, loss, exposure, destruction, or other cybersecurity incident that affects our data,resulting in increased costs and other consequences as described above.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.To 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 the46  TABLE OF CONTENTSextent OID or PIK interest constitute a portion of our income, we are exposed to typical risks associated with such income beingrequired to be included in taxable and accounting 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.Because 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 business47  TABLE OF CONTENTSwith other companies in our industry if they believe that our financial accounting is not as transparent as other companies in ourindustry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations maybe 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.The 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 astockholder of the opportunity to sell such stockholder’s shares at a premium to a potential acquirer. We believe that the benefitsof these provisions outweigh the potential48  TABLE OF CONTENTSdisadvantages of discouraging any such acquisition proposals because, among other things, the negotiation of such proposals mayimprove their terms. Our Board has considered both the positive and negative effects of the foregoing provisions and determinedthat they are in the best interest of our stockholders.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.Equity 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;49  TABLE OF CONTENTS•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’s ability to repay its obligations to us, which may have an adverse effect on the return on, or therecovery of, our investment in these businesses. Deterioration in a borrower’s financial condition and prospects may beaccompanied by deterioration in the value of the 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, 2017, 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.50  TABLE OF CONTENTSOur 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 company prohibiting the incurrence of additional secured debt without thesenior lender’s consent. Prior to and as a condition of permitting the portfolio company to borrow money from us secured by thesame collateral pledged to the senior lender, the senior lender may require assurances that it will control the disposition of anycollateral in the event of bankruptcy or other default. In many such cases, the senior lender requires us to enter into an“intercreditor agreement” prior to permitting the portfolio company to borrow from us. Typically the intercreditor agreements weare requested to execute expressly subordinate our debt instruments to those held by the senior lender and further provide that thesenior lender shall control: (i) the commencement of foreclosure or other proceedings to liquidate and collect on the collateral; (ii)the nature, timing and conduct of foreclosure or other collection proceedings; (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 under intercreditor agreements we may enter, we may be unable to realize theproceeds 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.51  TABLE OF CONTENTSThe 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.”Economic 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.52  TABLE OF CONTENTSThe 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.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.Our 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 Securities Exchange Commission (“SEC”). Any person that owns, directly orindirectly, 5% or more of our outstanding voting securities will be our affiliate for purposes of the 1940 Act and we are generallyprohibited from buying or selling any security 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 investmentsin the same company, without prior approval of our independent directors and, in some cases, the SEC. We are prohibited frombuying or selling any security from or to any person that controls us or who owns more than 25% of our voting securities or certainof that person’s affiliates, or entering into prohibited joint transactions with such persons, absent the prior approval of the SEC. Asa result of these restrictions, we may be53  TABLE OF CONTENTSprohibited from buying or selling any security (other than any security of which we are the issuer) from or to any company that isadvised or managed by our Investment Advisor or its affiliates without the prior approval of the SEC, which may limit the scope ofinvestment 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 RIC tax treatment under the Code, we do not have fixed guidelines for diversification, and our investmentsmay be concentrated in relatively few companies. As our portfolio is less diversified than the portfolios of some larger funds, weare more susceptible to failure if a single loan fails. The disposition or liquidity of a significant investment may also adverselyimpact our net asset value and our results of operations. Similarly, the aggregate returns we realize may be significantly adverselyaffected 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 RIC tax treatment under the Code, we do not have fixed guidelines fordiversification. To the extent that we assume large positions in the securities of a small number of issuers or our investments areconcentrated in relatively few industries, our net asset value may fluctuate to a greater extent than that of a diversified investmentcompany as a result of changes in the financial condition or the market’s assessment of the issuer. We may also be moresusceptible to any single economic or regulatory occurrence than a diversified 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 these54  TABLE OF CONTENTSindustries have to varying degrees, a material portion of our investment portfolio could be affected adversely, which, in turn,could adversely affect our financial position and results of operations.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 seven 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.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.Similarly, 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.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, which55  TABLE OF CONTENTScould trigger cross-defaults under other agreements and jeopardize our portfolio company’s ability to meet its obligations underthe debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate newterms with a defaulting portfolio company. Any extension or restructuring of our loans could adversely affect our cash flows. Inaddition, if one of our portfolio companies were to go bankrupt, even though we may have structured our interest as senior debt,depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to thatportfolio company, a bankruptcy court might recharacterize our debt holding and subordinate all or a portion of our claim to thatof other creditors. If any of these occur, 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 property rights, protect their tradesecrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement. Suchlitigation could result in substantial costs and diversion of resources. Similarly, if a portfolio company is found to infringe ormisappropriate a third-party’s patent or other proprietary rights, it could be required to pay damages to the third-party, alter itsproducts or processes, obtain a license from the third-party and/or cease activities utilizing the proprietary rights, includingmaking or selling products utilizing the proprietary rights. Any of the foregoing events could negatively affect both the portfoliocompany’s ability to service our debt investment and the value of any related debt and equity securities that we own, as well asany collateral securing our investment.Any unrealized depreciation we experience on our loan portfolio may be an indication of future realized losses, which couldreduce our income 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 depreciation in our loan portfolio could be an indication of a portfolio company’sinability to meet its repayment obligations to us with respect to the affected loans. This could result in realized losses in the futureand ultimately 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.56  TABLE OF CONTENTSWe 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 gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Suchhedging transactions may also limit the opportunity for gain if the values of the underlying portfolio positions increase. It may notbe possible to hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able toenter into a hedging transaction at an acceptable price. Moreover, for a variety of reasons, we may not seek to establish a perfectcorrelation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation mayprevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully orperfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value ofthose securities is likely to fluctuate as a result of factors not related to currency fluctuations.The SEC has proposed a new rule under the 1940 Act that would govern the use of derivatives (defined to include any swap,security-based swap, futures contract, forward contract, option or any similar instrument) as well as financial commitmenttransactions (defined to include reverse repurchase agreements, short sale borrowings and any firm or standby commitmentagreement or similar agreement) by BDCs. Under the proposed rule, a BDC would be required to comply with one of twoalternative portfolio limitations and manage the risks associated with derivatives transactions and financial commitmenttransactions by segregating certain assets. Furthermore, a BDC that engages in more than a limited amount of derivativestransactions or that uses complex derivatives would be required to establish a formalized derivatives risk management program. Ifthe SEC adopts this rule in the form proposed, we may incur greater and indirect costs to engage in derivatives transactions orfinancial commitment transactions, and our ability to enter into transactions involving such instruments may be hindered, whichcould have an adverse effect on our business, financial condition and results of operations.The interest rates of our term loans to our portfolio companies that extend beyond 2021 might be subject to change based onrecent regulatory changes.LIBOR, the London Interbank Offered Rate, is the basic rate of interest used in lending between banks on the Londoninterbank market and is widely used as a reference for setting the interest rate on loans globally. We typically use LIBOR as areference rate in term loans we extend to portfolio companies such that the interest due to us pursuant to a term loan extended to aportfolio company is calculated using LIBOR. Some of our term loan agreements with portfolio companies contain a statedminimum value for LIBOR.57  TABLE OF CONTENTSOn July 27, 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it intends tophase out LIBOR by the end of 2021. It is unclear if at that time whether or not LIBOR will cease to exist or if new methods ofcalculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with theAlternative Reference Rates Committee, a steering committee comprised of large US financial institutions, is consideringreplacing U.S. dollar LIBOR with a new index calculated by short term repurchase agreements, backed by Treasury securities. Thefuture of LIBOR at this time is uncertain. If LIBOR ceases to exist, we may need to renegotiate the credit agreements extendingbeyond 2021 with our portfolio companies that utilize LIBOR as a factor in determining the interest rate to replace LIBOR withthe new standard that is established.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.Although the U.S. ratified the Paris Agreement on November 4, 2016, the current administration announced the U.S. would ceaseparticipation. As a result, some of our portfolio companies may become subject to new or strengthened regulations or legislation,at least through November 4, 2020 (the earliest date the U.S. may withdraw from the Paris Agreement), which could increase theiroperating costs and/or decrease 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 thatavailable58  TABLE OF CONTENTSfrom higher grade issues, but typically involve greater risk. These securities are especially sensitive to adverse changes in generaleconomic conditions, to changes in the financial condition of their issuers and to price fluctuation in response to changes ininterest rates. During periods of economic downturn or rising interest rates, issuers of below investment grade instruments mayexperience financial stress that could adversely affect their ability to make payments of principal and interest and increase thepossibility of default.Our 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 tax treatment;•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 stockholderactivism, 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. Stockholder activism, which could take many forms or arise in a variety of situations,increased in the BDC space recently. Specifically, we are currently subject to class action litigation.59  TABLE OF CONTENTSOn December 28, 2017, an alleged stockholder filed a putative class action lawsuit complaint, Paskowitz v. Capitala FinanceCorp., et al., in the United States District Court for the Central District of California (case number 2:17-cv-09251-MWF-AS) (the“Paskowitz Action”), against the Company and certain of its current officers on behalf of all persons who purchased or otherwiseacquired the Company’s common stock between January 4, 2016 and August 7, 2017. On January 3, 2018, another allegedstockholder filed a putative class action complaint, Sandifer v. Capitala Finance Corp., et al., in the United States District Courtfor the Central District of California (case number 2:18-cv-00052-MWF-AS) (the “Sandifer Action”), asserting substantiallysimilar claims on behalf of the same putative class and against the same defendants. The complaints in the Paskowitz Action andthe Sandifer Action allege certain violations of the securities laws, including, inter alia, that the defendants made certainmaterially false and misleading statements and omissions regarding the Company’s business, operations, and prospects. OnFebruary 2, 2018, the Sandifer Action was transferred, on stipulation of the parties, to the United States District Court for theWestern District of North Carolina on February 2, 2018, which remains pending. While the Company intends to vigorously defenditself in this litigation, the outcome of these legal proceedings cannot be predicted with certainty.Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult and requires anextensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, are in the earlystages of the proceedings, and are subject to appeal. In addition, because most legal proceedings are resolved over extendedperiods of time, potential losses are subject to change due to, among other things, new developments, changes in legal strategy,the outcome of intermediate procedural and substantive rulings and other parties’ settlement posture and their evaluation of thestrength or weakness of their case against us. For these reasons, we are currently unable to predict the ultimate timing or outcomeof, or reasonably estimate the possible losses or a range of possible losses resulting from, the matters described above. Based oninformation currently available, the Company does not believe that any reasonably possible losses arising from the currentlypending legal matters described above will be material to the Company’s results of operations or financial condition. However, inlight of the inherent uncertainties involved in such matters, an adverse outcome in this litigation could materially adversely affectthe Company’s financial condition, results of operations or cash flows in any particular reporting period.Securities litigation and corresponding stockholder activism, if any, including potential proxy contests, could result insubstantial costs and divert management’s and our Board’s attention and resources from our business. Additionally, such securitieslitigation and stockholder activism could give rise to perceived uncertainties as to our future, adversely affect our relationshipswith service providers and make it more difficult to attract and retain qualified personnel. Also, we may be required to incursignificant legal fees and other expenses related to any securities litigation and activist stockholder matters. Further, our stockprice could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of anysecurities litigation and stockholder 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.60  TABLE OF CONTENTSOur 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.You 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 tax treatment, compliance with applicable BDC, SBA regulations and suchother factors 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. In61  TABLE OF CONTENTSaddition, we can provide you no assurance that the any offering will be successful, or that by increasing the size of our availableequity capital, our aggregate expenses, and correspondingly, our expense ratio, 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 2017 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, 2017 and expiring on the earlier of the one-year anniversary of the date of the 2017 AnnualStockholders Meeting and the date of our 2018 Annual Stockholders Meeting, which is expected to be held in April 2018.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.Your 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 to62  TABLE OF CONTENTSdecline, the leverage would result in a greater decrease in net asset value to the holders of common stock than if we were notleveraged through the issuance of preferred stock. This greater net asset value decrease would also tend to cause a greater declinein the market price for the common stock. We might be in danger of failing to maintain the required asset coverage of the preferredstock or of losing our ratings, if any, on the preferred stock or, in an extreme case, our current investment income might not besufficient to meet the dividend requirements on the preferred stock. In order to counteract such an event, we might need toliquidate investments in order to fund a redemption of some or all of the preferred stock. In addition, we would pay (and theholders of common stock would bear) all costs and expenses relating to the issuance and ongoing maintenance of the preferredstock, including higher advisory fees if our total return exceeds the dividend rate on the preferred stock. Holders of preferred stockmay have different interests than holders of common stock and may 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 RIC tax treatment under the Code for U.S. federal income taxpurposes. While we would intend to redeem our preferred stock to the extent necessary to enable us to distribute our income asrequired to maintain our qualification as a RIC, there can be no assurance that such actions could be effected in time to meet thetax requirements.63  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 PROCEEDINGSOther than as described below, we and our subsidiaries are not currently subject to any material legal proceedings, nor, to ourknowledge, is any material legal proceeding threatened against us or our subsidiaries. From time to time, we, or our subsidiariesmay be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcementof our rights under contracts with our portfolio companies. While the outcome of these legal proceedings, if any, cannot bepredicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or resultsof operations.On December 28, 2017, an alleged stockholder filed a putative class action lawsuit complaint, Paskowitz v. Capitala FinanceCorp., et al., in the United States District Court for the Central District of California (case number 2:17-cv-09251-MWF-AS) (the“Paskowitz Action”), against the Company and certain of its current officers on behalf of all persons who purchased or otherwiseacquired the Company’s common stock between January 4, 2016 and August 7, 2017. On January 3, 2018, another allegedstockholder filed a putative class action complaint, Sandifer v. Capitala Finance Corp., et al., in the United States District Courtfor the Central District of California (case number 2:18-cv-00052-MWF-AS) (the “Sandifer Action”), asserting substantiallysimilar claims on behalf of the same putative class and against the same defendants. The complaints in the Paskowitz Action andthe Sandifer Action allege certain violations of the securities laws, including, inter alia, that the defendants made certainmaterially false and misleading statements and omissions regarding the Company’s business, operations, and prospects. OnFebruary 2, 2018, the Sandifer Action was transferred, on stipulation of the parties, to the United States District Court for theWestern District of North Carolina on February 2, 2018, which remains pending. While the Company intends to vigorously defenditself in this litigation, the outcome of these legal proceedings cannot be predicted with certainty.Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult and requires anextensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, are in the earlystages of the proceedings, and are subject to appeal. In addition, because most legal proceedings are resolved over extendedperiods of time, potential losses are subject to change due to, among other things, new developments, changes in legal strategy,the outcome of intermediate procedural and substantive rulings and other parties’ settlement posture and their evaluation of thestrength or weakness of their case against us. For these reasons, we are currently unable to predict the ultimate timing or outcomeof, or reasonably estimate the possible losses or a range of possible losses resulting from, the matters described above. Based oninformation currently available, the Company does not believe that any reasonably possible losses arising from the currentlypending legal matters described above will be material to the Company’s results of operations or financial condition. However, inlight of the inherent uncertainties involved in such matters, an adverse outcome in this litigation could materially adversely affectthe Company’s financial condition, results of operations or cash flows in any particular reporting period.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.64  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 2017 NAV(1) High Low Premium or(Discount) ofHigh SalesPrice to NAV(2) Premium or(Discount) ofLow SalesPrice to NAV(2) DeclaredDistributions(3)Fourth Quarter $13.91 $10.00 $7.12 (28.1)% (48.8)% $0.25 Third Quarter $14.21 $13.57 $8.67 (4.5)% (39.0)% $0.39 Second Quarter $14.97 $14.43 $12.85 (3.6)% (14.2)% $0.39 First Quarter $15.71 $14.65 $13.00 (6.7)% (17.3)% $0.39 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 (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 February 26, 2018 was $7.18 per share. As of February 26, 2018 there were 44holders 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. 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 the65  TABLE OF CONTENTSasset coverage requirements applicable to us as a BDC under the 1940 Act. If we do not distribute a certain percentage of ourincome annually, we will suffer adverse tax consequences, including the possible loss of our qualification as a RIC. We cannotassure 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 table summarizes our distributions declared during fiscal years ended 2018, 2017, and 2016: Date Declared Record Date Payment Date Amount PerShareJanuary 2, 2018 January 22, 2018 January 30, 2018 $0.0833 January 2, 2018 February 20, 2018 February 27, 2018 0.0833 January 2, 2018 March 23, 2018 March 29, 2018 0.0833 Total Distributions Declared for Fiscal2018 $0.25 Date Declared Record Date Payment Date Amount PerShareJanuary 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 April 3, 2017 April 19, 2017 April 27, 2017 0.1300 April 3, 2017 May 23, 2017 May 29, 2017 0.1300 April 3, 2017 June 21, 2017 June 29, 2017 0.1300 July 3, 2017 July 21, 2017 July 28, 2017 0.1300 July 3, 2017 August 23, 2017 August 30, 2017 0.1300 July 3, 2017 September 20, 2017 September 28, 2017 0.1300 October 2, 2017 October 23, 2017 October 30, 2017 0.0833 October 2, 2017 November 21, 2017 November 29, 2017 0.0833 October 2, 2017 December 20, 2017 December 28, 2017 0.0833 Total Distributions Declared for Fiscal2017 $1.42 66  TABLE OF CONTENTS Date Declared Record Date Payment Date Amount PerShareJanuary 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 for Fiscal2016 $1.80 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, 2017. 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 stockholder 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.The 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 1934 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, 2017, we issued 83,186 shares of common stock under our DRIP. The issuances were notsubject to the registration requirements under the Securities Act of 1933, as amended. The cash paid for shares of common stockissued under our DRIP during the year ended December 31, 2017 was approximately $0.9 million. Other than the shares issuedunder our DRIP during the year ended December 31, 2017, we did not sell any unregistered equity securities.67  TABLE OF CONTENTSISSUER 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, 2017, 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 and for the years ended December 31, 2017 2016 2015 2014 2013Consolidated statements of operations data: Total investment income $51,089 $68,312 $63,976 $49,528 $35,433 Total expenses, net of fee waivers 35,565 39,272 38,649 29,562 15,949 Net investment income 15,524 29,040 25,327 19,966 19,484 Net realized gain (loss) from investments (24,189) (22,766) 5,436 832 2,187 Net unrealized appreciation (depreciation) oninvestments and written call option 2,970 2,878 (16,913) (24,238) 7,187 Tax provision (1,289) — — — — Net increase (decrease) in net assets resulting fromoperations $(6,984) $9,152 $13,850 $(3,440) $28,858 Per share data: Net investment income $0.98 $1.84 $1.67 $1.54 $1.50 Net increase (decrease) in net assets resulting fromoperations $(0.44) $0.58 $0.91 $(0.27) $2.22 Distributions declared $1.42 $1.80 $2.38 $1.88 $0.47 Net asset value per share $13.91 $15.79 $17.04 $18.56 $20.71 Consolidated statements of assets and liabilitiesdata: Total assets $534,595 $584,415 $632,818 $539,864 $476,428 Total net assets $221,887 $250,582 $268,802 $240,837 $268,670 Other data: Total Return(1)(2) (35.68)% 24.07% (20.43)% (0.85)% 1.88% Number of portfolio company investments at yearend 47 53 57 52 41 Total portfolio investment deployments for theyear $82,750 $120,844 $260,640 $216,276 $110,929 Investment repayments for the year $115,810 $163,564 $142,713 $80,197 $52,755 (1)Total investment return for the years ended December 31, 2017, 2016, 2015 and 2014 is calculated assuming a purchase ofcommon shares at the current market value on the first day 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.(2)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.68  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 our 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-looking69  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 our 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 U.S. Securities and Exchange Commission (“SEC”)rule or 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, and as such, are subject to reduced public company reporting requirements. Ourinvestment objective is to generate both current income and capital appreciation through debt and equity investments. We aremanaged 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 (“U.S.”), with a non-exclusiveemphasis on the Southeast, Southwest and Mid-Atlantic regions. We invest primarily in companies with a history of earningsgrowth and positive cash flow, proven management teams, products or services with competitive advantages and industry-appropriate margins. We primarily invest in companies with between $4.5 million and $30 million in trailing twelve monthearnings before interest, tax, depreciation, and amortization (“EBITDA”).We invest in first lien loans, second lien loans, and subordinated loans. Most of our debt investments are coupled with equityinterests, whether in the form of detachable “penny” warrants or equity co-investments made pari-passu with our borrowers’financial sponsors.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 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, and continued tohold their existing investments at the time of IPO and have continued to make new investments after the IPO. The IPO consisted70  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 U.S. Small Business Administration (“SBA”) guaranteed debt payable. We have two subsidiaries licensed under theSmall Business Investment Company (“SBIC”) Act that have elected to be regulated as BDCs under the 1940 Act.During the fourth quarter of 2017, Florida Sidecar transferred all of its assets to Capitala Finance Corp. and was legallydissolved as a standalone partnership.The Company has formed and expects to continue to form certain consolidated taxable subsidiaries (the “TaxableSubsidiaries”), which are taxed as corporations for income tax purposes. These Taxable Subsidiaries allow the Company to makeequity investments in companies organized as pass-through entities while continuing to satisfy the requirements of a RIC underthe Code.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 of Regulation S-X. The consolidated financialstatements of the Company include the accounts of the Company and its wholly owned subsidiaries as described in the FormationTransactions above. The transactions related to Fund II, Fund III, and Florida Sidecar constituted an exchange of shares betweenentities under common control and have been accounted for in accordance with ASC Topic 805, Business Combinations (“ASC805”).The Company’s financial statements as of December 31, 2017 and 2016 are presented on a consolidated basis. The effects ofall intercompany transactions between the Company and its subsidiaries (Fund II, Fund III, Florida Sidecar, and the TaxableSubsidiaries) have been eliminated in consolidation. All financial data and information included in these consolidated financialstatements have been presented on the basis described above. In the opinion of management, the consolidated financial statementsreflect all adjustments that are necessary 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 investment companysubsidiaries (Fund II, Fund III, Florida Sidecar, and the Taxable Subsidiaries) in its consolidated financial statements. TheCompany did not consolidate its interest in Capitala Senior Liquid Loan Fund I, LLC (“CSLLF”) during the periods it was inexistence because the investment was not considered a substantially wholly owned investment company subsidiary. Further,CSLLF was a joint venture for which shared power existed relating to the decisions that most significantly impacted the economicperformance of the entity. See Note 4 to the consolidated financial statements for a description of the Company’s investment inCSLLF.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.71  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 (the “1934 Act”) 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.72  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 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 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.73  TABLE OF CONTENTSIn estimating the fair value of portfolio investments, the Company starts with the cost basis of the investment, which includesoriginal issue discount and payment-in-kind (“PIK”) income, if any. The transaction price is typically the best estimate of fairvalue at inception. When evidence supports a subsequent change to the carrying value from the original transaction 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 for the periods held. CSLLF recorded its underlying investments at fair value on a daily basis utilizing pricing informationfrom 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 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 payment-in-kind interest (“PIKinterest”) provision. The PIK interest, which represents contractually deferred interest added to the loan balance that is generallydue at maturity, is recorded on the accrual basis to the extent that such amounts are expected to be collected. PIK interest is notaccrued if the Company does not expect the issuer to be able to pay all principal and interest when due.74  TABLE OF CONTENTSNon-accrual investments: Management reviews all loans that become 90 days or more past due, or when there is reasonabledoubt that principal or interest will be collected, for possible placement on non-accrual status. When the Company otherwise doesnot expect the borrower to be able to service its debt and other obligations, the Company will place the loan on non-accrual status,and will generally cease recognizing interest income and PIK interest on that loan for financial reporting purposes. Interestpayments received on non-accrual loans may be recognized as income or applied to principal depending upon management’sjudgment. The Company writes off any previously accrued and uncollected cash interest when it is determined that interest is nolonger considered collectible. The Company may elect to cease accruing PIK interest and continue accruing interest income incases where a loan is currently paying its interest income but, in management’s judgment, there is a reasonable likelihood ofprincipal loss on the loan. Non-accrual loans are returned to accrual status when the borrower’s financial condition improves suchthat 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. TheCompany holds preferred equity investments in the portfolio that contain a payment-in-kind dividend (“PIK dividends”)provision. PIK dividends, which represent contractually deferred dividends added to the equity balance, are recorded on theaccrual 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: Discounts received to par on loans purchased are capitalized and accreted into income over the life ofthe loan. Any remaining discount is accreted into income upon prepayment 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 as a RIC under subchapter M of the Code and, among other things, intends to make the requisite distributions toits stockholders which will relieve the Company from 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 distributions75  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.The Company’s Taxable Subsidiaries record deferred tax assets or liabilities related to temporary book versus tax differenceson the income or loss generated by the underlying equity investments held by the Taxable Subsidiaries. As of December 31, 2017,and December 31, 2016, the Company recorded a net deferred tax liability of $1.3 million and $0.0 million, respectively. For theyear ended December 31, 2017, the Company recorded a tax provision of $1.3 million. For the years ended December 31, 2016and 2015, no tax provision was recorded.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 its 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 itsentire distribution in cash. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of thedividend 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 31,2017 and December 31, 2016, 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, 2017and 2016. 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 tax years ended August 31, 2017, 2016 and 2015 remain subject to examination by U.S. federal, state, and local taxauthorities. No interest expense or penalties have been assessed for the years ended December 31, 2017, 2016 and 2015. If theCompany was required to recognize interest and penalties, if any, related to unrecognized tax benefits this would be recognized asincome tax expense in the consolidated statements of operations.Portfolio and Investment ActivityAs of December 31, 2017, our portfolio consisted of investments in 47 portfolio companies with a fair value of approximately$499.9 million.During the year ended December 31, 2017, we made approximately $82.8 million of investments and had approximately$115.8 million in repayments and sales of investments resulting in net repayments and sales of76  TABLE OF CONTENTSapproximately $33.0 million for the year. During the year ended December 31, 2016, we made approximately $120.8 million ofinvestments and had approximately $163.6 million in repayments and sales resulting in net repayments and sales ofapproximately $42.8 million for the year. During the year ended December 31, 2015, we made approximately $260.6 million ofinvestments and had approximately $142.7 million in repayments and sales resulting in net investments of approximately $117.9million for the year.On 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 a 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 by the underlyingissuers 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 $6.8 million and $2.7 millionas of December 31, 2017 and 2016, respectively. For purposes of determining the fair value of the Written Call Option, wecalculated the difference in the fair value of the underlying equity investment in Eastport Holdings, LLC and the strike price ofthe Written Call Option, or intrinsic value. The time value of the Written Call Option as of December 31, 2017 and 2016 wasdetermined to be insignificant. The Written Call Option is classified as a Level 3 financial instrument. The Written Call Optionwas the only option contract granted by us during the year ended December 31, 2016, and the Written Call Option remainedoutstanding as of December 31, 2017.As of December 31, 2017, our average portfolio company investment and our largest portfolio company investment atamortized cost and fair value was approximately $9.9 million and $10.6 million, and $21.6 million and $42.9 million,respectively. As of December 31, 2017, the Company had approximately $31.2 million of cash and cash equivalents. As ofDecember 31, 2016, our average portfolio company investment and our largest portfolio company investment at amortized costand fair value was approximately $9.7 million and $10.2 million, and $22.1 million and $29.9 million, respectively. As ofDecember 31, 2016, the Company had approximately $36.3 million of cash and cash equivalents.As of December 31, 2017, our debt investment portfolio, which represented 75.5% of our total portfolio, had a weightedaverage annualized yield of approximately 12.8%, exclusive of the impact of our non-accrual debt investments. As of December31, 2017, 51.7% of our debt investment portfolio was bearing a fixed rate of interest. As of December 31, 2016, our debtinvestment portfolio, which represented 82.8% of our total portfolio, had a weighted average annualized yield of approximately13.2%, exclusive of the impact of our non-accrual debt investments. As of December 31, 2016, 57.1% of our debt investmentportfolio was bearing a fixed rate of interest.The weighted annualized yield is calculated based on the effective interest rate as of period end, divided by the fair value ofour accruing debt investments. The weighted average annualized yield of our debt investments is not the same as a return oninvestment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment ofall of our fees and expenses. There can be no assurance that the weighted average yield will remain at its current level.77  TABLE OF CONTENTSThe following table summarizes the amortized cost and the fair value of investments and cash and cash equivalents as ofDecember 31, 2017 (dollars in thousands): Investments atAmortized Cost Percentageof Total Investments atFair Value Percentageof TotalFirst Lien Debt $257,147 51.8% $243,489 45.8% Second Lien Debt 32,465 6.6 30,794 5.8 Subordinated Debt 120,235 24.2 103,385 19.5 Equity and Warrants 55,180 11.1 122,271 23.0 Cash and Cash Equivalents 31,221 6.3 31,221 5.9 Total $496,248 100.0% $531,160 100.0% 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% The following table shows the portfolio composition by industry grouping at fair value (dollars in thousands): December 31, 2017 December 31, 2016 Investments atFair Value Percentage ofTotal Portfolio Investments atFair Value Percentage ofTotal PortfolioBusiness Services $70,122 14.0% $51,731 9.5% Consumer Products 29,612 5.9 30,209 5.6 Oil & Gas Services 27,774 5.6 15,083 2.8 Financial Services 26,920 5.4 25,553 4.7 Information Technology 24,761 5.0 24,232 4.5 Healthcare 21,368 4.3 8,582 1.6 Specialty Retail 20,713 4.1 22,067 4.1 Building Products 17,879 3.6 18,152 3.3 Footwear Retail 17,748 3.6 19,236 3.5 Sales & Marketing Services 17,388 3.5 16,376 3.0 Food Product Manufacturer 16,222 3.2 16,599 3.1 Industrial Equipment Rental 15,603 3.1 10,755 2.0 Retail 15,000 3.0 15,000 2.8 Computer Supply Retail 12,551 2.5 12,183 2.2 Textile Equipment Manufacturer 12,505 2.5 13,134 2.4 IT Consulting 12,231 2.4 — — Fuel Transportation Services 11,588 2.3 10,303 1.9 Transportation 11,560 2.3 16,856 3.1 Government Services 10,320 2.1 — — Automobile Part Manufacturer 9,285 1.9 10,076 1.9 Healthcare Management 9,014 1.8 10,851 2.0 Professional and Personal Digital Imaging 8,810 1.8 9,000 1.7 Refrigeration/HVAC Services 8,736 1.7 — — 78  TABLE OF CONTENTS December 31, 2017 December 31, 2016 Investments atFair Value Percentage ofTotal Portfolio Investments atFair Value Percentage ofTotal PortfolioOil & Gas Engineering and ConsultingServices $8,528 1.7% $4,500 0.8% QSR Franchisor 7,650 1.5 8,497 1.6 Conglomerate 7,645 1.5 8,374 1.5 Bowling Products 7,186 1.4 12,503 2.3 Produce Distribution 6,170 1.2 6,182 1.1 Farming 5,581 1.1 11,779 2.2 Advertising & Marketing Services 5,157 1.0 3,910 0.7 Restaurant 4,880 1.0 4,857 0.9 Medical Device Distributor 4,713 0.9 25,768 4.8 Online Merchandise Retailer 3,755 0.8 4,169 0.8 Consumer Electronics 3,498 0.7 20,818 3.8 Home Repair Parts Manufacturer 2,767 0.6 1,408 0.3 Replacement Window Manufacturer 1,880 0.4 2,571 0.5 Household Product Manufacturer 1,316 0.3 1,001 0.2 Data Processing & Digital Marketing 1,035 0.2 1,015 0.2 In-Home Healthcare Services 174 0.1 446 0.1 Automotive Chemicals & Lubricants 101 0.0 2,230 0.4 Retail Display & Security Services 100 0.0 537 0.1 Dental Practice Management 93 0.0 109 0.0 Home Décor Manufacturer — — 14,670 2.7 Printing Services — — 12,761 2.4 Bakery Supplies Distributor — — 10,776 2.0 Construction Services — — 9,500 1.7 Specialty Clothing — — 5,011 0.9 Satellite Communications — — 5,000 0.9 Industrial Specialty Services — — 4,750 0.9 Specialty Defense Contractor — — 1,532 0.3 Entertainment — — 987 0.2 Total $499,939 100.0% $541,639 100.0% With the exception of the international investment holdings noted below, all investments made by the Company as ofDecember 31, 2017 and December 31, 2016 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, 2017 and December 31, 2016 (dollars in thousands): At December 31, 2017 At December 31, 2016 Investments atFair Value Percentage ofTotal Portfolio Investments atFair Value Percentage ofTotal PortfolioSouth $254,829 51.0% $257,162 47.5% West 107,835 21.5 85,642 15.8 Midwest 84,832 17.0 118,682 21.9 Northeast 44,428 8.9 68,613 12.7 International 8,015 1.6 11,540 2.1 Total $499,939 100.0% $541,639 100.0% In addition to various risk management tools, our Investment Advisor uses an investment rating system to characterize andmonitor our expected level of return on each investment in our portfolio.79  TABLE OF CONTENTSAs 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 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.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. The investment rating of a particular investment should not, however, be deemed to be a guarantee of the investment’sfuture performance.The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of December31, 2017 and 2016 (dollars in thousands): As of December 31, 2017 As of December 31, 2016Investment Rating Investments atFair Value Percentage ofTotalInvestments Investments atFair Value Percentage ofTotalInvestments1 $191,204 38.2% $183,826 33.9% 2 186,445 37.3 215,058 39.7 3 97,309 19.5 125,381 23.2 4 24,981 5.0 17,374 3.2 5 — — — — Total $499,939 100.0% $541,639 100.0% As of December 31, 2017, we had debt investments in four portfolio companies on non-accrual status with an amortized cost of$50.1 million and a fair value of $25.0 million, which represented 10.8% and 5.0% of the investment portfolio, respectively. As ofDecember 31, 2016, we had debt investments in three portfolio companies on non-accrual status with amortized cost of $29.5million and a fair value of $17.4 million, which represented 5.7% and 3.2% of the investment portfolio, respectively.80  TABLE OF CONTENTSCapitala Senior Liquid Loan Fund I, LLCOn March 24, 2015, the Company and Trinity Universal Insurance Company (“Trinity”), a subsidiary of Kemper Corporationentered into a limited liability company agreement to co-manage CSLLF. The purpose and design of the joint venture was toinvest primarily in broadly syndicated senior secured loans to middle-market companies, which were purchased on the secondarymarket. Capitala and Trinity committed to provide $25.0 million of equity to CSLLF, with Capitala providing $20.0 million andTrinity providing $5.0 million, resulting in an 80%/20% economic ownership between the two parties. The board of directors andinvestment committee of CSLLF were split 50/50 between Trinity and Capitala, resulting in equal voting power between the twoentities. In September 2016, the Company and Trinity elected to wind-down operations of CSLLF. During the fourth quarter of2016, CSLLF sold all referenced assets underlying the total return swap (“TRS”) and declared final distributions, inclusive ofdividends and return of capital, in December 2016.Because the TRS was wound down in a prior period, only comparative period disclosures are included herein. For the yearsended December 31, 2016 and December 31, 2015, the Company received $1.8 million and $0.9 million, respectively, in dividendincome from its equity interest in CSLLF. For the year ended December 31, 2016, CSLLF declared a return of capital distributionto the Company in the amount of $20.0 million, which included $19.9 million in cash received in December 2016, and $0.1million 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, CSLLF had posted $0.0 million in collateral to Bank of America in relation to the TRS, which wasrecorded on CSLLF’s statements of assets and liabilities as cash held as collateral on total return swap. The cash collateralrepresented CSLLF’s maximum credit exposure as of December 31, 2016.81  TABLE OF CONTENTSIn connection with the TRS, CSLLF made customary representations and warranties and was required to comply with variouscovenants, reporting requirements and other customary requirements for similar transactions governed by an ISDA 2002 MasterAgreement.CSLLF’s receivable due on the TRS represents realized amounts from payments on underlying loans in the total return swapportfolio. At December 31, 2016, the receivable due on TRS was $0.1 million, and is recorded on CSLLF’s statement of assets andliabilities below. CSLLF does not offset collateral posted in relation to the TRS with any unrealized appreciation or depreciationoutstanding in the statement of assets and liabilities as of December 31, 2016.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. Transactions in TRS contracts during the year ended December 31, 2015 resulted in $1.4million in realized gains and $(2.8) million in unrealized depreciation, which is recorded on CSLLF’s statements of operationsbelow.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 certain summarized financial information for CSLLF as of December 31, 2016 and for the years ended December 31,2016, and December 31, 2015 (dollars in thousands):Selected Statements of Assets and Liabilities: As ofDecember 31,2016ASSETS Receivable due on Total Return Swap $82 Total assets $82 LIABILITIES Distribution payable $82 Total liabilities $82 NET ASSETS Total net assets $— Total liabilities and net assets $82 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) 82  TABLE OF CONTENTSResults of OperationsOur operating results for the years ended December 31, 2017, 2016 and 2015 are as follows (dollars in thousands): For the Year Ended December 31, 2017 2016 2015Total investment income $51,089 $68,312 $63,976 Total expenses, net of fee waivers 35,565 39,272 38,649 Net investment income 15,524 29,040 25,327 Total realized gain (loss) from investments (24,189) (22,766) 5,436 Net unrealized appreciation (depreciation) on investments 7,049 5,594 (16,913) Net unrealized depreciation on written call option (4,079) (2,716) — Tax provision (1,289) — — Net increase (decrease) in net assets resulting fromoperations $(6,984) $9,152 $13,850 Investment incomeThe composition of our investment income for the years ended December 31, 2017, 2016 and 2015 was as follows (dollars inthousands): For the Year Ended December 31, 2017 2016 2015Interest income $40,462 $54,990 $50,586 Fee income 2,027 4,118 5,944 Payment-in-kind interest and dividend income 7,143 6,300 5,084 Dividend income 1,221 2,792 2,101 Interest from cash and cash equivalents 111 27 5 Other income 125 85 256 Total investment income $51,089 $68,312 $63,976 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 of discounts paid for purchased loans are included in interestincome as an adjustment to yield. As a general rule, our interest income and PIK interest and PIK dividend income are recurring innature.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 fee income is typically non-recurring for each investment, most ofour 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.For the year ended December 31, 2017, total investment income decreased by $17.2 million, or 25.2%, compared to the yearended December 31, 2016. The decrease from the prior year was driven primarily by a $14.5 million decline in interest income,from $55.0 million for the year ended December 31, 2016, to $40.5 million for the year ended December 31, 2017. The decline ininterest income was caused by a decline in average outstanding debt investments, and an increase in average non-accrual debtinvestments. Fee income declined by $2.1 million compared to the prior year, from $4.1 million for the year ended December 31,2016 to $2.0 million for the year ended December 31, 2017. For the year ended December 31, 2017, we generated $1.2 million inorigination fees from new deployments and $0.8 million in other fees. Comparatively, for the83  TABLE OF CONTENTSyear ended December 31, 2016, we generated $2.1 million in origination fees from new deployments and $2.0 million in otherfees. Dividend income decreased from $2.8 million for the year ended December 31, 2016 to $1.2 million for the year endedDecember 31, 2017, mostly driven by a $1.8 million decrease in dividends paid by CSLLF. PIK income increased $0.8 millioncompared to the prior year, from $6.3 million for the year ended December 31, 2016 to $7.1 million for the year ended December31, 2017. The increase in PIK income was primarily due to investments restructured during the year ended December 31, 2017 thatprovided for an increase in the PIK rate being charged.For the year ended December 31, 2016, total investment income increased by $4.3 million, or 6.8%, compared to the yearended December 31, 2015. The increase from the prior period relates primarily to higher interest and PIK income from a largeraverage investment portfolio. For the year ended December 31, 2016, we generated $2.1 million in origination fees from newdeployments and $2.0 million in other fees. Comparatively, for the year ended December 31, 2015, we generated $3.5 million inorigination fees from new deployments and $2.4 million in other fees. The year over year decline in origination fee income wasdue to a decline in investment originations. Dividend income increased from $2.1 million for the year ended December 31, 2015to $2.8 million for the year ended December 31, 2016, mostly driven by a $0.9 million increase in dividends paid by CSLLF.Operating expensesThe composition of our expenses for the years ended December 31, 2017, 2016 and 2015 was as follows (dollars in thousands): For the Year Ended December 31, 2017 2016 2015Interest and financing expenses $18,825 $19,711 $19,022 Loss on extinguishment of debt 2,732 — — Base management fee 9,780 10,588 10,590 Incentive fees, net of incentive fee waiver 350 5,169 4,985 General and administrative expenses 3,878 3,804 4,052 Total expenses, net of fee waivers $35,565 $39,272 $38,649 For the year ended December 31, 2017, operating expenses decreased by $3.7 million, or 9.4%, compared to the year endedDecember 31, 2016. For the year ended December 31, 2017, we recognized a $2.7 million loss on extinguishment of debt relatedto repayment of the 7.125% fixed-rate notes due 2021. The increase in expenses related to the loss on extinguishment of debt wasoffset by (i) a decline in base management fees, from $10.6 million for the year ended December 31, 2016, to $9.8 million for theyear ended December 31, 2017 due to lower average assets under management, (ii) a decline in incentive fees, net of incentive feewaiver, from $5.2 million for the year ended December 31, 2016 to $0.4 million for the year ended December 31, 2017, due tolower pre-incentive fee net investment income, and (iii) a decline in interest and financing expenses, from $19.7 million for theyear ended December 31, 2016 to $18.8 million for the year ended December 31, 2017, primarily due to a lower average debtbalance outstanding during the period.For the year ended December 31, 2016, operating expenses increased by $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 senior secured revolving credit agreement (the “Credit Facility”) with ING Capital,LLC, as administrative agent, arranger, and bookrunner, and the lender party thereto for the year ended December 31, 2016compared to the year ended December 31, 2015. Other expenses remained relatively unchanged year over year.Net realized gains (losses) on sales of investmentsDuring the years ended December 31, 2017, 2016, and 2015, we recognized $(24.2) million, $(22.8) million and $5.4 millionof net realized gains (losses) on our portfolio investments, respectively.84  TABLE OF CONTENTSNet unrealized appreciation (depreciation) on investmentsNet change in unrealized appreciation (depreciation) on investments reflects the net change in the fair value of our investmentportfolio. For the years ended December 31, 2017, 2016, and 2015, we had $7.0 million, $5.6 million and $(16.9) million ofunrealized appreciation (depreciation) on investments, respectively.Net unrealized depreciation on Written Call optionFor the years ended December 31, 2017, 2016 and 2015 we had net unrealized depreciation on the Written Call Option of $4.1million, $2.7 million, and $0.0 million, respectively.Tax provisionFor the year ended December 31, 2017, we recorded a tax provision of $1.3 million. For the years ended December 31, 2016and 2015, we recorded a tax provision of $0.0 million.Changes in net assets resulting from operationsFor the years ended December 31, 2017, 2016, and 2015 we recorded a net increase (decrease) in net assets resulting fromoperations of $(7.0) million, $9.2 million, and $13.9 million, respectively. Based on the weighted average shares of common stockoutstanding for the years ended December 31, 2017, 2016, and 2015 our per share net increase (decrease) in net assets resultingfrom operations was $(0.44), $0.58 and $0.91, 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 31,2017 and December 31, 2016, and for the three years in the period then ended.CableOrganizer Acquisition, LLCCableOrganizer Acquisition, 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 Acquisition,LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was$1.8 million, $1.9 million, and $0.4 million for the years ended December 31, 2017, December 31, 2016, and December 31, 2015,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 PIK dividends, fees, and unrealized appreciation (depreciation), was $11.4million and $14.3 million for the years ended December 31, 2017 and December 31, 2016, respectively. The Company invested inthe portfolio company in January 2016. As such, comparative financial information for the year ended December 31, 2015 is notpresented.Kelle’s Transport Service, LLCKelle’s Transport Service, LLC, a Delaware limited liability company organized on March 28, 2014, provides temperaturesensitive transportation services throughout North America. The income (loss) the Company generated from Kelle’s TransportService, LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees, realized losses, and unrealizedappreciation (depreciation), was $(6.9) million, $(1.2) million, and $3.0 million for the years ended December 31, 2017, December31, 2016, and December 31, 2015, respectively.85  TABLE OF CONTENTSNavis 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 PIK dividends, fees, and unrealized appreciation (depreciation) was $0.7 million, $1.9million, and $4.2 million for the years ended December 31, 2017, December 31, 2016, and December 31, 2015, respectively.On-Site Fuel Services, Inc.On-Site Fuel Services, Inc. is a 100% owned subsidiary of On-Site Fuel Holdings, Inc., which was incorporated in Delaware onDecember 19, 2011. On-Site Fuel Services, Inc. provides fueling services for commercial and government vehicle fleetsthroughout the southeast U.S. The income (loss) the Company generated from On-Site Fuel Service, Inc., which includes allinterest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $0.1 million, $4.5million, and $(3.2) million for the years ended December 31, 2017, December 31, 2016, and December 31, 2015, respectively.The summarized financial information of our unconsolidated subsidiaries was as follows (dollars in thousands): As ofBalance Sheet – CableOrganizer Acquisition, LLC December 31,2017 December 31,2016Current assets $5,286 $5,589 Noncurrent assets 9,664 9,872 Total assets $14,950 $15,461 Current liabilities $5,207 $4,219 Noncurrent liabilities 12,373 11,882 Total liabilities $17,580 $16,101 Total deficit $(2,630) $(640) For the year endedStatements of Operations – CableOrganizer Acquisition, LLC December 31,2017 December 31,2016 December 31,2015Net sales $27,134 $23,277 $25,315 Cost of goods sold 19,778 15,715 16,878 Gross profit $7,356 $7,562 $8,437 Other expenses $9,345 $10,344 $10,008 Loss before income taxes (1,989) (2,782) (1,571) Net loss $(1,989) $(2,782) $(1,571) As ofBalance Sheet – Eastport Holdings, LLC December 31,2017 December 31,2016Current assets $94,186 $96,175 Noncurrent assets 185,087 145,802 Total assets $279,273 $241,977 Current liabilities $142,250 $157,622 Noncurrent liabilities 70,765 41,355 Total liabilities $213,015 $198,977 Total equity $66,258 $43,000 86  TABLE OF CONTENTS For the year endedStatement of Operations – Eastport Holdings, LLC December 31,2017 December 31,2016Net sales $556,895 $499,986 Cost of goods sold 411,167 377,036 Gross profit $145,728 $122,950 Other expenses $134,231 $111,677 Income before income taxes 11,497 11,273 Income tax provision 628 — Net income $10,869 $11,273 As ofBalance Sheet – Kelle’s Transport Service, LLC December 31,2017 December 31,2016Current assets $6,734 $8,554 Noncurrent assets 11,801 13,237 Total assets $18,535 $21,791 Current liabilities $11,092 $4,655 Noncurrent liabilities 17,693 14,962 Total liabilities $28,785 $19,617 Total equity (deficit) $(10,250) $2,174 For the year endedStatements of Operations – Kelle’s Transport Service, LLC December 31,2017 December 31,2016 December 31,2015Net sales $51,405 $65,471 $66,942 Cost of goods sold 49,343 55,859 54,027 Gross profit $2,062 $9,612 $12,915 Other expenses $14,077 $12,804 $12,071 Income (loss) before income taxes (12,015) (3,192) 844 Income tax provision 5 44 50 Net income (loss) $(12,020) $(3,236) $794 As ofBalance Sheet – Navis Holdings, Inc. December 31,2017 December 31,2016Current assets $4,721 $4,655 Noncurrent assets 2,950 3,446 Total assets $7,671 $8,101 Current liabilities $1,941 $2,448 Noncurrent liabilities 6,973 6,719 Total liabilities $8,914 $9,167 Total deficit $(1,243) $(1,066) 87  TABLE OF CONTENTS For the year endedStatements of Operations – Navis Holdings, Inc. December 31,2017 December 31,2016 December 31,2015Net sales $13,948 $17,803 $17,076 Cost of goods sold 8,724 10,933 11,087 Gross profit $5,224 $6,870 $5,989 Other expenses $4,647 $5,070 $5,414 Income before income taxes 577 1,800 575 Income tax provision 229 701 343 Net income $348 $1,099 $232 As ofBalance Sheet – On-Site Fuel Services, Inc. December 31,2017 December 31,2016Current assets $28,064 $13,079 Noncurrent assets 26,807 16,314 Total assets $54,871 $29,393 Current liabilities $32,626 $16,498 Noncurrent liabilities 34,515 19,903 Total liabilities $67,141 $36,401 Total deficit $(12,270) $(7,008) For the year endedStatements of Operations – On-Site Fuel Service, Inc. December 31,2017 December 31,2016 December 31,2015Net sales $157,774 $110,412 $114,137 Cost of goods sold 149,436 101,714 106,668 Gross profit $8,338 $8,698 $7,469 Other expenses $13,600 $13,682 $13,592 Loss before income taxes (5,262) (4,984) (6,123) Income tax provision — 14 1,967 Net loss $(5,262) $(4,998) $(8,090) 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 stockholders, 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 October 17, 2014, we entered into the Credit Facility. On June 16, 2017, we entered into an amendment to our CreditFacility with ING Capital, LLC (the “Amendment”). Pursuant to the Amendment, the Credit Facility currently provides forborrowings up to $114.5 million and may be increased up to $200.0 million pursuant to its “accordion” feature. The CreditFacility matures on June 16, 2021. As of December 31, 2017, we had $9.0 million outstanding and $105.5 million available underthe Credit Facility.On April 13, 2015, we completed an underwritten offering of 3,500,000 shares of our common stock at a public offering priceof $18.32 per share. The total proceeds received in the offering net of underwriting discounts and offering costs wereapproximately $61.7 million.On May 16, 2017, we issued $70.0 million in aggregate principal amount of 6.0% fixed-rate notes due May 31, 2022 (the“2022 Notes”). On May 25, 2017, we issued an additional $5.0 million in aggregate principal amount of the 2022 Notes pursuantto a partial exercise of the underwriters’ overallotment option. The 2022 Notes will mature on May 31, 2022, and may beredeemed in whole or in part at any time or from time to time at our option on or after May 31, 2019 at a redemption price equal to100% of the outstanding88  TABLE OF CONTENTSprincipal, plus accrued and unpaid interest. Interest is payable quarterly beginning August 31, 2017. The 2022 Notes are listed onthe NASDAQ Global Select Market under the trading symbol “CPTAL” with a par value $25.00 per share.On May 26, 2017, we issued $50.0 million in aggregate principal amount of 5.75% fixed-rate convertible notes due on May31, 2022 (the “2022 Convertible Notes”). On June 26, 2017, we issued an additional $2.1 million in aggregate principal amountof the 2022 Convertible Notes pursuant to a partial exercise of the underwriters’ overallotment option. Interest is payable quarterlybeginning August 31, 2017. The 2022 Convertible Notes are listed on the NASDAQ Capital Market under the trading symbol“CPTAG” with a par value $25.00 per share.As of December 31, 2017, 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 1934 Act, with respect to Fund II and Fund III. We intend to comply with theconditions of the order.As of December 31, 2017, we had $31.2 million in cash and cash equivalents, and our net assets totaled $221.9 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, 2017 are as follows (dollars in thousands): Contractual Obligations Payments Due by Period Less Than1 Year 1 – 3Years 3 – 5Years More Than5 Years TotalSBA Debentures $— $24,000 $121,700 $25,000 $170,700 2022 Notes — — 75,000 — 75,000 2022 Convertible Notes — — 52,088 — 52,088 Credit Facility — — 9,000 — 9,000 Total Contractual Obligations $— $24,000 $257,788 $25,000 $306,788 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 income89  TABLE OF CONTENTS(during the calendar year) plus 98.2% of our net capital gain income (during each 12-month period ending on October 31) plusany net ordinary income and capital gain net income for preceding years that were not distributed during such years and on whichwe paid no U.S. federal income tax to avoid a U.S. federal excise tax. We made quarterly distributions to our stockholders for thefirst four full quarters subsequent to our IPO. To the extent we have income available, we have made and intend to make monthlydistributions thereafter. Our monthly stockholder distributions, if any, will be determined by our Board on a quarterly basis. Anydistribution to our stockholders will be declared out of assets legally 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 from January 2, 2015 through December 31, 2017: 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 April 3, 2017 April 19, 2017 April 27, 2017 0.1300 April 3, 2017 May 23, 2017 May 29, 2017 0.1300 April 3, 2017 June 24, 2017 June 29, 2017 0.1300 July 3, 2017 July 21, 2017 July 28, 2017 0.1300 July 3, 2017 August 23, 2017 August 30, 2017 0.1300 July 3, 2017 September 20, 2017 September 28, 2017 0.1300 October 2, 2017 October 23, 2017 October 30, 2017 0.0833 October 2, 2017 November 21, 2017 November 29, 2017 0.0833 October 2, 2017 December 20, 2017 December 28, 2017 0.0833 Total Distributions Declared andDistributed for 2017 $1.42 90  TABLE OF CONTENTS 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 for 2016 $1.80 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 for 2015 $2.38 (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. Joseph B. Alala, our chief executiveofficer and chairman of our Board, is the managing partner and chief investment officer of the Investment Advisor, and M. HuntBroyhill, a member of our Board, has an indirect controlling interest in the Investment Advisor.91  TABLE OF CONTENTSIn 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 Credit FundV, L.P. (“Fund V”); a private investment limited partnership providing financing solutions to lower middle-market and traditionalmiddle-market companies. 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 (the “Order”)permitting this relief. Pursuant to the Order, we are permitted to co-invest in such investment opportunities with our affiliates if a“required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions inconnection with a co-investment transaction, including, but not limited to, that (1) the terms of the potential co-investmenttransaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involveoverreaching in respect of us or our stockholders on the part of any person concerned, and (2) the potential co-investmenttransaction is consistent with the interests of our stockholders and is consistent with our then-current investment objective andstrategies.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, 2017, the Company had outstanding unfunded commitments related to debt investments in existingportfolio companies of $3.1 million (Portrait Studio, LLC), $2.0 million (CIS Secure Computing, Inc.), $1.0 million (Kelle’sTransport Service, LLC), and $0.7 million (U.S. Well Services, LLC). As of December 31, 2016, the Company had outstandingunfunded commitments related to debt investments in an existing portfolio company of $1.2 million (On-Site Fuel Services, Inc.).In addition to unfunded commitments related to debt investments, the Company also has extended a guaranty on behalf of oneof our portfolio companies, whereby we have guaranteed $1.9 million of obligations92  TABLE OF CONTENTSof Kelle’s Transport Service, LLC. As of December 31, 2017 we have not been required to make payments on this or any previousguaranties, and we consider the credit risks to be remote and the fair value of this guaranty to be immaterial.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 2, 2018, our Board declared the following distributions: Date Declared Record Date Payment Date Amount PerShareJanuary 2, 2018 January 22, 2018 January 30, 2018 $0.0833 January 2, 2018 February 20, 2018 February 27, 2018 0.0833 January 2, 2018 March 23, 2018 March 29, 2018 0.0833 Total Distributions Declared for Fiscal2018 $0.25 Portfolio ActivityOn January 2, 2018, the Company invested $15.0 million in first lien debt and $0.5 million in membership units of US BathGroup, LLC. The debt investment has a yield of LIBOR + 9.0% with a 1.0% floor.On January 19, 2018, the Company received $7.2 million in cash repayment for its first lien debt investment in BrunswickBowling Products, Inc., repaid at par.93  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, 2017, we did not engage in hedging activities.As of December 31, 2017, we held 21 securities bearing a variable rate of interest. Our variable rate investments representapproximately 48.3% of the fair value of total debt investments. As of December 31, 2017, 8.5% of variable rate securities wereyielding interest at a rate equal to the established interest rate floor or interest rate ceiling and 91.5% of variable rate securitieswere yielding interest at a rate above its interest rate floor, below its interest rate ceiling, or were not subject to an interest ratefloor. As of December 31, 2017, we had $9.0 million outstanding on our Credit Facility, which has a variable rate of interest atone-month LIBOR + 3.0%. As of December 31, 2017, all of our other interest paying liabilities, consisting of $170.7 million inSBA-guaranteed debentures, $75.0 million in 2022 Notes, and $52.1 million in 2022 Convertible Notes, were bearing interest at afixed 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, 2017 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 Increase(decrease)in netincomeUp 300 basis points $5,240 $(270) $4,970 Up 200 basis points $3,486 $(180) $3,306 Up 100 basis points $1,731 $(90) $1,641 Down 100 basis points $(1,282) $91 $(1,191) Down 200 basis points $(1,361) $143 $(1,218) Down 300 basis points $(1,361) $143 $(1,218) 94  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, 2017 and December 31,2016 F-2 Consolidated Statements of Operations for the years ended December 31, 2017, December 31, 2016and December 31, 2015 F-3 Consolidated Statements of Changes in Net Assets for the years ended December 31, 2017, December31, 2016 and December 31, 2015 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2017, December 31, 2016and December 31, 2015 F-5 Consolidated Schedules of Investments as of December 31, 2017 and December 31, 2016 F-6 Notes to Consolidated Financial Statements F-18 95  TABLE OF CONTENTSReport of Independent Registered Public Accounting FirmTo the Shareholders and the Board of Directors of Capitala Finance Corp.Opinion on the Financial StatementsWe 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, 2017 and 2016, 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, 2017, and therelated notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financialstatements present fairly, in all material respects, the financial position of Capitala Finance Corp. at December 31, 2017 and 2016,the results of its operations, changes in its net assets, and its cash flows for each of the three years in the period ended December31, 2017, in conformity with U.S. generally accepted accounting principles.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express anopinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered withthe Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect tothe Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities andExchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to erroror fraud. The Company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control overfinancial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting,but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on atest basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our procedures includedconfirmation of securities owned as of December 31, 2017 and 2016 by correspondence with the custodian and directly withmanagement or designees of the portfolio companies, as applicable. Our audits also included evaluating the accounting principlesused and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financialstatements. We believe that our audits provide a reasonable basis for our opinion./s/ Ernst & Young LLPWe have served as the Company’s auditor since 2013.Charlotte, North CarolinaFebruary 27, 2018F-1  TABLE OF CONTENTSCapitala Finance Corp. Consolidated Statements of Assets and Liabilities(in thousands, except share and per share data) As of December 31,2017 December 31,2016ASSETS Investments at fair value Non-control/non-affiliate investments (amortized cost of $298,132 and$391,706, respectively) $288,374 $393,525 Affiliate investments (amortized cost of $77,336 and $39,279, respectively) 103,957 61,464 Control investments (amortized cost of $89,559 and $82,791, respectively) 107,608 86,650 Total investments at fair value (amortized cost of $465,027 and $513,776,respectively) 499,939 541,639 Cash and cash equivalents 31,221 36,281 Interest and dividend receivable 2,976 5,735 Due from related parties 95 182 Prepaid expenses 309 506 Other assets 55 72 Total assets $534,595 $584,415 LIABILITIES SBA debentures (net of deferred financing costs of $2,300 and $2,911,respectively) $168,400 $167,789 2021 Notes (net of deferred financing costs of $0 and $3,025, respectively) — 110,413 2022 Notes (net of deferred financing costs of $2,496 and $0, respectively) 72,504 — 2022 Convertible Notes (net of deferred financing costs of $1,583 and $0,respectively) 50,505 — Credit Facility (net of deferred financing costs of $1,293 and $759, respectively) 7,707 43,241 Due to related parties — 35 Management and incentive fee payable 2,172 6,426 Interest and financing fees payable 3,141 2,657 Accounts payable and accrued expenses — 536 Trade settlement payable 175 — Deferred tax liability, net 1,289 — Written call option at fair value (proceeds of $20 and $20, respectively) 6,815 2,736 Total liabilities $312,708 $333,833 Commitments and contingencies (Note 2) NET ASSETS Common stock, par value $.01, 100,000,000 common shares authorized,15,951,231 and 15,868,045 common shares issued and outstanding,respectively $160 $159 Additional paid in capital 241,027 240,184 Undistributed net investment income 15,854 22,973 Accumulated net realized losses from investments (61,982) (37,881) Net unrealized appreciation on investments, net of deferred taxes 33,623 27,863 Net unrealized depreciation on written call option (6,795) (2,716) Total net assets $221,887 $250,582 Total liabilities and net assets $534,595 $584,415 Net asset value per share $13.91 $15.79 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 2017 2016 2015INVESTMENT INCOME Interest and fee income: Non-control/non-affiliate investments $31,084 $42,667 $39,535 Affiliate investments 4,509 5,723 11,589 Control investments 6,896 10,718 5,406 Total interest and fee income 42,489 59,108 56,530 Payment-in-kind interest and dividend income: Non-control/non-affiliate investments 4,503 4,965 2,644 Affiliate investments 1,898 383 1,363 Control investments 742 952 1,077 Total payment-in-kind interest and dividend income 7,143 6,300 5,084 Dividend income: Non-control/non-affiliate investments 225 263 617 Affiliate investments 641 115 115 Control investments 355 2,414 1,369 Total dividend income 1,221 2,792 2,101 Other Income 125 85 256 Interest income from cash and cash equivalents 111 27 5 Total investment income 51,089 68,312 63,976 EXPENSES Interest and financing expenses 18,825 19,711 19,022 Loss on extinguishment of debt 2,732 — — Base management fee 9,780 10,588 10,590 Incentive fees 1,308 6,842 6,043 General and administrative expenses 3,878 3,804 4,052 Expenses before incentive fee waiver 36,523 40,945 39,707 Incentive fee waiver (See Note 7) (958) (1,673) (1,058) Total expenses, net of fee waivers 35,565 39,272 38,649 NET INVESTMENT INCOME 15,524 29,040 25,327 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS ANDWRITTEN CALL OPTION: Net realized gain (loss) from investments: Non-control/non-affiliate investments (6,682) 1,261 8,758 Affiliate investments 4,926 (24,172) (9,109) Control investments (22,433) 145 5,787 Net realized gain (loss) from investments (24,189) (22,766) 5,436 Net unrealized appreciation (depreciation) on investments: Non-control/non-affiliate investments (11,577) (11,661) (4,161) Affiliate investments 4,436 4,124 1,142 Control investments 14,190 13,131 (13,894) Net unrealized appreciation (depreciation) from investments 7,049 5,594 (16,913) Net unrealized depreciation on written call option (4,079) (2,716) — Net loss on investments and written call option (21,219) (19,888) (11,477) Tax provision (1,289) — — Total net realized and unrealized gain (loss) on investments and written calloption, net of taxes (22,508) (19,888) (11,477) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROMOPERATIONS $(6,984) $9,152 $13,850 NET INCREASE (DECREASE) IN NET ASSETS PER SHARERESULTING FROM OPERATIONS – BASIC AND DILUTED $(0.44) $0.58 $0.91 WEIGHTED AVERAGE COMMON STOCK OUTSTANDING – BASICAND DILUTED 15,903,167 15,819,175 15,210,577 DISTRIBUTIONS PAID PER SHARE $1.42 $1.80 $2.38 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,net ofDeferredTaxes NetUnrealizedDepreciationon WrittenCall Option Total Number ofShares ParValueBALANCE, 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 Net investment income — — — 15,524 — — — 15,524 Net realized loss from investments — — — — (24,189) — — (24,189) Net change in unrealizedappreciation on investments — — — — — 7,049 — 7,049 Net change in unrealizeddepreciation on written calloption — — — — — — (4,079) (4,079) Tax provision — — — — — (1,289) — (1,289) Distributions to Shareholders: Stock issued under dividendreinvestment plan 83,186 1 864 — — — — 865 Distributions declared — — — (22,576) — — — (22,576) Tax reclassification ofstockholders’ equity inaccordance with generallyaccepted accounting principles — — (21) (67) 88 — — — BALANCE, December 31, 2017 15,951,231 $160 $241,027 $15,854 $(61,982) $33,623 $(6,795) $221,887 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 2017 2016 2015CASH FLOWS FROM OPERATING ACTIVITIES Net increase (decrease) in net assets resulting from operations $(6,984) $9,152 $13,850 Adjustments to reconcile net increase (decrease) in net assets resulting fromoperations to net cash provided by (used in) operating activities: Purchase of investments (82,750) (120,844) (260,640) Repayments and sales of investments 115,810 163,564 142,713 Net realized (gain) loss on investments 24,189 22,766 (5,436) Net unrealized (appreciation) depreciation on investments (7,049) (5,594) 16,913 Payment-in-kind interest and dividends (7,143) (6,300) (5,084) Accretion of original issue discount on investments (1,357) (2,775) (585) Proceeds from written call option — 20 — Net unrealized depreciation on written call option 4,079 2,716 — Amortization of deferred financing fees 2,100 2,149 1,966 Loss on extinguishment of debt 2,732 — — Tax provision 1,289 — — Changes in assets and liabilities: Interest and dividend receivable 2,759 (345) (2,277) Due from related parties 87 74 262 Prepaid expenses 197 (3) 12 Other assets 17 36 166 Due to related parties (35) 29 (2) Management and incentive fee payable (4,254) 4,739 1,528 Interest and financing fees payable 484 (330) 85 Accounts payable and accrued expenses (536) 69 145 Trade settlement payable 175 — — NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 43,810 69,123 (96,384) CASH FLOWS FROM FINANCING ACTIVITIES Paydowns on SBA debentures — (13,500) (8,000) Proceeds from Credit Facility 9,000 29,000 105,000 Payments to Credit Facility (44,000) (55,000) (35,000) Issuance of 2022 Notes 75,000 — — Issuance of 2022 Convertible Notes 52,088 — — Repayment of 2021 Notes (113,438) — — Issuance of common stock, net of offering and underwriting costs — — 61,700 Distributions paid to shareholders (21,711) (27,372) (35,585) Repurchases of common stock under stock repurchase program — — (12,000) Deferred financing fees paid (5,809) (75) (733) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (48,870) (66,947) 75,382 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,060) 2,176 (21,002) CASH AND CASH EQUIVALENTS, beginning of year 36,281 34,105 55,107 CASH AND CASH EQUIVALENTS, end of year $31,221 $36,281 $34,105 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $15,503 $17,591 $16,349 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ANDFINANCING TRANSACTIONS Distributions paid through dividend reinvestment plan share issuances $865 $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, 2017 Portfolio Company, Country(1),(2),(3),(4) Industry Type of Investment PrincipalAmount Cost Fair Value % of NetAssetsNon-control/non-affiliated investments – 130.0% Non-control/non-affiliated investments – United States 3 Bridge Solutions, LLC IT Consulting First Lien Debt (10.38% Cash(1 month LIBOR + 9.0%, 1%Floor), Due 12/4/22) $11,250 $11,250 $11,250 5.1% 3 Bridge Solutions, LLC IT Consulting Preferred Units (965,250 units,8% PIK)(5) 971 971 0.4% 3 Bridge Solutions, LLC IT Consulting Membership Units (39,000units) 10 10 0.0% 12,231 12,231 5.5% Alternative Biomedical Solutions,LLC Healthcare First Lien Debt (11.74% Cash,Due 12/18/22)(6) 13,000 13,000 13,000 5.9% Alternative Biomedical Solutions,LLC Healthcare Membership Units (20,092units) 800 800 0.4% 13,800 13,800 6.3% American Clinical Solutions, LLC Healthcare First Lien Debt (10.5% Cash, 1%PIK, Due 6/11/20) 9,068 9,068 7,568 3.4% 9,068 7,568 3.4% American Exteriors, LLC Replacement WindowManufacturer First Lien Debt (10% PIK, Due1/1/19)(7)(8) 8,287 5,679 1,880 0.8% American Exteriors, LLC Replacement WindowManufacturer Common Stock Warrants (10%fully diluted) — — 0.0% 5,679 1,880 0.8% AmeriMark Direct, LLC Consumer Products First Lien Debt (12.75% Cash,Due 9/8/21) 19,100 18,713 19,100 8.6% 18,713 19,100 8.6% B&W Quality Growers, LLC Farming Membership Unit Warrants(91,739 Units) — 5,581 2.5% — 5,581 2.5% BigMouth, Inc. Consumer Products First Lien Debt (13.3% Cash,Due 11/14/21)(6) 9,790 9,790 9,790 4.4% BigMouth, Inc. Consumer Products Series A Preferred Stock(350,000 shares, 8% PIK)(5) 382 722 0.3% 10,172 10,512 4.7% Bluestem Brands, Inc. Online Merchandise Retailer First Lien Debt (9.07% Cash (1month LIBOR + 7.5%, 1%Floor), Due 11/7/20) 4,029 3,965 3,755 1.7% 3,965 3,755 1.7% Brunswick Bowling Products, Inc. Bowling Products First Lien Debt (8% Cash (1month LIBOR + 6%, 2% Floor),Due 5/22/20) 1,600 1,600 1,600 0.7% Brunswick Bowling Products, Inc. Bowling Products First Lien Debt (16.25% Cash(1 month LIBOR + 14.25%, 2%Floor), Due 5/22/20) 5,586 5,586 5,586 2.5% 7,186 7,186 3.2% Burke America Parts Group, LLC Home Repair Parts Manufacturer Membership Units (14 units) 5 2,767 1.2% 5 2,767 1.2% California Pizza Kitchen, Inc. Restaurant Second Lien Debt (11.57% Cash(1 month LIBOR + 10%, 1%Floor), Due 8/23/23) 5,000 4,880 4,880 2.2% 4,880 4,880 2.2% Caregiver Services, Inc. In-Home Healthcare Services Common Stock (293,186shares) 258 54 0.0% Caregiver Services, Inc. In-Home Healthcare Services Common Stock Warrants(655,908 units)(9) 264 120 0.1% 522 174 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, 2017 Portfolio Company, Country(1),(2),(3),(4) Industry Type of Investment PrincipalAmount Cost Fair Value % of NetAssetsCedar Electronics Holding Corp. Consumer Electronics Subordinated Debt (12% Cash,Due 12/26/20)(7) $21,550 $21,550 $3,498 1.6% 21,550 3,498 1.6% CIS Secure Computing, Inc. Government Services First Lien Debt (9.88% Cash (1month LIBOR + 8.5%, 1%Floor), 1% PIK, Due9/14/22)(10) 9,116 9,116 9,116 4.1% CIS Secure Computing, Inc. Government Services Common Stock (46,163 shares) 1,000 1,204 0.5% 10,116 10,320 4.6% Corporate Visions, Inc. Sales & Marketing Services Subordinated Debt (9% Cash,2% PIK, Due 11/29/21) 18,159 18,159 16,995 7.7% Corporate Visions, Inc. Sales & Marketing Services Common Stock (15,750 shares) 1,575 393 0.2% 19,734 17,388 7.9% Currency Capital, LLC Financial Services First Lien Debt (12.38% Cash (1month LIBOR + 11%, 0.50%Floor) Due 1/20/22)(11) 17,000 17,000 17,000 7.7% Currency Capital, LLC Financial Services Class A Preferred Units(2,000,000 units)(11) 2,000 1,905 0.9% 19,000 18,905 8.6% Flavors Holdings, Inc. Food Product Manufacturer First Lien Debt (7.44% Cash (3month LIBOR + 5.75%, 1%Floor), Due 4/3/20) 6,700 6,589 5,911 2.7% Flavors Holdings, Inc. Food Product Manufacturer Second Lien Debt (11.69% Cash(3 month LIBOR + 10%, 1%Floor), Due 10/3/21) 12,000 11,740 10,311 4.6% 18,329 16,222 7.3% Nth Degree, Inc. Business Services First Lien Debt (8.38% Cash (1month LIBOR + 7%, 1% Floor),1% PIK, Due 12/14/20) 8,833 8,833 8,833 4.0% Nth Degree, Inc. Business Services First Lien Debt (12.88% Cash (1month LIBOR + 11.5%, 1%Floor), 2% PIK, Due 12/14/20) 7,200 7,200 7,200 3.2% Nth Degree, Inc. Business Services Preferred Stock (2,400 Units,10% PIK dividend)(5) 2,938 11,140 5.0% 18,971 27,173 12.2% Sequoia Healthcare Management,LLC Healthcare Management First Lien Debt (12% Cash, 4%PIK, Due 7/17/19) 9,014 8,964 9,014 4.1% 8,964 9,014 4.1% Spectra Services Holdings, LLC Refrigeration/HVAC services First Lien Debt (10% Cash, 4%PIK, Due 12/27/22) 7,450 7,450 7,450 3.4% Spectra Services Holdings, LLC Refrigeration/HVAC services Class A Units (1,283,823 units,4% Cash dividend, 11% PIKdividend)(5) 1,286 1,286 0.6% Spectra Services Holdings, LLC Refrigeration/HVAC services Class B Units (257 units) — — 0.0% 8,736 8,736 4.0% Sur La Table, Inc. Retail First Lien Debt (12% Cash, Due7/28/20) 15,000 15,000 15,000 6.8% 15,000 15,000 6.8% Taylor Precision Products, Inc. Household Product Manufacturer Series C Preferred Stock (379shares) 758 1,316 0.6% 758 1,316 0.6% Vintage Stock, Inc. Specialty Retail First Lien Debt (13.86% Cash (1month LIBOR + 12.5%, 0.5%floor), 3% PIK, Due 11/3/21) 20,713 20,713 20,713 9.3% 20,713 20,713 9.3% Vology, Inc. Information Technology Subordinated Debt (15% Cash(3 month LIBOR + 14%, 1%Ceiling), 4% PIK Due 6/30/20) 8,374 8,374 8,374 3.8% 8,374 8,374 3.8% 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, 2017 Portfolio Company, Country(1),(2),(3),(4) Industry Type of Investment PrincipalAmount Cost Fair Value % of NetAssetsWestern Windows Systems, LLC Building Products First Lien Debt (11.9% Cash,Due 7/31/20)(6) $10,500 $10,500 $10,500 4.7% Western Windows Systems, LLC Building Products Membership Units (39,860units) 3,000 7,379 3.3% 13,500 17,879 8.0% Xirgo Technologies, LLC Information Technology Subordinated Debt (11.5% Cash,Due 3/1/22) 15,750 15,750 15,750 7.1% Xirgo Technologies, LLC Information Technology Membership Units (600,000units) 600 637 0.3% 16,350 16,387 7.4% Sub Total Non-control/non-affiliated investments – United States 286,316 280,359 126.4% Non-control/non-affiliated investments – Brazil Velum Global Credit Management,LLC Financial Services First Lien Debt (15% PIK, Due12/31/17)(7)(8)(11)(12) 12,275 11,816 8,015 3.6% 11,816 8,015 3.6% Sub Total Non-control/non-affiliated investments – Brazil 11,816 8,015 3.6% Sub Total Non-control/non-affiliated investments $298,132 $288,374 130.0% Affiliate investments – 46.8% Affiliate investments – United States AAE Acquisition, LLC Industrial Equipment Rental Second Lien Debt (8% Cash, 4%PIK, Due 8/24/19)(8) $15,846 $15,846 $15,603 7.0% AAE Acquisition, LLC Industrial Equipment Rental Membership Units (2.19% fullydiluted) 17 — 0.0% AAE Acquisition, LLC Industrial Equipment Rental Warrants (37.78% fully diluted) — — 0.0% 15,863 15,603 7.0% Burgaflex Holdings, LLC Automobile Part Manufacturer Subordinated Debt (14% Cash,Due 8/9/19)(13) 3,000 3,000 3,000 1.4% Burgaflex Holdings, LLC Automobile Part Manufacturer Subordinated Debt (12% Cash,Due 8/9/19)(13) 5,828 5,828 5,828 2.6% Burgaflex Holdings, LLC Automobile Part Manufacturer Common Stock (1,253,198shares) 1,504 457 0.2% 10,332 9,285 4.2% City Gear, LLC Footwear Retail Subordinated Debt (13% Cash,Due 10/20/19)(8) 8,231 8,231 8,231 3.7% City Gear, LLC Footwear Retail Preferred Membership Units(2.78% fully diluted, 9% CashDividend)(5) 1,269 1,269 0.6% City Gear, LLC Footwear Retail Membership Unit Warrants(11.38% fully diluted) — 8,248 3.7% 9,500 17,748 8.0% GA Communications, Inc. Advertising & Marketing Services Series A-1 Preferred Stock(1,998 shares, 8% PIKDividend)(5) 2,902 3,225 1.5% GA Communications, Inc. Advertising & Marketing Services Series B-1 Common Stock(200,000 shares) 2 1,932 0.9% 2,904 5,157 2.4% J&J Produce Holdings, Inc. Produce Distribution Subordinated Debt (6% Cash,7% PIK, Due 6/16/19)(8) 6,368 6,368 6,170 2.8% 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% 7,186 6,170 2.8% LJS Partners, LLC QSR Franchisor Common Stock (1,500,000shares) 896 7,650 3.4% 896 7,650 3.4% MMI Holdings, LLC Medical Device Distributor First Lien Debt (12% Cash, Due1/31/19)(8) 2,600 2,600 2,600 1.2% MMI Holdings, LLC Medical Device Distributor Subordinated Debt (6% Cash,Due 1/31/19)(8) 400 388 400 0.2% MMI Holdings, LLC Medical Device Distributor Preferred Units (1,000 units, 6%PIK dividend)(5) 1,381 1,520 0.7% 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, 2017 Portfolio Company, Country(1),(2),(3),(4) Industry Type of Investment PrincipalAmount Cost Fair Value % of NetAssetsMMI Holdings, LLC Medical Device Distributor Common Membership Units (45units) $— $193 0.1% 4,369 4,713 2.2% MTI Holdings, LLC Retail Display & Security Services Membership Units (2,000,000units)(14) — 100 0.0% — 100 0.0% Sierra Hamilton HoldingsCorporation Oil & Gas Engineering andConsulting Services Common Stock(15,068,000 shares) 6,958 8,528 3.8% 6,958 8,528 3.8% Source Capital Penray, LLC Automotive Chemicals &Lubricants Membership Units (11.3%ownership)(14) — 101 0.0% — 101 0.0% STX Healthcare ManagementServices, Inc. Dental Practice Management Common Stock(1,200,000 shares)(14) — 93 0.0% — 93 0.0% U.S. Well Services, LLC Oil & Gas Services First Lien Debt (7.35% Cash (1month LIBOR + 6%, 1% floor),Due 2/2/22)(15) $2,299 2,299 2,299 1.0% U.S. Well Services, LLC Oil & Gas Services First Lien Debt (12.35% PIK (1month LIBOR + 11%, 1%floor), Due 2/2/22) 9,516 9,516 9,516 4.3% U.S. Well Services, LLC Oil & Gas Services Class A Units (5,680,688 Units) 6,259 15,004 6.8% U.S. Well Services, LLC Oil & Gas Services Class B Units (2,076,298 Units) 441 955 0.4% 18,515 27,774 12.5% V12 Holdings, Inc. Data Processing & DigitalMarketing Subordinated Debt(19) 813 1,035 0.5% 813 1,035 0.5% Sub Total Affiliate investments – United States $77,336 $103,957 46.8% Control investments – 48.5% Control investments – United States CableOrganizer Acquisition, LLC Computer Supply Retail First Lien Debt (12% Cash, 4%PIK, Due 5/24/18) $12,373 $12,373 $12,373 5.6% CableOrganizer Acquisition, LLC Computer Supply Retail Common Stock (21.3% fullydiluted) 1,394 118 0.1% CableOrganizer Acquisition, LLC Computer Supply Retail Common Stock Warrants (10%fully diluted) — 60 0.0% 13,767 12,551 5.7% Eastport Holdings, LLC Business Services Subordinated Debt (14.49%Cash(3 month LIBOR + 13%, 0.5%Floor), Due 4/29/20) 16,500 14,738 16,500 7.4% Eastport Holdings, LLC Business Services Membership Units (33.3%ownership)(16) 4,733 26,449 11.9% 19,471 42,949 19.3% Kelle’s Transport Service, LLC Transportation First Lien Debt (4% Cash, Due2/15/20)(17) 2,000 2,000 2,000 0.9% Kelle’s Transport Service, LLC Transportation First Lien Debt (1.46% Cash,Due 2/15/20)(8) 13,674 13,669 9,560 4.3% Kelle’s Transport Service, LLC Transportation Membership Units (27.5% fullydiluted) — — 0.0% 15,669 11,560 5.2% Micro Precision, LLC Conglomerate Subordinated Debt (10% Cash,Due 9/15/18)(8) 1,862 1,862 1,862 0.8% Micro Precision, LLC Conglomerate Subordinated Debt (14% Cash,4% PIK, Due 9/15/18)(8) 4,154 4,154 4,154 1.9% Micro Precision, LLC Conglomerate Series A Preferred Units (47units) 1,629 1,629 0.7% 7,645 7,645 3.4% 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, 2017 Portfolio Company, Country(1),(2),(3),(4) Industry Type of Investment PrincipalAmount Cost Fair Value % of NetAssetsNavis Holdings, Inc. Textile Equipment Manufacturer First Lien Debt (15% Cash, Due10/30/20)(8) $6,500 $6,500 $6,500 2.9% Navis Holdings, Inc. Textile Equipment Manufacturer Class A Preferred Stock (1,000shares, 10% Cash Dividend)(5) 1,000 1,000 0.5% Navis Holdings, Inc. Textile Equipment Manufacturer Common Stock (300,000shares) 1 5,005 2.3% 7,501 12,505 5.7% On-Site Fuel Services, Inc. Fuel Transportation Services Subordinated Debt (18% Cash,Due 12/19/18)(7)(8) 14,072 11,020 11,588 5.2% 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 (33,058 shares) 33 — 0.0% 16,696 11,588 5.2% Portrait Studio, LLC Professional and Personal DigitalImaging First Lien Debt (8.56% Cash (1month LIBOR + 7%, 2%ceiling), Due 12/31/22)(18) 1,860 1,860 0.9% Portrait Studio, LLC Professional and Personal DigitalImaging First Lien Debt (8.56% Cash (1month LIBOR + 7%, 5%ceiling), Due 12/31/22) 4,500 4,500 2.0% Portrait Studio, LLC Professional and Personal DigitalImaging Preferred Units (4,350,000Units) 2,450 2,450 1.1% Portrait Studio, LLC Professional and Personal DigitalImaging Membership Units (150,000Units) — — 0.0% 8,810 8,810 4.0% Sub Total Control investments – United States $89,559 $107,608 48.5% TOTAL INVESTMENTS – 225.3% $465,027 $499,939 225.3% Derivatives – (3.1)% Derivatives – United States Eastport Holdings, LLC Business Services Written Call Option(16) $(20) $(6,815) (3.1)% Sub Total Derivatives – United States $(20) $(6,815) (3.1)% TOTAL DERIVATIVES – (3.1)% $(20) $(6,815) (3.1)% (1)All investments valued using unobservable inputs (Level 3).(2)All investments valued by the Board of Directors.(3)All debt investments are income producing, unless otherwise noted. Equity and warrant investments are non-incomeproducing, unless otherwise noted.(4)Percentages are based on net assets of $221,887 as of December 31, 2017.(5)The equity investment is income producing, based on rate disclosed.(6)The cash rate equals the approximate current yield on our last-out portion of the unitranche facility.(7)Non-accrual investment.(8)The maturity date of the original investment has been extended.(9)The equity investment has an excercisable put option.(10)The investment has a $2.0 million unfunded commitment.(11)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, 2017, 5.0% of the Company’s total assets were non-qualifying assets.(12)The company is headquartered in Brazil. 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, 2017(13)In addition to the stated rate, the Company is charging 3% default interest on the investment.(14)The investment has been exited. The residual value reflects estimated escrow to be settled post-closing.(15)The investment has a $0.7 million unfunded commitment.(16)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, 2017, the fair value of the written calloption is approximately $6.8 million. See Note 4 to the consolidated financial statements for further detail on the written calloption transaction.(17)The investment has a $1.0 million unfunded commitment.(18)The investment has a $3.1 million unfunded commitment.(19)The investment has been exited. The residual value reflects estimated escrow and earnout to be settled post-closing. 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, 2016 Portfolio Company, Country(4),(5),(14),(15) Industry Type of Investment PrincipalAmount Cost Fair Value % of NetAssetsNon-control/non-affiliated investments – 157.1% Non-control/non-affiliated investments – United States 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, Due1/1/17)(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(1 month 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% Caregiver Services, Inc. In-Home Healthcare Services Common Stock Warrants(655,908 units)(7) 264 309 0.1% 522 446 0.2% 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, 2016 Portfolio Company, Country(4),(5),(14),(15) Industry Type of Investment PrincipalAmount Cost Fair Value % of NetAssetsCedar 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% Immersive Media Tactical Solutions,LLC Specialty Defense Contractor Subordinated Debt(Due 12/9/19)(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, Due3/31/19) 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% Nth 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% 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, 2016 Portfolio Company, Country(4),(5),(14),(15) Industry Type of Investment PrincipalAmount Cost Fair Value % of NetAssetsPortrait 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, Due7/28/20) 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% 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 – United States 380,165 381,985 152.5% Non-control/non-affiliated investments – Brazil Velum Global Credit Management,LLC Financial Services First Lien Debt (15% PIK, Due12/31/17)(1)(8) 10,553 10,553 10,553 4.2% 10,553 10,553 4.2% Sub Total Non-Control/non-affiliated investments – Brazil 10,553 10,553 4.2% Non-control/non-affiliated investments – Canada 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% Sub Total Non-Control/non-affiliated investments – Canada 988 987 0.4% Sub Total Non-control/non – affiliated investments $391,706 $393,525 157.1% Affiliate investments – 24.5% Affiliate investments – UnitedStates 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% 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, 2016 Portfolio Company, Country(4),(5),(14),(15) Industry Type of Investment PrincipalAmount Cost Fair Value % of NetAssetsBurgaflex 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, Due1/31/18)(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 – United States $39,279 $61,464 24.5% Control investments – 34.6% Control investments – UnitedStates 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% 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, 2016 Portfolio Company, Country(4),(5),(14),(15) Industry Type of Investment PrincipalAmount Cost Fair Value % of NetAssetsCableOrganizer 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, Due10/30/20)(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 (33,058 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 – United States $82,791 $86,650 34.6% TOTAL INVESTMENTS – 216.2% $513,776 $541,639 216.2% Derivatives – (1.1)% Derivatives – United States Eastport Holdings, LLC Business Services Written Call Option(11) $(20) $(2,736) (1.1)% Sub Total Derivatives – United States $(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.(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. 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, 2016(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 satisfactionof the 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%.(14)All investments valued using unobservable inputs (Level 3).(15)All investments valued by the Board of Directors. See accompanying notes to consolidated financial statements.F-17  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 1. OrganizationCapitala Finance Corp. (the “Company”, “we”, “us”, and “our”) is an externally managed non-diversified closed-endmanagement investment company incorporated in Maryland that has elected to be regulated as a business development company(“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company is an “emerging growthcompany” within the meaning of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and as such, is subject toreduced public company reporting requirements. The Company commenced operations on May 24, 2013 and completed its initialpublic offering (“IPO”) on September 30, 2013. The Company is managed by Capitala Investment Advisors, LLC (the “InvestmentAdvisor”), an investment adviser that is registered as an investment adviser under the Investment Advisers Act of 1940, asamended (the “Advisors Act”), and Capitala Advisors Corp. (the “Administrator”) provides the administrative services necessaryfor the Company to operate. For U.S. federal income tax purposes, the Company has elected to be treated, and intends to complywith the requirements to continue to qualify annually, as a regulated investment company (“RIC”) under subchapter M of theInternal Revenue Code of 1986, as amended (the “Code”).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 loans, second lien loans, subordinated loans, and, to alesser extent, equity securities issued by lower middle-market companies and traditional middle-market companies.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.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.During the fourth quarter of 2017, Florida Sidecar transferred all of its assets to Capitala Finance Corp. and was legallydissolved as a standalone partnership.The Company has formed and expects to continue to form certain consolidated taxable subsidiaries (the “TaxableSubsidiaries”), which are taxed as corporations for income tax purposes. These Taxable Subsidiaries allow the Company to makeequity investments in companies organized as pass-through entities while continuing to satisfy the requirements of a RIC underthe Code.F-18  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 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 reporting on Form 10-K and Article 6 of Regulation S-X. The consolidated financialstatements of the Company include the accounts of the Company and its wholly owned subsidiaries, including Fund II, Fund III,Florida Sidecar, and the Taxable Subsidiaries.The Company’s financial statements as of December 31, 2017 and 2016 are presented on a consolidated basis. The effects ofall intercompany transactions between the Company and its subsidiaries (Fund II, Fund III, Florida Sidecar, and the TaxableSubsidiaries) have been eliminated in consolidation. All financial data and information included in these consolidated financialstatements have been presented on the basis described above. In the opinion of management, the consolidated financial statementsreflect all adjustments that are necessary for the fair presentation of financial results as of and for the periods presented.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 investment company subsidiaries (Fund II, Fund III, Florida Sidecar, and the Taxable Subsidiaries) in its consolidatedfinancial statements. The Company did not consolidate its interest in Capitala Senior Liquid Loan Fund I, LLC (“CSLLF”) duringthe periods it was in existence because the investment was not considered a substantially wholly owned investment companysubsidiary. Further, CSLLF was a joint venture for which shared power existed relating to the decisions that most significantlyimpacted the economic performance of the entity. See Note 4 to the consolidated financial statements for a description of theCompany’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 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 theF-19  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 2. Summary of Significant Accounting Policies – (continued)Company is deemed to “Control.” “Affiliate Investments” are investments in those companies that are “Affiliated Companies” ofthe Company, as defined in the 1940 Act, other than Control Investments. “Non-Control/Non-Affiliate Investments” are thoseinvestments that are neither Control Investments nor Affiliate Investments. Generally under the 1940 Act, the Company is deemedto control a company in which it has invested if the Company owns more than 25% of the voting securities of such companyand/or has greater than 50% representation on its board or has the power to exercise control over management or policies of suchportfolio company. The Company is deemed to be an affiliate of a company in which the Company has invested if it ownsbetween 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 it reviews. In accordance with U.S.GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizesthe use of unobservable 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, 2017Note 2. Summary of Significant Accounting Policies – (continued)In estimating the fair value of portfolio investments, the Company starts with the cost basis of the investment, which includesoriginal issue discount and payment-in-kind (“PIK”) income, if any. The transaction price is typically the best estimate of fairvalue at inception. When evidence supports a subsequent change to the carrying value from the original transaction 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 for the periods held. CSLLF recorded its underlying investments at fair value on a daily basis utilizing pricing informationfrom third-party sources.The valuation methodologies summarized below are utilized by the Company in estimating fair value.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 ratios, 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 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.F-21  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 2. Summary of Significant Accounting Policies – (continued)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 interest (“PIKinterest”) provision. The PIK interest, which represents contractually deferred interest added to the loan balance that is generallydue at maturity, is recorded on an accrual basis to the extent that such amounts are expected to be collected. PIK interest is notaccrued if the Company does not expect the issuer to be able to pay all principal and interest when due.Non-accrual investments: Management reviews all loans that become 90 days or more past due, or when there is reasonabledoubt that principal or interest will be collected, for possible placement on non-accrual status. When the Company otherwise doesnot expect the borrower to be able to service its debt and other obligations, the Company will place the loan on non-accrual status,and will generally cease recognizing interest income and PIK interest on that loan for financial reporting purposes. Interestpayments received on non-accrual loans may be recognized as income or applied to principal depending upon management’sjudgment. The Company writes off any previously accrued and uncollected interest when it is determined that interest is no longerconsidered collectible. The Company may elect to cease accruing PIK interest and continue accruing interest income in caseswhere a loan is currently paying its interest income but, in management’s judgment, there is a reasonable likelihood of principalloss on the loan. Non-accrual loans are returned to accrual status when the borrower’s financial condition improves such thatmanagement 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. TheCompany holds preferred equity investments in the portfolio that contain a payment-in-kind dividend (“PIK dividends”)provision. PIK dividends, which represent contractually deferred dividends added to the equity balance, are recorded on theaccrual 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: Discounts received to par on loans purchased are capitalized and accreted into income over the life ofthe loan. Any remaining discount is accreted into income upon prepayment 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.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.F-22  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 2. Summary of Significant Accounting Policies – (continued)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, 2017, the Company had outstanding unfunded commitments related to debt investments in existingportfolio companies of $3.1 million (Portrait Studio, LLC), $2.0 million (CIS Secure Computing, Inc.), $1.0 million (Kelle’sTransport Service, LLC), and $0.7 million (U.S. Well Services, LLC). As of December 31, 2016, the Company had outstandingunfunded commitments related to debt investments in an existing portfolio company of $1.2 million (On-Site Fuel Services, Inc.).In addition to unfunded commitments related to debt investments, the Company also has extended a guaranty on behalf of oneof our portfolio companies, whereby we have guaranteed $1.9 million of obligations of Kelle’s Transport Service, LLC. As ofDecember 31, 2017 we have not been required to make payments on this or any previous guaranties, and we consider the creditrisks to be remote and the fair value of this guaranty to be immaterial.In the ordinary course of business, the Company may enter into contracts or agreements that contain indemnifications orwarranties. Future events could occur that could lead to the execution of these provisions against the Company. Based on itshistory and experience, management believes that the likelihood of such an event is remote.On December 28, 2017, an alleged shareholder filed a putative class action complaint, Paskowitz v. Capitala Finance Corp., etal., in the United States District Court for the Central District of California (case number 2:17-cv-09251-MWF-AS) (the “PaskowitzAction”), against the Company and certain of its current officers on behalf of all persons who purchased or otherwise acquired theCompany's common stock between January 4, 2016 and August 7, 2017. On January 3, 2018, another alleged shareholder filed aputative class action complaint, Sandifer v. Capitala Finance Corp., et al., in the United States District Court for the CentralDistrict of California (case number 2:18-cv-00052-MWF-AS) (the “Sandifer Action”), asserting substantially similar claims onbehalf of the same putative class and against the same defendants. The complaints in the Paskowitz Action and the SandiferAction allege certain violations of the securities laws, including, inter alia, that the defendants made certain materially false andmisleading statements and omissions regarding the Company's business, operations, and prospects. On February 2, 2018, theSandifer Action was transferred, on stipulation of the parties, to the United States District Court for the Western District of NorthCarolina (case number 3:18-cv-00063-MOC-DCK). The defendants filed a motion to transfer the Paskowitz Action to the UnitedStates District Court for the Western District of North Carolina on February 2, 2018, which remains pending. While the Companyintends to vigorously defend itself in this litigation, the outcome of these legal proceedings cannot be predicted with certainty.Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult and requires anextensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, are in the earlystages of the proceedings, and are subject to appeal. In addition, because most legal proceedings are resolved over extendedperiods of time, potential losses are subject toF-23  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 2. Summary of Significant Accounting Policies – (continued)change due to, among other things, new developments, changes in legal strategy, the outcome of intermediate procedural andsubstantive rulings and other parties' settlement posture and their evaluation of the strength or weakness of their case against us.For these reasons, we are currently unable to predict the ultimate timing or outcome of, or reasonably estimate the possible lossesor a range of possible losses resulting from, the matters described above. Based on information currently available, the Companydoes not believe that any reasonably possible losses arising from the currently pending legal matters described above will bematerial to the Company's results of operations or financial condition. However, in light of the inherent uncertainties involved insuch matters, an adverse outcome in this litigation could materially and adversely affect the Company's financial condition,results of operations or cash flows in any particular reporting period.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, 2017 and December 31, 2016.Management is of the opinion that the ultimate resolution of such claims, if any, will not materially affect the Company’sbusiness, financial position, results of operations or liquidity. Furthermore, in management’s opinion, it is not possible to estimatea range of reasonably possible losses with respect to 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 as a RIC under subchapter M of the Code and, among other things, intends to make the requisite distributions toits stockholders which will relieve the Company from 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 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.The Company’s Taxable Subsidiaries record deferred tax assets or liabilities related to temporary book versus tax differenceson the income or loss generated by the underlying equity investments held by the Taxable Subsidiaries. As of December 31, 2017,and December 31, 2016, the Company recorded a net deferred tax liability of $1.3 million and $0.0 million, respectively. For theyear ended December 31, 2017, the Company recorded a tax provision of $1.3 million. For the years ended December 31, 2016and 2015, no tax provision was recorded.In accordance with certain applicable U.S. Treasury regulations and guidance issued by the Internal Revenue Service, a RICmay treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive itsentire distribution in either cash or stock of the RIC, subject to a limitation on the aggregate amount of cash to be distributed to allstockholders, which limitation must be at least 20.0% of the aggregate declared distribution. If too many stockholders elect toreceive cash, the cash available for distribution must be allocated among the stockholders electing to receive cash (with thebalanceF-24  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 2. Summary of Significant Accounting Policies – (continued)of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive the lesser of (a) the portion ofthe distribution such stockholder has elected to receive in cash or (b) an amount equal to his or her entire distribution times thepercentage limitation on cash available for distribution. If these and certain other requirements are met, for U.S federal income taxpurposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead ofstock. For income tax purposes, the Company has paid distributions on its common stock from ordinary income in the amount of$25.2 million, $24.5 million, and $25.1 million during the tax years ended August 31, 2017, 2016 and 2015, 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, 2017 andDecember 31, 2016, 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 tax years ended August 31, 2017, 2016 and 2015, and 2014 remain subject to examination by U.S. federal, state, and localtax authorities. No interest expense or penalties have been assessed as of December 31, 2017 and 2016. If the Company wasrequired to recognize interest and penalties, if any, related to unrecognized tax benefits this would be recognized as income taxexpense in the consolidated statements 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.The Company has adopted an “opt out” dividend reinvestment plan (“DRIP”) for the Company’s common stockholders. As aresult, if the Company declares a distribution, then stockholders’ cash distributions will be automatically reinvested in additionalshares of the Company’s common stock unless a stockholder specifically “opts out” of our DRIP. If a stockholder opts out, thatstockholder will receive cash distributions. Although distributions paid in the form of additional shares of our common stock willgenerally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, stockholders participating inthe Company’s DRIP will not receive any corresponding cash distributions with which to pay any such applicable taxes.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 legalF-25  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 2. Summary of Significant Accounting Policies – (continued)uncertainties. Prices of investments may be volatile, and a variety of factors that are inherently difficult to predict, such asdomestic or international economic and political developments, may significantly affect the results of the Company’s activitiesand the value of its investments. In addition, the value of the Company’s portfolio may fluctuate as the general level of interestrates 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 October 2016, the SEC adopted new rules and amended existing rules (together, “final rules”) intended to modernize thereporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X andrequire standardized, enhanced disclosures about derivatives in investment company financial statements, as well as otheramendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. Management has adopted theamendments to Regulation S-X and included required disclosures in the Company’s consolidated financial statements and relateddisclosures.In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (AccountingStandards Codification (“ASC”) Topic 606) (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirementsunder ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the ASC. The core principle of theguidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amountthat reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The new guidancewill significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capitalmarkets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue thatis recognized. The new guidance will be effective for the annual reporting period beginning after December 15, 2017, includinginterim periods within that reporting period. The Company completed its initial assessment in evaluating the potential impact onits consolidated financial statements and based on its initial assessment, determined that its financial contracts are excluded fromthe scope of ASU 2014-09. As a result of the scope exception for financial contracts, the Company's management has determinedthat there will be no material changes to the recognition timing and classification of revenues and expenses; additionally, theCompany's management does not expect the adoption of ASU 2014-09 to have a significant impact on its consolidated financialstatement disclosures upon adoption.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 the Company’s subsidiaries that are licensed by the SBA under the SBIC Act, theCompany offers customized financing to business owners, management teamsF-26  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 4. Investments and Fair Value Measurements – (continued)and financial sponsors for change of ownership transactions, recapitalizations, strategic acquisitions, business expansion and othergrowth initiatives. The Company invests in first lien loans, second lien loans, and subordinated loans. Most of the Company’sdebt investments are coupled with equity interests, whether in the form of detachable “penny” warrants or equity co-investmentsmade pari-passu with our borrowers’ financial sponsors. As of December 31, 2017, our portfolio consisted of investments in 47portfolio companies with a fair value of approximately $499.9 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. Unitranche debt, a form of first lien loan, typically involves issuing one debt security that blends the risk andreturn profiles of both senior secured and subordinated debt in one debt security, bifurcating the loan into a first-out tranche andlast-out tranche. As of December 31, 2017, 13.7% of our first lien loans consisted of last-out loans. In some cases, first lien loansmay be subordinated, solely with respect to the payment of cash interest, to an asset based 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 the Company 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 a second lien 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, 2017, the Company made approximately $82.8 million of investments and hadapproximately $115.8 million in repayments and sales resulting in net repayments and sales of approximately $33.0 million forthe year. 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 and sales resulting in net investments of approximately $117.9 million for the year.During the year ended December 31, 2017, the Company funded $5.9 million of previously committed capital to existingportfolio companies. During the year ended December 31, 2017, the Company funded $76.9 million of investments in portfoliocompanies for which it was not previously committed to fund. During the year ended December 31, 2016, the Company funded$2.8 million of previously committed capital to existing portfolio companies. During the year ended December 31, 2016, theCompany funded $118.0 million of investments in portfolio companies for which it was not previously committed to fund. Duringthe year ended December 31, 2015, the Company funded $52.4 million of previously committed capital to existing portfoliocompanies. During the year ended December 31, 2015, the Company funded $208.2 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, 2017, theCompany assisted one portfolio company in obtaining indirect financing by providing a limited guarantee. During the year endedDecember 31, 2016, the Company did not lead any syndicates and did not assist anyF-27  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 4. Investments and Fair Value Measurements – (continued)portfolio companies in obtaining indirect financing. During the year ended December 31, 2015, the Company assisted onecompany in securing financing from other sources as part of a loan syndication.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 Company’s Board pre-approved this transaction pursuant toSection 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 the Company’s consolidated statements of assets and liabilities, was approximately $6.8million and $2.7 million as of December 31, 2017 and 2016, respectively. For purposes of determining the fair value of theWritten Call Option, the Company calculated the difference in the fair value of the underlying equity investment in EastportHoldings, LLC and the strike price of the Written Call Option, or intrinsic value. The time value of the Written Call Option as ofDecember 31, 2017 and 2016 was determined to be insignificant. The Written Call Option is classified as a Level 3 financialinstrument.The composition of our investments as of December 31, 2017, at amortized cost and fair value was as follows (dollars inthousands): Investments atAmortized Cost Amortized CostPercentage ofTotal Portfolio Investmentsat Fair Value Fair ValuePercentage ofTotal PortfolioFirst Lien Debt $257,147 55.3% $243,489 48.7% Second Lien Debt 32,465 7.0 30,794 6.1 Subordinated Debt 120,235 25.8 103,385 20.7 Equity and Warrants 55,180 11.9 122,271 24.5 Total $465,027 100.0% $499,939 100.0% The composition of our investments as of December 31, 2016, at amortized cost and fair value was 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% F-28  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 4. Investments and Fair Value Measurements – (continued)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.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 the Company’s valuation policy, theCompany evaluates the source of inputs, including any markets in which its 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 the fair value measurements of investments, by major class, as of December 31, 2017 (dollars inthousands), according to the fair value hierarchy: Fair Value Measurements Level 1 Level 2 Level 3 TotalFirst Lien Debt $ — $ — $243,489 $243,489 Second Lien Debt — — 30,794 30,794 Subordinated Debt — — 103,385 103,385 Equity and Warrants — — 122,271 122,271 Total $— $— $499,939 $499,939 F-29  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 4. Investments and Fair Value Measurements – (continued)The following table presents fair value measurements of the Written Call Option as of December 31, 2017 (dollars inthousands), according to the fair value hierarchy: Fair Value Measurements Level 1 Level 2 Level 3 TotalWritten Call Option $ — $ — $(6,815) $(6,815) Total $— $— $(6,815) $(6,815) 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 provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs forthe year ended December 31, 2017 (dollars in thousands): First LienDebt Second LienDebt SubordinatedDebt EquityandWarrants TotalBalance as of January 1, 2017 $226,578 $71,483 $150,232 $93,346 $541,639 Reclassifications (7,109) — (9,000) 16,109 — Repayments/sales (26,409) (45,804) (22,092) (21,505) (115,810) Purchases 69,722 4,000 2,730 6,298 82,750 Payment in-kind interest and dividendsaccrued 4,378 846 987 932 7,143 Accretion of original issue discount 274 322 761 — 1,357 Realized gain (loss) from investments (28,356) (1,456) (2,000) 7,623 (24,189) Net unrealized appreciation (depreciation)on investments 4,411 1,403 (18,233) 19,468 7,049 Balance as of December 31, 2017 $243,489 $30,794 $103,385 $122,271 $499,939 F-30  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 4. Investments and Fair Value Measurements – (continued)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, 2017 (dollars in thousands): Written CallOptionBalance as of January 1, 2017 $(2,736) Net unrealized depreciation on Written Call Option (4,079) Balance as of December 31, 2017 $(6,815) 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 net change in unrealized appreciation (depreciation) on investments held as of December 31, 2017 and 2016 was $(1.6)million and $3.9 million, respectively, and is included in net unrealized appreciation (depreciation) on investments in theconsolidated statements of operations.F-31  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 4. Investments and Fair Value Measurements – (continued)The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets(liabilities) as of December 31, 2017 were as follows: Fair Value(in millions) Valuation Approach Unobservable Input Range (Weighted Average)First lien debt $211.2 Income Required Rate of ReturnLeverage RatioAdjusted EBITDA 8.6% – 21.2% (13.5%)1.7x – 7.0x (3.6x)$1.8 million – $131.2 million ($21.1 million) First lien debt $32.3 Enterprise ValueWaterfall andAsset(1) EBITDA MultipleAdjusted EBITDA 4.0x – 7.0x (5.5x)$2.1 million – $3.1 million ($2.6 million) Second lien debt $30.8 Income Required Rate of ReturnLeverage RatioAdjusted EBITDA 11.6% – 17.6% (14.4%)4.9x – 7.0x (6.0x)$7.3 million – $78.5 million ($41.1 million) Subordinated debt $64.4 Income Required Rate of ReturnLeverage RatioAdjusted EBITDA 11.5% – 19.0% (14.2%)3.2x – 8.1x (5.6x)$3.2 million – $15.1 million ($9.7 million) Subordinated debt $39.0 Enterprise ValueWaterfall andAsset(1) EBITDA MultipleAdjusted EBITDARevenue MultipleRevenue 6.0x – 7.5x (7.2x)$1.8 million – $30.1 million ($21.2 million)0.2x – 0.2x (0.2x)$150.7 million – $150.7 million ($150.7million) Equity and warrants $122.3 Enterprise ValueWaterfall EBITDA MultipleAdjusted EBITDA 3.5x – 14.5x (7.9x)$1.8 million – $77.6 million ($24.3 million) Written Call Option $(6.8) Enterprise ValueWaterfall EBITDA MultipleAdjusted EBITDA 7.25x – 7.25x (7.25x)$30.1 million – $30.1 million ($30.1 million) (1)$1.0 million in subordinated debt and $1.9 million in first lien debt were valued using the asset approach.F-32  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 4. Investments and Fair Value Measurements – (continued)The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets(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.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, the Company and Trinity Universal Insurance Company (“Trinity”), a subsidiary of Kemper Corporation,entered into a limited liability company agreement to co-manage CSLLF. The purpose and design of the joint venture was toinvest primarily in broadly syndicated senior secured loans to middle-market companies, which were purchased on the secondarymarket. Capitala and Trinity committed to provide $25.0 million of equity to CSLLF, with Capitala providing $20.0 million andTrinity providing $5.0 million, resulting in an 80%/20% economic ownership between the two parties. The board of directors andinvestment committee of CSLLF were split 50/50 between Trinity and Capitala, resulting in equal voting power between the twoentities. In September 2016, the Company and Trinity elected to wind-down operations of CSLLF. During the fourth quarter of2016, CSLLF sold all referenced assets underlying the total return swap (“TRS”) and declared final distributions, inclusive ofdividends and return of capital, in December 2016.F-33  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 4. Investments and Fair Value Measurements – (continued)Because the TRS was wound down in a prior period, only comparative period disclosures are included herein. For the yearsended December 31, 2016 and December 31, 2015, the Company received $1.8 million and $0.9 million, respectively, in dividendincome from its equity interest in CSLLF. For the year ended December 31, 2016, CSLLF declared a return of capital distributionto the Company in the amount of $20.0 million, which included $19.9 million in cash received in December 2016 and $0.1million 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, CSLLF had posted $0.0 million in collateral to Bank of America in relation to the TRS, which wasrecorded on CSLLF’s statements of assets and liabilities as cash held as collateral on total return swap. The cash collateralrepresented CSLLF’s maximum credit exposure as of December 31, 2016.In connection with the TRS, CSLLF made customary representations and warranties and was required to comply with variouscovenants, reporting requirements and other customary requirements for similar transactions governed by an ISDA 2002 MasterAgreement.CSLLF’s receivable due on the TRS represents realized amounts from payments on underlying loans in the total return swapportfolio. At December 31, 2016, the receivable due on TRS was $0.1 million and is recorded on CSLLF’s statement of assets andliabilities below. CSLLF does not offset collateral posted in relation to the TRS with any unrealized appreciation or depreciationoutstanding in the statement of assets and liabilities as of December 31, 2016.F-34  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 4. Investments and Fair Value Measurements – (continued)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. Transactions in TRS contracts during the year ended December 31, 2015 resulted in $1.4million in realized gains and $(2.8) million in unrealized depreciation, which is recorded on CSLLF’s statements of operationsbelow.The following represents the volume of the CSLLF’s derivative transactions during the year December 31, 2016 and 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 certain summarized financial information for CSLLF as of December 31, 2016 and for the years ended December 31,2016, and December 31, 2015 (dollars in thousands):Selected Statements of Assets and Liabilities: As ofDecember 31,2016ASSETS Receivable due on Total Return Swap $82 Total assets $82 LIABILITIES Distribution payable $82 Total liabilities $82 NET ASSETS Total net assets $— Total liabilities and net assets $82 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-35  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 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, 2017, and the level of each financial liability within the fair value hierarchy (dollars inthousands): CarryingValue(1) Fair Value Level 1 Level 2 Level 3SBA debentures $170,700 $173,373 $— $— $173,373 2022 Notes 75,000 75,600 75,600 — — 2022 Convertible Notes 52,088 51,775 51,775 — — Credit Facility 9,000 9,038 — — 9,038 Total $306,788 $309,786 $127,375 $— $182,411 (1)Carrying value equals the gross principal outstanding at period end.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, 2016, and the level of each financial liability within the fair value hierarchy (dollars inthousands): CarryingValue(1) Fair Value Level 1 Level 2 Level 3SBA debentures $170,700 $175,581 $— $— $175,581 2021 Notes 113,438 115,888 115,888 — — Credit Facility 44,000 43,927 — — 43,927 Total $328,138 $335,396 $115,888 $— $219,508 (1)Carrying value equals the gross principal outstanding at period end.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.The estimated fair value of the Company’s 7.125% fixed rate notes due 2021 (the “2021 Notes”) was based on the closingprice as of the measurement date as the 2021 Notes were traded on the New York Stock Exchange under the ticker “CLA.”The estimated fair value of the 2022 Notes and 2022 Convertible Notes was based on their respective closing prices as of themeasurement date as they are traded on the NASDAQ Global Select Market under the ticker “CPTAL” (2022 Notes) and on theNASDAQ Capital Market under the ticker “CPTAG” (2022 Convertible Notes).The estimated fair value of the senior secured revolving credit agreement (the “Credit Facility”) with ING Capital, LLC, asadministrative agent, arranger, and bookrunner, and the lender party thereto was based on future contractual cash paymentsdiscounted at estimated market interest rates for similar debt.F-36  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 6. Transactions With Affiliated CompaniesDuring the year ended December 31, 2017, the Company had investments in portfolio companies designated as affiliates underthe 1940 Act. Transactions with affiliates were as follows: Company(4) Type of Investment PrincipalAmount Amount ofInterest, Feesor DividendsCredited toIncome(1) December 31,2016Fair Value GrossAdditions(2) GrossReductions(3) RealizedGain/(Loss) UnrealizedGain/(Loss) December 31,2017Fair ValueAffiliate investments AAE Acquisition, LLC Second Lien Debt (8%Cash, 4% PIK, Due8/24/19) $15,846 $757 $— $15,846 $— $— $(243) $15,603 AAE Acquisition, LLC Membership Units (2.19%fully diluted) — — — 16 — — (16) — AAE Acquisition, LLC Warrants (37.78% fullydiluted) — — — — — — — — 757 — 15,862 — — (259) 15,603 Burgaflex Holdings,LLC Subordinated Debt (14%Cash, Due 8/9/19) 3,000 515 3,000 — — — — 3,000 Burgaflex Holdings,LLC Subordinated Debt (12%Cash, Due 8/9/19) 5,828 886 5,828 — — — — 5,828 Burgaflex Holdings,LLC Common Stock (1,253,198shares) — — 1,248 — — — (791) 457 1,401 10,076 — — — (791) 9,285 City Gear, LLC Subordinated Debt (13%Cash, Due 10/20/19) 8,231 1,085 8,231 — — — — 8,231 City Gear, LLC(5) Preferred MembershipUnits (2.78% fully diluted,9% Cash Dividend) — 115 1,269 — — — — 1,269 City Gear, LLC Membership Unit Warrants(11.38% fully diluted) — — 9,736 — — — (1,488) 8,248 1,200 19,236 — — — (1,488) 17,748 GA Communications,Inc.(5) Series A-1 Preferred Stock(1,998 shares, 8% PIKDividend) — — 2,864 255 — — 106 3,225 GA Communications,Inc. Series B-1 Common Stock(200,000 shares) — — 1,046 — — — 886 1,932 — 3,910 255 — — 992 5,157 J&J Produce Holdings,Inc. Subordinated Debt (6%Cash, 7% PIK, Due6/16/19) 6,368 632 6,182 186 — — (198) 6,170 J&J Produce Holdings,Inc. Common Stock (8,182shares) — — — — — — — — J&J Produce Holdings,Inc. Common Stock Warrants(6,369 shares) — — — — — — — — 632 6,182 186 — — (198) 6,170 LJS Partners, LLC Common Stock (1,500,000shares) — — 8,497 — (630) — (217) 7,650 — 8,497 — (630) — (217) 7,650 MJC Holdings, LLC Series A Preferred Units(2,000,000 units) — — 5,011 — (5,473) 4,473 (4,011) — — 5,011 — (5,473) 4,473 (4,011) — MMI Holdings, LLC First Lien Debt (12% Cash,Due 1/31/19) 2,600 317 2,600 — — — — 2,600 MMI Holdings, LLC Subordinated Debt (6%Cash, Due 1/31/19) 400 24 400 — — — — 400 MMI Holdings, LLC(5) Preferred Units (1,000units, 6% PIK Dividend) — — 1,433 85 — — 2 1,520 MMI Holdings, LLC Common MembershipUnits (45 units) — — 228 — — — (35) 193 341 4,661 85 — — (33) 4,713 MTI Holdings, LLC Membership Units(2,000,000 units) — — 537 — (437) 437 (437) 100 — 537 — (437) 437 (437) 100 F-37  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 6. Transactions With Affiliated Companies – (continued) Company(4) Type of Investment PrincipalAmount Amount ofInterest, Feesor DividendsCredited toIncome(1) December 31,2016Fair Value GrossAdditions(2) GrossReductions(3) RealizedGain/(Loss) UnrealizedGain/(Loss) December 31,2017Fair ValueSierra HamiltonHoldingsCorporation Common Stock(15,068,000 shares) $— $— $— $6,958 $— $— $1,570 $8,528 — — 6,958 — — 1,570 8,528 Source Capital Penray,LLC Subordinated Debt (13%Cash, Due 4/8/19) — 78 1,425 — (1,425) — — — Source Capital Penray,LLC Membership Units (11.3%ownership) — 526 805 — (750) — 46 101 604 2,230 — (2,175) — 46 101 STX HealthcareManagementServices, Inc. Common Stock (1,200,000shares) — — 109 — (16) 16 (16) 93 — 109 — (16) 16 (16) 93 U.S. Well Services,LLC First Lien Debt (7.35%Cash (1 month LIBOR +6%, 1% floor), Due 2/2/22) 2,299 132 — 2,299 — — — 2,299 U.S. Well Services,LLC First Lien Debt (12.35%PIK (1 month LIBOR +11%, 1% floor), Due2/2/22) 9,516 83 — 9,516 — — — 9,516 U.S. Well Services,LLC Class A Units (5,680,688Units) — — — 6,260 — — 8,744 15,004 U.S. Well Services,LLC Class B Units (2,076,298Units) — — — 441 — — 514 955 215 — 18,516 — — 9,258 27,774 V12 Holdings, Inc. Subordinated Debt — — 1,015 — — — 20 1,035 — 1,015 — — — 20 1,035 Sub Total Affiliate investments $5,150 $61,464 $41,862 $(8,731) $4,926 $4,436 $103,957 Control investments CableOrganizerAcquisition, LLC First Lien Debt (12% Cash,4% PIK, Due 5/24/18) $12,373 $1,473 $11,882 $491 $— $— $— $12,373 CableOrganizerAcquisition, LLC Common Stock (21.3%fully diluted) — — 200 — — — (82) 118 CableOrganizerAcquisition, LLC Common Stock Warrants(10% fully diluted) — — 101 — — — (41) 60 1,473 12,183 491 — — (123) 12,551 Capitala Senior LiquidLoan Fund I, LLC Common Stock (80%Ownership) — 5 — — — — — — 5 — — — — — — Eastport Holdings,LLC Subordinated Debt(14.49% Cash (3 monthLIBOR + 13%, 0.5%Floor), Due 4/29/20) 16,500 3,138 16,500 757 — — (757) 16,500 Eastport Holdings,LLC Membership Units (33.3%ownership) — — 13,395 — — — 13,054 26,449 3,138 29,895 757 — — 12,297 42,949 Kelle’s TransportService, LLC First Lien Debt (4% Cash,Due 2/15/20) 2,000 22 — 2,000 — — — 2,000 Kelle’s TransportService, LLC First Lien Debt (1.46%Cash, Due 2/15/20) 13,674 77 — 13,669 — — (4,109) 9,560 Kelle’s TransportService, LLC Membership Units (27.5%fully diluted) — — — — — — — — 99 — 15,669 — — (4,109) 11,560 Micro Precision, LLC Subordinated Debt (10%Cash, Due 9/15/18) 1,862 186 1,862 — — — — 1,862 Micro Precision, LLC Subordinated Debt (14%Cash, 4% PIK, Due9/15/18) 4,154 577 3,989 165 — — — 4,154 F-38  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 6. Transactions With Affiliated Companies – (continued) Company(4) Type of Investment PrincipalAmount Amount ofInterest, Feesor DividendsCredited toIncome(1) December 31,2016Fair Value GrossAdditions(2) GrossReductions(3) RealizedGain/(Loss) UnrealizedGain/(Loss) December 31,2017Fair ValueMicro Precision, LLC Series A Preferred Units(47 units) $— $— $2,523 $— $— $— $(894) $1,629 763 8,374 165 — — (894) 7,645 Navis Holdings, Inc. First Lien Debt (15% Cash,Due 10/30/20) 6,500 989 6,500 — — — — 6,500 Navis Holdings, Inc.(5) Class A Preferred Stock(1,000 shares, 10% CashDividend) — 100 1,000 — — — — 1,000 Navis Holdings, Inc. Common Stock (300,000shares) — 250 5,634 — — — (629) 5,005 1,339 13,134 — — — (629) 12,505 On-Site Fuel Services,Inc. Subordinated Debt (18%Cash, Due 12/19/18) 14,072 — 10,303 1,182 — — 103 11,588 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 (33,058shares) — — — — — — — — — 10,303 1,182 — — 103 11,588 Portrait Studio, LLC First Lien Debt (8.56%Cash (1 month LIBOR +7%, 2% ceiling), Due12/31/22) 1,860 — — 1,860 — — — 1,860 Portrait Studio, LLC First Lien Debt (8.56%Cash (1 month LIBOR +7%, 5% ceiling), Due12/31/22) 4,500 — — 4,500 — — — 4,500 Portrait Studio, LLC Preferred Units (4,350,000Units) — — — 2,450 — — — 2,450 Portrait Studio, LLC Membership Units(150,000 Units) — — — — — — — — — — 8,810 — — — 8,810 Print Direction, Inc. First Lien Debt (10% cash2% PIK, due 2/24/19) — 434 12,761 2,087 — (19,403) 4,555 — Print Direction, Inc. Common Stock (18,543shares) — — — 40 — (3,030) 2,990 — Print Direction, Inc. Common Stock Warrants(820 shares) — — — — — — — — 434 12,761 2,127 — (22,433) 7,545 — Sub Total Control investments $7,251 $86,650 $29,201 $— $(22,433) $14,190 $107,608 (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 investments, follow-oninvestments and accrued PIK interest. Gross additions also include transfers into an affiliate or control classification.(3)Gross reductions include decreases in the total cost basis of investments resulting from principal or PIK repayments and sales.(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.F-39  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 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 3, 2017. 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, andthereafter 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 theF-40  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 7. Agreements – (continued)calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under theAdministration Agreement to our Administrator, and any interest expense and dividends paid on any issued and outstandingpreferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments witha deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accruedincome that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains,computed net of all realized capital losses or unrealized capital appreciation or depreciation. Pre-incentive fee net investmentincome, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, iscompared to a hurdle of 2.0% per quarter (8.0% annualized). The net investment income used to calculate this part of the incentivefee is also included in the amount of the gross assets used to calculate the 1.75% base management fee. The Company pays theInvestment Advisor an incentive fee with respect to the pre-incentive fee net investment income in each calendar quarter asfollows:•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).The Investment Advisor has voluntarily agreed to waive all or such portion of the quarterly incentive fees earned by theInvestment Advisor that would otherwise cause the Company’s quarterly net investment income to be less than the distributionpayments declared by the Board. Quarterly incentive fees are earned by the Investment Advisor pursuant to the InvestmentAdvisory Agreement. Incentive fees subject to the waiver cannot exceed the amount of incentive fees earned during the period, ascalculated on a quarterly basis. The Investment Advisor will not be entitled to recoup any amount of incentive fees that it waives.The waiver was effective in the fourth quarter of 2015 and will continue unless otherwise publicly disclosed by the Company.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 ofF-41  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 7. Agreements – (continued)December 31, 2017 and December 31, 2016, the Company had incentive fees payable to the Investment Advisor of $2.2 millionand $6.4 million, respectively.For the years ended December 31, 2017, 2016 and 2015, the Company incurred $9.8 million, $10.6 million and $10.6 millionin base management fees, respectively. The Company incurred $1.3 million, $6.8 million, and $6.0 million in incentive feesrelated to pre-incentive fee net investment income for the years ended December 31, 2017, 2016, and 2015, respectively. For theyears ended December 31, 2017, 2016 and 2015, our Investment Advisor waived incentive fees of $1.0 million, $1.7 million and$1.1 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 NAV, oversees the preparation andfiling of the tax returns and the printing and dissemination of reports to the stockholders, and generally oversees the payment ofthe 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 and the chiefcompliance officer, and their respective administrative support staff. Under the Administration Agreement, the Administrator willalso provide, on the Company’s behalf, managerial assistance to those portfolio companies that request such assistance. Unlessterminated earlier in accordance with its terms, the Administration Agreement will remain in effect if approved annually by theBoard. The Board most recently approved the renewal of the Administration Agreement on August 3, 2017. To the extent that theAdministrator outsources any of its functions, the Company will pay the fees associated with such functions on a direct basiswithout any incremental profit to our Administrator. Stockholder approval is not required to amend the AdministrationAgreement.For the years ended December 31, 2017, 2016, and 2015, the Company paid the Administrator $1.1 million for the Company’sallocable 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.F-42  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 8. Related Party TransactionsAt December 31, 2017 and December 31, 2016, 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): December 31,2017 December 31,2016CapitalSouth Corporation $74 $182 CapitalSouth Partners Florida Sidecar Fund II, L.P. 21 (35) Capitala Investment Advisors, LLC (2,172) (6,426) Total $(2,077) $(6,279) 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, 2017 and December 31, 2016 the Company has $170.7 million of SBA-guaranteed debentures outstanding. The Company has issued all SBA-guaranteed debentures that were permitted under each ofthe Legacy Funds’ respective SBIC licenses (as applicable), and there are no unused SBA debenture commitments remaining.SBA-guaranteed debentures are secured by a lien on all assets of Fund II and Fund III. As of December 31, 2017 and December 31,2016, Fund II and Fund III had total assets of approximately $341.5 million and $349.4 million, respectively. On June 10, 2014,the Company received an exemptive order from the SEC exempting the Company, 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 Securities Exchange Act of 1934, asamended (the “1934 Act”), with respect to Fund II and Fund III. The Company intends to comply with the conditions of the order.The following table summarizes the interest expense and annual charges, deferred financing costs, average balanceoutstanding, and average stated interest and annual charge rate on the SBA-guaranteed debentures for the years ended December31, 2017, December 31, 2016 and December 31, 2015 (dollars in thousands): For the year ended December 31,2017 December 31,2016 December 31,2015Interest expense and annual charges $6,336 $6,873 $7,519 Deferred financing costs 611 627 655 Total interest and financing expenses $6,947 $7,500 $8,174 Average outstanding balance $170,700 $178,695 $189,526 Average stated interest and annual charge rate 3.71% 3.83% 3.96% F-43  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 9. Borrowings – (continued)As of December 31, 2017 and December 31, 2016, the Company’s issued and outstanding SBA-guaranteed debentures matureas follows (dollars in thousands): Fixed Maturity Date InterestRate SBA AnnualCharge December 31,2017 December 31,2016March 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 $170,700 2021 NotesOn June 16, 2014, the Company issued $113.4 million in aggregate principal amount of the 2021 Notes. On May 26, 2017, theCompany caused notices to be issued to the holders of its 2021 Notes regarding the Company’s exercise of its option to redeem allof the issued and outstanding 2021 Notes. The Company redeemed all $113.4 million in aggregate principal amount of the 2021Notes on June 25, 2017. The Notes were redeemed at 100% of their principal amount ($25 per Note), plus the accrued and unpaidinterest thereon from June 16, 2017, through, but excluding, June 25, 2017. As a result of the redemption, the Companyrecognized a loss on the extinguishment of debt of $2.7 million for the year ended December 31, 2017 due to the amortization ofthe deferred financing costs remaining on the 2021 Notes.The following table summarizes the interest expense, deferred financing costs, average outstanding balance and average statedinterest rate on the 2021 Notes for the years ended December 31, 2017, 2016, and 2015 (dollars in thousands): For the year ended December 31,2017 December 31,2016 December 31,2015Interest expense $3,908 $8,082 $8,082 Deferred financing costs 293 557 519 Total interest and financing expenses $4,201 $8,639 $8,601 Average outstanding balance $53,766 $113,438 $113,438 Average stated interest rate 7.13% 7.13% 7.13% 2022 NotesOn May 16, 2017, the Company issued $70.0 million in aggregate principal amount of 6.0% fixed-rate notes due May 31,2022 (the “2022 Notes”). On May 25, 2017, the Company issued an additional $5.0 million in aggregate principal amount of the2022 Notes pursuant to a partial exercise of the underwriters’ overallotment option. The 2022 Notes will mature on May 31, 2022,and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after May 31, 2019 at aredemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest is payable quarterlybeginning August 31, 2017.F-44  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 9. Borrowings – (continued)The following table summarizes the interest expense, deferred financing costs, average outstanding balance, and averagestated interest rate on the 2022 Notes for the years ended December 31, 2017, 2016, and 2015 (dollars in thousands): For the year ended December 31,2017 December 31,2016 December 31,2015Interest expense $2,812 $ — $ — Deferred financing costs 303 — — Total interest and financing expenses $3,115 $— $— Average outstanding balance $47,137 $— $— Average stated interest rate 6.0% — — 2022 Convertible NotesOn May 26, 2017, the Company issued $50.0 million in aggregate principal amount of 5.75% fixed-rate convertible notes dueon May 31, 2022 (the “2022 Convertible Notes”). On June 26, 2017, the Company issued an additional $2.1 million in aggregateprincipal amount of the 2022 Convertible Notes pursuant to a partial exercise of the underwriters’ overallotment option. Interest ispayable quarterly beginning August 31, 2017.The 2022 Convertible Notes are convertible, at the holder’s option, into shares of the Company’s common stock at any timeon or prior to the close of business on the business day immediately preceding the maturity date. The conversion rate for the 2022Convertible Notes is initially 1.5913 shares per $25.00 principal amount of 2022 Convertible Notes (equivalent to an initialconversion price of approximately $15.71 per share of common stock). The initial conversion premium is approximately 14.0%.Upon conversion, the Company will deliver shares of its common stock (and cash in lieu of fractional shares). The conversion rateis subject to adjustment if certain events occur as outlined in the supplemental indenture relating to the 2022 Convertible Notes.The Company has determined that the embedded conversion option in the 2022 Convertible Notes is not required to be separatelyaccounted for as a derivative under GAAP.In addition, pursuant to a “fundamental change” as defined in the supplemental indenture relating to the 2022 ConvertibleNotes, holders of the 2022 Convertible Notes may require the Company to repurchase for cash all or part of their 2022 ConvertibleNotes at a repurchase price equal to 100.0% of the principal amount of the 2022 Convertible Notes to be repurchased, plusaccrued and unpaid interest through, but excluding, the repurchase date. The 2022 Convertible Notes are not redeemable prior tomaturity and no “sinking fund” is provided for the 2022 Convertible Notes.The following table summarizes the interest expense, deferred financing costs, average outstanding balance, and averagestated interest rate on the 2022 Convertible Notes for the years ended December 31, 2017, 2016, and 2015 (dollars in thousands): For the year ended December 31,2017 December 31,2016 December 31,2015Interest expense $1,789 $ — $ — Deferred financing costs 180 — — Total interest and financing expenses $1,969 $— $— Average outstanding balance $31,218 $— $— Average stated interest rate 5.75% — — F-45  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 9. Borrowings – (continued)Credit FacilityOn October 17, 2014, the Company entered into the Credit Facility. On June 16, 2017, the Company entered into anamendment to its Credit Facility with ING Capital, LLC (the “Amendment”). Pursuant to the Amendment, the Credit Facilitycurrently provides for borrowings up to $114.5 million and may be increased up to $200.0 million pursuant to its “accordion”feature. The Credit Facility matures on June 16, 2021.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 with increased flexibility to manage interest rate risks as compared to a borrowing arrangement that does not provide forsuch optionality. Once a particular LIBOR rate has been selected, the interest rate on the applicable amount borrowed will resetafter the applicable tenor period and be based on the then applicable selected LIBOR rate (e.g., borrowings for which theCompany has elected the one month LIBOR rate will reset on the one month anniversary of the period based on the then selectedLIBOR rate). For any given borrowing under the Credit Facility, the Company intends to elect what it believes to be anappropriate LIBOR rate taking into account the Company’s needs at the time as well as the Company’s view of future interest ratemovements. The Amendment provides for the ability to step-down the pricing of the Credit Facility from LIBOR plus 3.00% toLIBOR plus 2.75% when certain conditions are met. The Company will also pay an unused commitment fee at a rate of 2.50% perannum on the amount (if positive) by which 40% of the aggregate commitments under the Credit Facility exceeds the outstandingamount of loans under the Credit Facility and 0.50% per annum on any remaining unused portion of the Credit Facility.The following table summarizes the interest expense, deferred financing costs, unused commitment fees, average outstandingbalance, and average stated interest rate on the Credit Facility for the years ended December 31, 2017, 2016, and 2015 (dollars inthousands): For the year ended December 31,2017 December 31,2016 December 31,2015Interest expense $908 $2,303 $724 Deferred financing costs 713 965 794 Unused commitment fees 972 304 729 Total interest and financing expenses $2,593 $3,572 $2,247 Average outstanding balance $22,493 $64,625 $21,860 Average stated interest rate 4.08% 3.51% 3.25% As of December 31, 2017 and 2016, the Company had $9.0 million and $44.0 million, respectively, outstanding under theCredit Facility. The Credit Facility is secured by investments and cash held by Capitala Finance Corp., exclusive of assets held atour two SBIC subsidiaries. Assets pledged to secure the Credit Facility had a carrying value of $192.4 million at December 31,2017. As part of the terms of the Credit Facility, the Company may not make cash distributions with respect to any taxable yearthat exceed 110% (125% if the Company is not in default and our covered debt does not exceed 85% of the borrowing base) of theamounts required to be distributed to maintain eligibility as a RIC and to reduce our tax liability to zero for taxes imposed on ourinvestment company taxable income and net capital gains.F-46  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 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 stockholders. The Company intends to make therequisite distributions to its stockholders which will relieve the Company from U.S. federal income taxes. The Company’s taxyear-end is August 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.Permanent differences between taxable income and net investment income for financial reporting purposes are reclassifiedamong the capital accounts in the financial statements to reflect their tax character. During the years ended December 31, 2017,2016, and 2015, the Company reclassified for book purposes amounts arising from permanent differences in the book and taxbasis of partnership investments sold, sales relating to defaulted bond accruals, and book and tax character of distributions paid.Such reclassifications are reported in “Tax reclassifications of stockholders’ equity in accordance with generally acceptedaccounting principles” in the statements of changes in net assets for years ended December 31, 2017, 2016, and 2015,respectively.The following permanent differences due to adjustments for the realized gains (losses) upon disposition of partnership interestsand for the transfer of distributions between accumulated capital gains and accumulated net investment income were reclassifiedfor tax purposes for the tax years ended August 31, 2017, 2016, and 2015 (dollars in thousands): Tax yearendedAugust 31,2017 Tax yearendedAugust 31,2016 Tax yearendedAugust 31,2015Increase (decrease) in accumulated net investment income $(67) $13,838 $(3,398) Increase (decrease) in accumulated net realized gains oninvestments 88 (13,816) 3,398 Increase (decrease) in capital in excess of par value (21) (22) — For the tax years ended August 31, 2017, 2016, and 2015, the tax basis components of distributable earnings were as follows(dollars in thousands): Tax yearendedAugust 31,2017 Tax yearendedAugust 31,2016 Tax yearendedAugust 31,2015Undistributed ordinary income $8,999 $5,646 $— Accumulated capital gains (losses) (43,618) (44,296) 8,378 Unrealized appreciation 25,994 47,837 25,269 Other temporary differences (8,276) (2,570) (8,196) Total $(16,901) $6,617 $25,451 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, 2017, the Company has a short-term capital loss carryforward of $3.2 million and a long-term capital loss carry forward of $40.4 million.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 andF-47  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 10. Income Taxes – (continued)expenses and generally excludes unrealized appreciation (depreciation) on investments as investment gains and losses are notincluded in taxable income until they are realized.The following table reconciles net increase in net assets resulting from operations to taxable income for the tax years endedAugust 31, 2017, 2016 and 2015 (dollars in thousands): Tax yearendedAugust 31,2017 Tax yearendedAugust 31,2016 Tax yearendedAugust 31,2015Net increase in net assets resulting from operations $1,647 $10,291 $10,983 Net change in unrealized (appreciation) depreciation oninvestments and written call option 18,518 (20,809) 35,557 Capital loss carryforward (utilization) (679) 44,296 (7,565) Other deductions for book in excess of deductions for tax 9,053 (3,654) 4,488 Total taxable income $28,539 $30,124 $43,463 For income tax purposes, distributions paid to stockholders 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, 2017, 2016, and 2015(dollars in thousands): Tax yearendedAugust 31,2017 Tax yearendedAugust 31,2016 Tax yearendedAugust 31,2015Ordinary income $25,187 $24,478 $25,063 Long-term capital gains — 8,378 10,705 Return of capital — — — Total $25,187 $32,856 $35,768 For U.S. federal income tax purposes, as of August 31, 2017, the aggregate net unrealized appreciation for all securities was$26.0 million. As of August 31, 2017, gross unrealized appreciation was $72.6 million and gross unrealized depreciation was$46.6 million. The aggregate cost of securities for U.S. federal income tax purposes was $450.1 million.The Company has formed and expects to continue to form certain Taxable Subsidiaries, which are taxed as corporations forincome tax purposes. These Taxable Subsidiaries allow the Company to make equity investments in companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code. The Taxable Subsidiaries are wholly ownedconsolidated subsidiaries of the Company.The Company acquired the non-controlling interest in Print Direction, Inc. on December 1, 2017 and converted the entity toCPTA Master Blocker, Inc. (Georgia), retaining its net operating losses in the transaction pursuant to Section 382 of the Code. Asof December 31, 2017, the Taxable Subsidiaries had net operating losses for federal income tax purposes of approximately $8.9million. If not utilized, $6.5 million of these net operating losses will expire in the year ended December 31, 2037 and $2.4million of these net operating losses will expire in the year ended December 31, 2036.On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act, whichsignificantly changes the existing U.S. tax laws, including a reduction in the corporate tax rate from 35% to 21%, a move from aworldwide tax system to a territorial system, as well as other changes. The Taxable Subsidiaries’ provisional tax is based on thenew lower blended federal and state corporate tax rate of 25%. This estimate incorporates assumptions made based on the TaxableSubsidiaries’ current interpretation of the Tax Act and may change, possibly materially, as we complete our analysis and receiveadditional clarification and implementation guidance.F-48  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 10. Income Taxes – (continued)Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilitiesfor financial reporting and tax purposes. Components of deferred tax assets (liabilities) as of December 31, 2017 and 2016 are asfollows (dollars in thousands): December31,2017 December 31,2016Deferred tax assets: Net operating loss carryforwards $2,216 $ — Less valuation allowance (363) — 1,853 — Deferred tax liabilities: Net unrealized appreciation on investments (2,809) — Basis reduction in partnership investments (333) — (3,142) — Net deferred tax liability $(1,289) $— At December 31, 2017, the valuation allowance on deferred tax assets was $0.4 million which represents the state tax effect ofnet operating losses that we do not believe we will realize through future taxable income. The Company believes it is more likelythan not that there is an ability to realize its remaining deferred tax assets through future table income. Any adjustments to theCompany’s valuation allowance will depend on estimates of future taxable income and will be made in the period suchdetermination is made.Total income tax expense (benefit) differs from the amount computed by applying the federal statutory income tax rate of 35%to net investment loss and net realized and unrealized appreciation (depreciation) on investments for the year ended December 31,2017, 2016, and 2015, as follows (dollars in thousands): December 31,2017 December31,2016 December 31,2015Tax expense at statutory rates $1,998 $— $— State income tax expense (net of federal benefit) 188 — — Tax benefit on net operating losses (908) — — Tax expense on permanent items 140 — — Revaluation for federal rate change (492) Change in valuation allowance 363 — — Total tax provision, net $1,289 $— $— Total income taxes are computed by applying the federal statutory rate of 35% plus an estimated blended state rate of 4%.For the years ended December 31, 2017, 2016 and 2015, the components of the Company’s tax provision include thefollowing (dollars in thousands): December31,2017 December31,2016 December 31,2015Deferred tax expense Federal $778 $ — $ — State 148 — — Less valuation allowance 363 Total tax provision, net $1,289 $— $— F-49  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 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 $5,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the auditcommittee receives an annual fee of $10,000 and each chairman of any other committee receives an annual fee of $5,000 for theiradditional services, if any, in these capacities. For the years ended December 31, 2017, 2016 and 2015, the Company recognizeddirectors fees expense of $0.4 million. No compensation is expected to be paid to directors who are “interested persons” of theCompany, 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, 2017, the Company had 15,951,231 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 31,2017 and December 31, 2016, and for the three years in the period then ended.CableOrganizer Acquisition, LLCCableOrganizer Acquisition, 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 Acquisition,LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was$1.8 million, $1.9 million, and $0.4 million for the years ended December 31, 2017, December 31, 2016, and December 31, 2015,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 PIK dividends, fees, and unrealized appreciation (depreciation), was $11.4million and $14.3 million for the years ended December 31, 2017 and December 31, 2016, respectively. The Company invested inthe portfolio company in January 2016. As such, comparative financial information for the year ended December 31, 2015 is notpresented.F-50  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 13. Summarized Financial Information of Our Unconsolidated Subsidiaries – (continued)Kelle’s Transport Service, LLCKelle’s Transport Service, LLC, a Delaware limited liability company organized on March 28, 2014, provides temperaturesensitive transportation services throughout North America. The income (loss) the Company generated from Kelle’s TransportService, LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees, realized losses, and unrealizedappreciation (depreciation), was $(6.9) million, $(1.2) million, and $3.0 million for the years ended December 31, 2017, December31, 2016, and December 31, 2015, 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 PIK dividends, fees, and unrealized appreciation (depreciation) was $0.7 million, $1.9million, and $4.2 million for the years ended December 31, 2017, December 31, 2016, and December 31, 2015, respectively.On-Site Fuel Services, Inc.On-Site Fuel Services, Inc. is a 100% owned subsidiary of On-Site Fuel Holdings, Inc., which was incorporated in Delaware onDecember 19, 2011. On-Site Fuel Services, Inc. provides fueling services for commercial and government vehicle fleetsthroughout the southeast U.S. The income (loss) the Company generated from On-Site Fuel Service, Inc., which includes allinterest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $0.1 million, $4.5million, and $(3.2) million for the years ended December 31, 2017, December 31, 2016, and December 31, 2015, respectively.The summarized financial information of our unconsolidated subsidiaries was as follows (dollars in thousands): As ofBalance Sheet – CableOrganizer Acquisition, LLC December31,2017 December 31,2016Current assets $5,286 $5,589 Noncurrent assets 9,664 9,872 Total assets $14,950 $15,461 Current liabilities $5,207 $4,219 Noncurrent liabilities 12,373 11,882 Total liabilities $17,580 $16,101 Total deficit $(2,630) $(640) For the year endedStatements of Operations – CableOrganizer Acquisition, LLC December 31,2017 December 31,2016 December 31,2015Net sales $27,134 $23,277 $25,315 Cost of goods sold 19,778 15,715 16,878 Gross profit $7,356 $7,562 $8,437 Other expenses $9,345 $10,344 $10,008 Loss before income taxes (1,989) (2,782) (1,571) Net loss $(1,989) $(2,782) $(1,571) F-51  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 13. Summarized Financial Information of Our Unconsolidated Subsidiaries – (continued) As ofBalance Sheet – Eastport Holdings, LLC December31,2017 December 31,2016Current assets $94,186 $96,175 Noncurrent assets 185,087 145,802 Total assets $279,273 $241,977 Current liabilities $142,250 $157,622 Noncurrent liabilities 70,765 41,355 Total liabilities $213,015 $198,977 Total equity $66,258 $43,000 For the year endedStatement of Operations – Eastport Holdings, LLC December31,2017 December 31,2016Net sales $556,895 $499,986 Cost of goods sold 411,167 377,036 Gross profit $145,728 $122,950 Other expenses $134,231 $111,677 Income before income taxes 11,497 11,273 Income tax provision 628 — Net income $10,869 $11,273 As ofBalance Sheet – Kelle’s Transport Service, LLC December 31,2017 December 31,2016Current assets $6,734 $8,554 Noncurrent assets 11,801 13,237 Total assets $18,535 $21,791 Current liabilities $11,092 $4,655 Noncurrent liabilities 17,693 14,962 Total liabilities $28,785 $19,617 Total equity (deficit) $(10,250) $2,174 For the year endedStatements of Operations – Kelle’s Transport Service, LLC December 31,2017 December 31,2016 December 31,2015Net sales $51,405 $65,471 $66,942 Cost of goods sold 49,343 55,859 54,027 Gross profit $2,062 $9,612 $12,915 Other expenses $14,077 $12,804 $12,071 Income (loss) before income taxes (12,015) (3,192) 844 Income tax provision 5 44 50 Net income (loss) $(12,020) $(3,236) $794 F-52  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 13. Summarized Financial Information of Our Unconsolidated Subsidiaries – (continued) As ofBalance Sheet – Navis Holdings, Inc. December31,2017 December 31,2016Current assets $4,721 $4,655 Noncurrent assets 2,950 3,446 Total assets $7,671 $8,101 Current liabilities $1,941 $2,448 Noncurrent liabilities 6,973 6,719 Total liabilities $8,914 $9,167 Total deficit $(1,243) $(1,066) For the year endedStatements of Operations – Navis Holdings, Inc. December31,2017 December 31,2016 December 31,2015Net sales $13,948 $17,803 $17,076 Cost of goods sold 8,724 10,933 11,087 Gross profit $5,224 $6,870 $5,989 Other expenses $4,647 $5,070 $5,414 Income before income taxes 577 1,800 575 Income tax provision 229 701 343 Net income $348 $1,099 $232 As ofBalance Sheet – On-Site Fuel Services, Inc. December31,2017 December 31,2016Current assets $28,064 $13,079 Noncurrent assets 26,807 16,314 Total assets $54,871 $29,393 Current liabilities $32,626 $16,498 Noncurrent liabilities 34,515 19,903 Total liabilities $67,141 $36,401 Total deficit $(12,270) $(7,008) For the year endedStatements of Operations – On-Site Fuel Service, Inc. December 31,2017 December 31,2016 December 31,2015Net sales $157,774 $110,412 $114,137 Cost of goods sold 149,436 101,714 106,668 Gross profit $8,338 $8,698 $7,469 Other expenses $13,600 $13,682 $13,592 Loss before income taxes (5,262) (4,984) (6,123) Income tax provision — 14 1,967 Net loss $(5,262) $(4,998) $(8,090) F-53  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 14. Earnings Per ShareIn accordance with the provisions of ASC Topic 260, Earnings per Share (“ASC 260”), basic earnings per share is computed bydividing earnings available to common stockholders 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, 2017, all convertible shares related to the 2022 Convertible Notes, which would beapproximately 3.3 million shares if converted, were considered anti-dilutive. As of December 31, 2017, 2016, and 2015, there wereno dilutive shares.The following information sets forth the computation of the weighted average basic and diluted net increase (decrease) in netassets per share resulting from operations for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands, exceptshare and per share data): For the year endedBasic and diluted December 31,2017 December 31,2016 December 31,2015Net increase (decrease) in net assets resulting fromoperations $(6,984) $9,152 $13,850 Weighted average common stock outstanding – basicand diluted 15,903,167 15,819,175 15,210,577 Net increase (decrease) in net assets per share resultingfrom operations – basic and diluted $(0.44) $0.58 $0.91 Note 15. DistributionsThe Company’s distributions are recorded as payable on the declaration date. Stockholders have the option to receivepayment of the distribution in cash, shares of common stock, or a combination of cash and common stock.The following tables summarize the Company’s distribution declarations during the years ended December 31, 2017, 2016and 2015 (in thousands, except share and per share data): Date Declared Record Date Payment Date AmountPer Share CashDistribution DRIPSharesIssued DRIPShareValueJanuary 3, 2017 January 20, 2017 January 30, 2017 $0.1300 $1,993 5,304 $70 January 3, 2017 February 20, 2017 February 27, 2017 0.1300 1,993 5,195 70 January 3, 2017 March 23, 2017 March 30, 2017 0.1300 1,998 4,948 67 April 3, 2017 April 19, 2017 April 27, 2017 0.1300 1,996 5,164 69 April 3, 2017 May 23, 2017 May 29, 2017 0.1300 1,990 5,880 76 April 3, 2017 June 21, 2017 June 29, 2017 0.1300 1,969 7,959 97 July 3, 2017 July 21, 2017 July 28, 2017 0.1300 1,995 5,889 73 July 3, 2017 August 23, 2017 August 30, 2017 0.1300 1,957 13,162 111 July 3, 2017 September 20, 2017 September 28, 2017 0.1300 1,989 9,085 80 October 2, 2017 October 23, 2017 October 30, 2017 0.0833 1,280 5,876 48 October 2, 2017 November 21, 2017 November 29, 2017 0.0833 1,278 6,856 49 October 2, 2017 December 20, 2017 December 28, 2017 0.0833 1,273 7,868 55 Total Distributions Declared and Distributed for Fiscal 2017 $1.42 $21,711 83,186 $865 F-54  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 15. Distributions – (continued) 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 72 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-55  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 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 1934 Act, 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 $12.0million of the Company’s outstanding shares of common stock had been repurchased. As of December 31, 2017, the repurchaseprogram has expired and has not been extended by the Board.The Company repurchased 774,858 shares of common stock in open market transactions for an aggregate cost (includingtransaction costs) of $12.0 million, utilizing the maximum amount available under the repurchase program. The Company isincorporated in Maryland and under the laws of the state, shares repurchased are considered retired (repurchased shares becomeauthorized but unissued shares) rather than treasury stock. As a result, the cost of the stock repurchased is recorded as a reductionto capital in excess of par value on the consolidated statement of changes in net assets.F-56  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 17. Financial HighlightsThe following is a schedule of financial highlights for the years ended December 31, 2017, 2016, 2015, 2014 and 2013(dollars in thousands, except share and per share data): For the years ended December 31, 2017 2016 2015 2014 2013Per share data: Net asset value at beginning of period $15.79 $17.04 $18.56 $20.71 $17.61 Net investment income(1) 0.98 1.84 1.67 1.54 1.50 Net realized gain (loss) on investments(1) (1.52) (1.44) 0.35 0.06 0.17 Net unrealized appreciation (depreciation) oninvestments(1) 0.44 0.35 (1.11) (1.87) 0.55 Net unrealized depreciation on Written CallOption(1) (0.26) (0.17) — — — Tax provision(1) (0.08) — — — — Distributions declared from net investmentincome (1.42) (1.80) (1.88) (1.88) (0.47) Distributions declared from net realized gains — — (0.50) — — Partners’ capital distribution — — — — 1.92 Distribution to partners — — — — (0.57) Issuance of common stock — — (0.15) — — Accretive impact of stockrepurchase — — 0.13 — — Other(7) (0.02) (0.03) (0.03) — — Net asset value at end of period $13.91 $15.79 $17.04 $18.56 $20.71 Net assets at end of period $221,887 $250,582 $268,802 $240,837 $268,670 Shares outstanding at end of period 15,951,231 15,868,045 15,777,345 12,974,420 12,974,420 Per share market value at end of period $7.28 $12.93 $12.08 $17.87 $19.90 Total return based on market value(2) (35.68)% 24.07% (20.43)% (0.85)% 1.88% Ratio/Supplemental data: Ratio of net investment income to average netassets 6.54% 11.32% 9.55% 7.78% 7.68% Ratio of incentive fee, net of incentive feewaiver, to average net assets(6) 0.15% 2.01% 1.88% 1.11% 0.60% Ratio of interest and financing expenses toaverage net assets 7.94% 7.68% 7.17% 5.21% 3.30% Ratio of loss on extinguishment of debt toaverage net assets 1.15% —% —% —% —% Ratio of tax provision to average net assets 0.54% —% —% —% —% Ratio of other operating expenses net ofmanagement fee waiver to average netassets(8) 5.75% 5.61% 5.52% 5.20% 2.38% Ratio of total expenses including tax provision,net of fee waivers to average net assets(6)(8) 15.53% 15.30% 14.57% 11.52% 6.28% Portfolio turnover rate(3) 16.34% 21.33% 25.99% 18.62% 16.77% Average debt outstanding(4) $325,314 $356,758 $324,824 $255,268 $198,159 Average debt outstanding per common share $20.39 $22.48 $20.59 $19.67 $15.27 Asset coverage ratio per unit(5) $2,630 $2,592 $2,465 $1,788 $2,376 F-57  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 17. Financial Highlights – (continued)(1)Based on daily weighted average balance of shares outstanding during the period.(2)Total investment return for the years ended December 31, 2017, 2016, 2015, and 2014 is calculated assuming a purchase ofcommon shares at the current market value on the first day 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 DRIP. Total investment return does not reflect brokerage commissions. Total investment return for theyear ended December 31, 2013 is calculated assuming a purchase of common shares at the IPO offering price per share atSeptember 25, 2013, of $20.00 and a sale at the current market value on the last day of the period reported. Dividends anddistributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’sdividend reinvestment plan. Total investment return does not reflect brokerage commissions. Total investment returns coveringless than a full period are not annualized.(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 indebtedness notrepresented by senior securities, to the aggregate amount of senior securities representing indebtedness. We have excluded ourSBA-guaranteed debentures from the asset coverage calculation as of December 31, 2017, 2016, and 2015 pursuant to theexemptive relief granted by the SEC in June 2014 that permits us to exclude such debentures from the definition of seniorsecurities in the 200% asset coverage ratio we are required to maintain under the 1940 Act. Asset coverage per unit is expressedin terms of dollar amounts per $1,000 of indebtedness.(6)The ratio of waived incentive fees to average net assets was 0.40% and 0.65%, and 0.40% for the years ended December 31,2017, 2016 and 2015, respectively. There were no waived incentive fees for the years ended December 31, 2014 and 2013.(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.(8)The ratio of waived management fees to average net assets was 0.09% and 0.13% for the years ended December 31, 2014 and2013, respectively. There were no waived management fees for the years ended December 31, 2017, 2016 and 2015.Note 18. Selected Quarterly Financial Data (Unaudited) For the quarter ended(Dollars in thousands, except per share data) December 31,2017 September30, 2017 June 30,2017 March 31,2017Total investment income $11,600 $12,312 $12,362 $14,815 Net investment income $4,220 $4,410 $703 $6,191 Net increase (decrease) in net assets resulting fromoperations $(587) $(5,753) $(5,525) $4,881 Net investment income per share(1) $0.26 $0.28 $0.04 $0.39 Net increase (decrease) in net assets resulting fromoperations per share(1) $(0.04) $(0.36) $(0.35) $0.31 Net asset value per share at end of period $13.91 $14.21 $14.97 $15.71 F-58  TABLE OF CONTENTSCAPITALA FINANCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017Note 18. Selected Quarterly Financial Data (Unaudited) – (continued) For the quarter ended(Dollars in thousands, except per share data) December 31,2016 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 resulting fromoperations $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 resulting fromoperations per 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 (1)Calculated based on weighted average shares outstanding during the quarter.Note 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, 2017.DistributionsOn January 2, 2018, the Company’s Board declared normal monthly distributions for January, February and March of 2018 asset forth below: Date Declared Record Date Payment Date DistributionsPer ShareJanuary 2, 2018 January 22, 2018 January 30, 2018 $0.0833 January 2, 2018 February 20, 2018 February 27, 2018 0.0833 January 2, 2018 March 23, 2018 March 29, 2018 0.0833 Total Distributions Declared for Fiscal 2018 $0.25 Portfolio ActivityOn January 2, 2018, the Company invested $15.0 million in first lien debt and $0.5 million in membership units of US BathGroup, LLC. The debt investment has a yield of LIBOR + 9.0% with a 1.0% floor.On January 19, 2018, the Company received $7.2 million in cash repayment for its first lien debt investment in BrunswickBowling Products, Inc., repaid at par.F-59  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, 2017 (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, 2017 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, 2017.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, 2017.(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 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controlover financial reporting.ITEM 9B. OTHER INFORMATIONNone.96  TABLE OF CONTENTSPART IIIWe will file a definitive Proxy Statement for our 2018 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 our2018 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 our2018 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 our2018 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 our2018 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 our2018 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.97  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, 2017 and December 31, 2016 F-2 Consolidated Statements of Operations for the years ended December 31, 2017, December 31, 2016and December 31, 2015 F-3 Consolidated Statements of Changes in Net Assets for the years ended December 31, 2017, December31, 2016 and December 31, 2015 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2017, December 31, 2016and December 31, 2015 F-5 Consolidated Schedules of Investments as of December 31, 2017 and December 31, 2016 F-6 Notes to Consolidated Financial Statements F-18 98  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 Second Supplemental Indenture relating to the 6.00% notes due 2022, by and between theRegistrant and U.S. Bank National Association, as trustee, including the form of Global Note(8) 4.4 Form of the Third Supplemental Indenture relating to the 5.75% convertible notes due 2022, by andbetween the Registrant and U.S. Bank National Association, as trustee, including the form of GlobalNote(9)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 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) 10.11 Form of Amendment No. 2 to Senior Secured Revolving Credit Agreement dated June 16, 2017,among Capitala Finance Corp., as Borrower, the lenders party thereto, and ING Capital LLC, asadministrative agent, arranger, and bookrunner(10)99  TABLE OF CONTENTS ExhibitNumber Description of Document 10.12 Form of Amendment No. 1 to Guarantee, Pledge and Security Agreement dated June 16, 2017, amongCapitala Finance Corp., as Borrower, the subsidiary guarantors party thereto, ING Capital LLC, asRevolving Administrative Agent for the Revolving Lenders and as Collateral Agent, and eachFinancing Agent and Designated Indebtedness Holder party thereto(10)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(*)21.1 List of Subsidiaries (filed herewith)31.1 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)(*)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 onForm N-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 onForm N-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 onForm N-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 August 25, 2015.(8)Previously filed in connection with Post-Effective Amendment No. 5 to Capitala Finance Corp.’s registration statement onForm N-2 (File No. 333-204582) filed on May 16, 2017.(9)Previously filed in connection with Post-Effective Amendment No. 6 to Capitala Finance Corp.’s registration statement onForm N-2 (File No. 333-204582) filed on May 26, 2017.(10)Previously filed in connection with Capitala Finance Corp.’s report on Form 8-K filed on June 21, 2017.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.100  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: February 27, 2018 By/s/ Joseph B. Alala IIIJoseph B. Alala IIIChief Executive Officer(Principal Executive Officer)Capitala Finance Corp.Date: February 27, 2018 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) February 27, 2018/s/ Stephen A. ArnallStephen A. Arnall Chief Financial Officer(Principal Financial and Accounting Officer) February 27, 2018/s/ M. Hunt BroyhillM. Hunt Broyhill Director February 27, 2018/s/ R. Charles MoyerR. Charles Moyer Director February 27, 2018/s/ Larry W. CarrollLarry W. Carroll Director February 27, 2018/s/ H. Paul ChapmanH. Paul Chapman Director February 27, 2018101 Exhibit 14.2 CAPITALA FINANCE CORP.CAPITALA INVESTMENT ADVISORS, LLCCAPITALA PRIVATE ADVISORS, LLCCODE OF ETHICS 1.1Purpose THIS CODE OF ETHICS APPLIES TO: (I) CAPITALA INVESTMENT ADVISORS, LLC (“CIA” OR “Capitala”), WHICH SERVES AS THE INVESTMENT ADVISER TO CAPITALA FINANCECORP. (THE “BDC”) AND CAPITALSOUTH PARTNERS SBIC FUND IV, L.P. (“Fund IV”), (II) CAPITALA PRIVATE ADVISORS, LLC, A WHOLLY-OWNED SUBSIDIARY OF CIA(“CPA”, AND TOGETHER WITH CIA, THE “Firm”), WHICH SERVES AS INVESTMENT ADVISER TO CAPITALA PRIVATE CREDIT FUND V, L.P. (“Fund V”), AND THE (III) THE BDC.ADDITIONALLY, THE FIRM MAY, FROM TIME TO TIME, ALSO SERVE AS INVESTMENT ADVISER TO OTHER CLIENT ACCOUNTS SUCH AS NON-REGISTERED POOLED INVESTMENT VEHICLESAND SEPARATELY MANAGED ACCOUNTS, INCLUDING THOSE NOT YET FORMED (COLLECTIVELY WITH FUND IV AND FUND V, EXCLUDING THE BDC, THE “Private Funds” OR “Non-BDC Clients”). References to “Clients” and “Funds” in this Code of Ethics include the BDC and Non-BDC Clients. THE FIRM AND THE BDC HAVE AND WILL CONTINUE TO UPHOLD A HIGH LEVEL OF BUSINESS ETHICS AND PERSONAL INTEGRITY IN ALL TYPES OF TRANSACTIONS AND INTERACTIONS.ACCORDINGLY, THE FIRM AND THE BDC HAVE ADOPTED THIS CODE OF ETHICS PURSUANT TO RULE 204A-1 UNDER THE INVESTMENT ADVISERS ACT OF 1940, AS AMENDED (THE“Advisers Act”) and Rule 17j-1 under the Investment Company Act of 1940, as amended (the “Investment Company Act”). THIS CODE OF ETHICS IS INTENDED TO(I) SET FORTH STANDARDS OF ETHICAL AND LEGAL BEHAVIOR REQUIRED OF THE EMPLOYEES (AS DEFINED BELOW); (II) EMPHASIZE THE FIRM’S COMMITMENT TO ETHICS ANDCOMPLIANCE WITH THE LAW, INCLUDING FEDERAL SECURITIES LAWS1 AND THE SMALL BUSINESS INVESTMENT ACT OF 1958, AS AMENDED (THE “SBIC Act”); (III) PROVIDEreporting mechanisms for known or suspected ethical or legal violations; and (iv) assist in preventing and detecting wrongdoing. ADDITIONALLY, IT IS THE POLICY OF THE FIRM AND OF THE BDC THAT NO EMPLOYEE SHALL, IN CONNECTION WITH THE PURCHASE OR SALE, DIRECTLY OR INDIRECTLY, BY SUCHperson of any security held or to be acquired by a Client account managed by the Firm: (1) Employ any device, scheme or artifice to defraud the BDC; (2) MAKE TO THE BDC ANY UNTRUE STATEMENT OF A MATERIAL FACT OR OMIT TO STATE TO THE BDC A MATERIAL FACT NECESSARY IN ORDER TO MAKE THE STATEMENTmade, in light of the circumstances under which it is made, not misleading; (3) Engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon the BDC; or (4) Engage in any manipulative practice with respect to the BDC. THIS CODE OF ETHICS ALSO SPECIFICALLY ADDRESSES INSIDER TRADING AND THE REPORTING BY EMPLOYEES OF CERTAIN PERSONAL SECURITIES HOLDINGS AND TRANSACTIONS. GIVENTHE POTENTIAL LIABILITY TO WHICH THE FIRM AND ITS DIRECTORS AND OFFICERS MAY BE SUBJECT TO UNDER THE FEDERAL SECURITIES LAWS, IT IS CRITICAL THAT ALL EMPLOYEESthoroughly familiarize themselves with the Code of Ethics. 1 THE TERM “Federal Securities Laws” INCLUDES FOR PURPOSES OF THIS CODE OF ETHICS: THE SECURITIES ACT OF 1933 (THE “1933 Act”), THE SECURITIES EXCHANGE ACTof 1934 (the “1934 Act”), THE SARBANES-OXLEY ACT OF 2002 (“Sarbanes-Oxley”), THE INVESTMENT COMPANY ACT, THE ADVISERS ACT, TITLE V OF THE GRAMM-LEACH-BLILEY ACT (RELATING TO PRIVACY REGULATION), ANY SECURITIES AND EXCHANGE COMMISSION (“SEC”) RULES ADOPTED THEREUNDER, THE BANK SECRECY ACT OF 1970 AS ITAPPLIES TO THE OPERATIONS OF BOTH THE BDC AND THE FIRM (ANTI-MONEY LAUNDERING REGULATION), AND ANY RULES ADOPTED THEREUNDER BY THE SEC OR THE DEPARTMENTof Treasury. 1  FOR PURPOSES OF THIS CODE OF ETHICS, THE TERM “EMPLOYEE” SHALL MEAN THE FIRM’S (I) ACCESS PERSONS, AS DEFINED IN INVESTMENT ADVISERS ACT RULE 204A-1, (II)ACCESS PERSONS, AS DEFINED IN INVESTMENT COMPANY ACT 17J-1, (III) SUPERVISED PERSONS, AS DEFINED IN ADVISERS ACT SECTION 202(A)(25), AND (IV) ALL OTHERemployees of the Firm not otherwise covered by (i)-(iii) herein. NOTWITHSTANDING THE FOREGOING, THE TERM “EMPLOYEE” SHALL NOT INCLUDE ANY DIRECTOR OF THE BDC WHO IS NOT AN “INTERESTED PERSON” OF THE BDC WITHIN THEMEANING OF SECTION 2(A)(19) OF THE INVESTMENT COMPANY ACT, FOR PURPOSES OF Sections 2.6 AND 2.7 OF THIS CODE OF ETHICS, UNLESS SUCH PERSON OTHERWISE IS ASUPERVISED PERSON OF THE FIRM. FURTHERMORE, Section 2.4 OF THIS CODE OF ETHICS SHALL NOT APPLY TO EACH DIRECTOR OF A BDC WHO IS NOT AN “INTERESTED PERSON” OFTHE BDC WITHIN THE MEANING OF SECTION 2(A)(19) OF THE INVESTMENT COMPANY ACT, AND WHO WOULD BE REQUIRED TO MAKE A PERSONAL SECURITIES TRANSACTION REPORTSOLELY BY REASON OF BEING A BDC DIRECTOR, EXCEPT THAT SUCH DIRECTOR SHALL BE REQUIRED TO MAKE A QUARTERLY TRANSACTION REPORT PURSUANT TO Section 2.4.1 IF THEDIRECTOR KNEW OR, IN THE ORDINARY COURSE OF FULFILLING HIS OR HER OFFICIAL DUTIES AS A BDC DIRECTOR SHOULD HAVE KNOWN THAT DURING THE 15-DAY PERIOD IMMEDIATELYBEFORE OR AFTER THE DIRECTOR'S TRANSACTION IN A REPORTABLE SECURITY, THE BDC PURCHASED OR SOLD THE REPORTABLE SECURITY, OR THE BDC OR THE FIRM CONSIDEREDpurchasing or selling the Reportable Security. 1.2Standards of Business Conduct THE FIRM IS COMMITTED TO ADHERING TO THE HIGHEST ETHICAL AND PROFESSIONAL STANDARDS AND TO ACTING WITH INTEGRITY AND IN THE BEST INTERESTS OF ITSCLIENTS. AS SUCH, THE FIRM’S AND THE BDC’S JOINT COMPLIANCE MANUAL AND THIS CODE OF ETHICS, IN PARTICULAR, ARE BASED ON THE PRINCIPLE THAT THE EMPLOYEES OFthe Firm will: ·place the interests of the Firm’s Clients before personal interests; ·CONDUCT THEIR AFFAIRS CONSISTENTLY WITH THE STANDARDS AND REQUIREMENTS SET FORTH HEREIN AND IN SUCH A MANNER AS TO AVOID ANY ACTUAL OR POTENTIALconflict of interest or any abuse of an employee’s position of trust and responsibility; and ·ADHERE TO THE FUNDAMENTAL STANDARD THAT THE FIRM’S PERSONNEL SHOULD NOT TAKE ADVANTAGE OF THEIR POSITIONS OF TRUST AND RESPONSIBILITY TO THEIRpersonal benefit. The following standards of business conduct are not exclusive, but are illustrative of the standards to which the Firm strives to attain. (1)NO ACCESS PERSON SHALL ENGAGE, DIRECTLY OR INDIRECTLY, IN ANY BUSINESS TRANSACTION OR ARRANGEMENT FOR PERSONAL PROFIT THAT ISINCONSISTENT WITH THE BEST INTERESTS OF THE COMPANY OR ITS SHAREHOLDERS OR CLIENTS, AS APPLICABLE; NOR SHALL HE OR SHE MAKE USE OF ANYCONFIDENTIAL INFORMATION GAINED BY REASON OF HIS OR HER EMPLOYMENT BY OR AFFILIATION WITH THE COMPANY OR AFFILIATES THEREOF INORDER TO DERIVE A PERSONAL PROFIT FOR HIMSELF OR HERSELF OR FOR ANY BENEFICIAL INTEREST, IN VIOLATION OF THE FIDUCIARY DUTY OWED TO THECompany or its shareholders or clients, as applicable. (2)ANY ACCESS PERSON RECOMMENDING OR AUTHORIZING THE PURCHASE OR SALE OF A COVERED SECURITY BY THE COMPANY OR ITS ADVISORYCLIENTS SHALL, AT THE TIME OF SUCH RECOMMENDATION OR AUTHORIZATION, DISCLOSE ANY BENEFICIAL INTEREST IN, OR BENEFICIAL OWNERSHIP OF,such Covered Security or the issuer thereof. 2  (3)NO ACCESS PERSON SHALL DISPENSE ANY INFORMATION CONCERNING SECURITIES HOLDINGS OR SECURITIES TRANSACTIONS OF THE COMPANY OR ITSADVISORY CLIENTS TO ANYONE OUTSIDE THE COMPANY, WITHOUT OBTAINING PRIOR WRITTEN APPROVAL FROM THE DESIGNATED OFFICER, OR SUCHPERSON OR PERSONS AS THESE INDIVIDUALS MAY DESIGNATE TO ACT ON THEIR BEHALF. NOTWITHSTANDING THE PRECEDING SENTENCE, SUCH ACCESSPerson may dispense such information without obtaining prior written approval: (a)when there is a public report containing the same information; (b)WHEN SUCH INFORMATION IS DISPENSED IN ACCORDANCE WITH COMPLIANCE PROCEDURES ESTABLISHED TO PREVENT CONFLICTS OF INTERESTbetween the Company and its affiliates; (c)when such information is reported to directors of the Company; or (d)in the ordinary course of his or her duties on behalf of the Company. (4)ALL PERSONAL SECURITIES TRANSACTIONS SHOULD BE CONDUCTED CONSISTENT WITH THIS CODE AND IN SUCH A MANNER AS TO AVOID ACTUAL ORPOTENTIAL CONFLICTS OF INTEREST, THE APPEARANCE OF A CONFLICT OF INTEREST, OR ANY ABUSE OF AN INDIVIDUAL’S POSITION OF TRUST ANDresponsibility within the Company. 1.2.1Fair Dealing EMPLOYEES SHALL BEHAVE HONESTLY AND ETHICALLY AT ALL TIMES AND WITH ALL PEOPLE. THEY SHALL ACT IN GOOD FAITH, WITH DUE CARE, AND SHALL ENGAGE ONLY IN FAIR ANDOPEN COMPETITION, BY TREATING ETHICALLY COLLEAGUES, COMPETITORS AND THIRD-PARTIES. STEALING PROPRIETARY INFORMATION, POSSESSING TRADE SECRET INFORMATION THATWAS OBTAINED WITHOUT THE OWNER’S CONSENT, OR INDUCING SUCH DISCLOSURES BY PAST OR PRESENT EMPLOYEES OF OTHER COMPANIES IS PROHIBITED. NO EMPLOYEE SHOULDTAKE UNFAIR ADVANTAGE OF ANYONE THROUGH MANIPULATION, CONCEALMENT, ABUSE OF PRIVILEGED INFORMATION, MISREPRESENTATION OF MATERIAL FACTS, OR OTHER UNFAIRpractices. 1.2.2Conflicts of Interest 1.2.2.1Generally A CONFLICT OF INTEREST EXISTS WHEN A PERSON’S PRIVATE INTERESTS INTERFERES IN ANY WAY WITH THE INTERESTS OF THE FIRM. A CONFLICT CAN ARISE WHEN AN EMPLOYEE TAKESACTIONS OR HAS INTERESTS THAT MAY MAKE IT DIFFICULT TO PERFORM HIS OR HER WORK FOR THE FIRM OBJECTIVELY AND EFFECTIVELY. CONFLICTS OF INTEREST MAY ALSO ARISE WHENAN EMPLOYEE, OR A MEMBER OF HIS OR HER FAMILY, RECEIVES IMPROPER PERSONAL BENEFITS AS A RESULT OF HIS OR HER POSITION AT THE FIRM. LOANS TO, OR GUARANTEES OFOBLIGATIONS OF, EMPLOYEES AND THEIR FAMILY MEMBERS MAY CREATE CONFLICTS OF INTEREST. IT IS ALMOST ALWAYS A CONFLICT OF INTEREST FOR AN EMPLOYEE TO WORKsimultaneously for the Firm and for a competitor, a Portfolio Company or one of the Firm’s sources of financing. ALL EMPLOYEES SHALL DISCLOSE ANY MATERIAL TRANSACTIONS OR RELATIONSHIPS THAT REASONABLY COULD BE EXPECTED TO GIVE RISE TO A CONFLICT TO THE CHIEF COMPLIANCEOFFIER (“CCO”) PROMPTLY UPON BECOMING AWARE OF SUCH CONFLICT. SUCH RELATIONSHIPS INCLUDE, AMONG OTHERS SERVING ON THE BOARD OF A CHARITY OR NON-PROFITORGANIZATION OR BEING A MEMBER OF AN INVESTMENT COMMITTEE. NO ACTION MAY BE TAKEN WITH RESPECT TO SUCH TRANSACTION OR PARTY UNLESS AND UNTIL SUCH ACTIONHAS BEEN APPROVED BY THE CCO. ADDITIONALLY, THE CCO MUST APPROVE ACTIVITIES THAT INVOLVE TEACHING ASSIGNMENTS, LECTURES OR BUSINESS-RELATED SPEAKINGengagements, consulting engagements, publication of articles or radio or television appearances. 3  Conflicts of interest may not always be clear-cut, so if you have a question, you should immediately consult with the CCO. 1.2.2.2Personal Conflicts of Interest EACH EMPLOYEE SHOULD STRIVE TO AVOID ALL SITUATIONS THAT PRESENT OR COULD REASONABLY BE EXPECTED TO PRESENT A CONFLICT BETWEEN HIS OR HER PERSONAL INTERESTSand those of the Firm (including the Clients). Conflicts of interest may arise when: ·AN EMPLOYEE’S POSITION OR RESPONSIBILITIES WITH THE FIRM GIVE THAT PERSON THE OPPORTUNITY TO OBTAIN FINANCIAL GAIN BEYOND HIS OR HER NORMALcompensation; ·AN EMPLOYEE’S PERSONAL OR FAMILY LOYALTIES OR INTERESTS ARE INCONSISTENT WITH, OR APPEAR TO BE INCONSISTENT WITH, THE BEST INTERESTS OF THE FIRM ANDits investors or clients; ·AN EMPLOYEE TAKES ACTIONS OR HAS INTERESTS, EITHER WITHIN OR OUTSIDE THE SCOPE OF SUCH PERSON’S EMPLOYMENT OR SERVICE WITH THE FIRM, THAT MAKE ITdifficult to perform his or her responsibilities and duties to the Firm and the Clients and their investors objectively and effectively; or ·An Employee has an opportunity and an incentive to favor the interests of one investor or Client over another. THE FOLLOWING IS A NON-EXHAUSTIVE LIST OF SITUATIONS WHERE A CONFLICT OF INTEREST MAY ARISE AND WHICH ARE THEREFORE PROHIBITED UNLESS SPECIFICALLY APPROVED BYthe CCO and the Chief Executive Officer (“CEO”): ·WORKING FOR ANY COMPETITOR OF THE FIRM OR PROVIDING BUSINESS SERVICES TO ANY THIRD PARTY THAT ARE SUBSTANTIALLY SIMILAR TO THE SERVICES PROVIDEDby the Employee to the Firm and the Clients; ·SERVING AS A DIRECTOR, TRUSTEE, OFFICER OR EMPLOYEE OF, OR CONSULTANT FOR, OR IN ANY OTHER SIMILAR CAPACITY WITH, ANY CLIENT OF THE FIRM, ANY INVESTORIN A CLIENT, OR ANY PORTFOLIO COMPANY, REGARDLESS OF WHETHER SUCH SERVICE IS COMPENSATED, UNLESS SUCH SERVICE IS WITHIN THE SCOPE OF EMPLOYMENTor service with the Firm; ·ACTING AS A BROKER, FINDER OR OTHER INTERMEDIARY FOR THE BENEFIT OF A THIRD PARTY IN TRANSACTIONS INVOLVING THE FIRM, ANY CLIENT OR ITS INVESTORS, ORany Portfolio Company, unless such service is within the scope of employment or service with the Firm; ·Using confidential or proprietary information about the Firm or any of its investors, the Clients, or any Portfolio Company, or any other businesspartner for the personal gain of a third party, the Employee’s personal gain, or the gain of a member of such Employee’s relatives or affiliates; ·HAVING, OR A MEMBER OF THE EMPLOYEE’S FAMILY HAVING, AN INTEREST IN A TRANSACTION IN WHICH THE FIRM, ONE OF THE CLIENTS OR ONE OF ITS INVESTORS ISinvolved; and 4  ·HOLDING, OR A MEMBER OF THE EMPLOYEE’S FAMILY HOLDING, ANY OWNERSHIP INTEREST IN ANY ENTITY THAT IS A COMPETITOR OF THE FIRM, OR IN ANY CLIENT ORANY OF ITS INVESTORS, OR IN ANY PORTFOLIO COMPANY, EXCEPT THAT AN EMPLOYEE AND HIS OR HER FAMILY MEMBERS MAY HOLD COMMON SHARES IN ANYpublicly traded entity. 1.2.2.3Conflicts Among Client Interests IN ADDITION TO THE CONFLICTS OF INTEREST DIRECTLY INVOLVING EMPLOYEES SET FORTH ABOVE, ACTUAL OR POTENTIAL CONFLICTS OF INTEREST ALSO MAY ARISE IN THE FOLLOWINGsituations, among others, in connection with the formation and management of the Clients: ·When allocating investments, time and resources among Clients; ·WHEN PROVIDING SERVICES TO THE CLIENTS OR TO PORTFOLIO COMPANIES FOR WHICH THE FIRM WILL BE COMPENSATED WHEN SUCH FEES ARE NOT OFFSET AGAINSTmanagement fees; ·When offering or allocating co-investment opportunities to investors in the Client; ·When selecting investors to sit on the advisory committee of a Client; and ·When valuing assets held by Clients and calculating carried interest payable by a Client. WHEN CONFLICTS ARISE BETWEEN CLIENTS, THE FIRM WILL SEEK TO MITIGATE THE CONFLICT, AND IN DOING SO, IT MAY CONSIDER MANY FACTORS, INCLUDING THE INTERESTS OF EACHCLIENT WITH RESPECT TO THE IMMEDIATE ISSUE AND/OR WITH RESPECT TO THE LONGER TERM COURSE OF DEALING AMONG THE CLIENTS. EXCEPT AS MAY BE SPECIFIED IN ANYRELEVANT CLIENT AGREEMENTS, THE FIRM’S DETERMINATIONS AS TO WHICH FACTORS ARE RELEVANT TO THE RESOLUTION OF ALL CONFLICT OF INTEREST, AND THE RESOLUTION OF SUCHconflicts, will be made in the Firm’s discretion. The following policies are designed to assuage conflicts of interest among Clients: ·A Client will not make any investment, or take any material action with respect to any investment, unless the Firm believes that such investmentor action is an appropriate investment or action considered solely from the viewpoint of such entity. ·CAPITALA AND THE OTHER ENTITIES COMPRISING THE FIRM WILL ABIDE BY THE PROVISIONS OF THE RELEVANT CLIENT AGREEMENTS, WHICH INCLUDE SETprocedures, restrictions or other provisions addressing many important conflicts of interest. ·AS REQUIRED BY THE RELEVANT CLIENT AGREEMENTS, BUT ALSO IN ADDITIONAL SITUATIONS WHERE THE FIRM IN ITS DISCRETION DETERMINES IT WOULD BE USEFUL,THE FIRM WILL CONSULT WITH THE ADVISORY COMMITTEE FOR THE RELEVANT ENTITY ON CONFLICTS OF INTEREST. THE MEMBERS OF THE CLIENT ADVISORY COMMITTEESARE NOT AFFILIATED WITH THE FIRM OTHER THAN BY BEING INVESTORS OR REPRESENTATIVES OF INVESTORS IN THE CLIENTS AND PLAY AN IMPORTANT ROLE INRESOLVING CONFLICTS OF INTEREST BY APPROVING OR DISAPPROVING DECISIONS THAT INVOLVE CERTAIN CONFLICTS OF INTEREST REFERRED TO IT BY THE GENERALPARTNER IN ACCORDANCE WITH THE RELEVANT CLIENT AGREEMENTS OR AS TO WHICH THE GENERAL PARTNER MAY CONSULT WITH THE ADVISORY COMMITTEE ON ITSown volition. ·When the Firm deems it appropriate in its sole discretion, unaffiliated third-parties may be used to help resolve conflicts. ·THE FIRM MAY DETERMINE THAT A THIRD PARTY UNAFFILIATED WITH THE FIRM MAKING AN INVESTMENT ON THE SAME OR SIMILAR TERMS AS A CLIENT DEMONSTRATESthe fairness of the transaction to such Client. 5  1.2.2.4Allocating Investment Opportunities THE FIRM AND ITS RELATED ENTITIES ENGAGE IN A BROAD RANGE OF ACTIVITIES, INCLUDING INVESTMENT ACTIVITIES FOR THEIR OWN ACCOUNT AND FOR THE ACCOUNT OF VARIOUSINVESTMENT FUNDS AND THE PROVISION OF INVESTMENT ADVISORY AND OTHER SERVICES TO FUNDS AND OPERATING COMPANIES. IN CONNECTION WITH ITS INVESTMENT ACTIVITIES,THE FIRM MAY ENCOUNTER SITUATIONS IN WHICH IT MUST DETERMINE HOW TO ALLOCATE INVESTMENT OPPORTUNITIES AMONG VARIOUS FUNDS AND OTHER PERSONS, INCLUDING THEprimary Clients the Firm manages, other Clients that have been formed to invest side-by-side with one or more of the Clients in particular transactions enteredINTO BY SUCH CLIENTS, AND INVESTORS AND OTHER THIRD PARTIES ACTING AS “CO-SPONSORS” OR CO-INVESTORS WITH THE FIRM WITH RESPECT TO A PARTICULAR TRANSACTION FORstrategic or other reasons. IN ALLOCATING INVESTMENT OPPORTUNITIES, THE FIRM MAY BE FACED WITH A VARIETY OF POTENTIAL CONFLICTS OF INTEREST. FOR EXAMPLE, IN ALLOCATING AN INVESTMENTOPPORTUNITY AMONG CLIENTS WITH DIFFERENT FEE, EXPENSE AND COMPENSATION STRUCTURES, THE FIRM MAY HAVE AN INCENTIVE TO ALLOCATE INVESTMENT OPPORTUNITIES TOthe Clients or other vehicles from which the Firm or its related persons may derive, directly or indirectly, a higher fee, compensation or other benefit. SUBJECT TO ITS FIDUCIARY DUTIES AND APPLICABLE LAW, AS WELL AS ANY RELEVANT RESTRICTIONS OR OTHER LIMITATIONS CONTAINED IN THE RELEVANT CLIENT AGREEMENTS, THEFirm will determine how to allocate investment opportunities using its best judgment, considering such factors as it deems relevant. THE FIRM WILL TYPICALLY CAUSE CLIENTS TO CO-INVEST IN TRANSACTIONS ACCORDING TO THE FIRM’S ALLOCATION POLICY. UNLESS NOTHING IS NEGOTIATED OTHER THAN PRICE, THECLIENTS MAY NOT INVEST ALONGSIDE THE BDC WITHOUT COMPLYING WITH THE CONDITIONS OF THE EXEMPTIVE RELIEF GRANTED BY THE SEC TO THE BDC, WHICH PERMITScertain co-investments between the BDC and the Clients advised by the Firm. 1.2.2.5Conflicts Under the SBIC Act In general, subject to receiving prior written exemptions from the Small Business Administration (“SBA”), THE FIRM MAY NOT ENGAGE IN A PLETHORA OF FINANCINGTRANSACTIONS WHICH MAY CONSTITUTE CONFLICTS OF INTEREST. SEE SECTION 107.730 OF THE SBIC ACT – FINANCINGS WHICH CONSTITUTE CONFLICTS OF INTEREST, THE TERMS OFWHICH ARE INCORPORATED HEREIN. MOREOVER, UNDER THE SBIC ACT, WITHOUT PRIOR AUTHORIZATION OR WRITTEN CONSENT BY THE SBA, THE FIRM MAY NOT ENGAGE IN SELF-DEALING THAT PREJUDICES (I) A SMALL BUSINESS (AS DEFINED UNDER THE SBIC ACT), (II) AN SBIC, (III) THE PARTNERS OF AN SBIC, OR (IV) THE SBA. THE FIRM IS PROHIBITEDunder the SBIC Act from, among other things: ·PROVIDING FINANCING TO ANY “ASSOCIATE” OF ANY SBIC OF THE FIRM, WITH “ASSOCIATE” BEING A VERY BROADLY DEFINED TERM WHICH INCLUDES THEINVESTMENT ADVISER TO AN SBIC, AS WELL AS CONTROL PERSONS OF THE SBIC AND CERTAIN CLOSE AND SECONDARY RELATIVES OF CERTAIN CONTROL PERSONS (ASsuch terms are defined in the SBIC Act); or ·PROVIDING FINANCINGS TO AN “ASSOCIATE” OF ANOTHER SBIC IF ANY ASSOCIATE OF ANY SBIC OF THE FIRM HAS RECEIVED OR WILL RECEIVE ANY DIRECT ORindirect financings or commitment from that SBIC or another SBIC in connection therewith. See Section 107.730 of the SBIC Act for other financings which may constitute conflicts of interest. In general, financings with Associates require the SBA’s prior written approval. 6  1.2.3Corporate Opportunities EMPLOYEES ARE PROHIBITED FROM TAKING FOR THEMSELVES OR FOR THIRD PARTIES OPPORTUNITIES THAT ARE DISCOVERED THROUGH THE USE OF CORPORATE PROPERTY, INFORMATIONOR POSITION WITHOUT THE CONSENT OF THE CCO AND THE CEO. NO EMPLOYEE MAY USE COMPANY PROPERTY, INFORMATION OR POSITION FOR IMPROPER PERSONAL GAIN, ANDNO EMPLOYEE MAY COMPETE WITH THE FIRM DIRECTLY OR INDIRECTLY. EMPLOYEES OWE A DUTY TO THE FIRM TO ADVANCE ITS LEGITIMATE BUSINESS INTERESTS WHENEVERpossible. 1.2.4Outside Business Activities A CONFLICT OF INTEREST MAY ARISE WHEN OUTSIDE BUSINESS ACTIVITIES REQUIRE THE TIME AND ATTENTION OF AN EMPLOYEE THAT COULD BE APPLIED TO THE FIRM AND ITSBUSINESS. THUS, AN EMPLOYEE MAY NOT ENGAGE IN AN OUTSIDE BUSINESS ACTIVITY, OTHER THAN THE PERFORMANCE OF SERVICES TO THE FIRM, FOR MATERIAL COMPENSATION OFANY KIND, DIRECT OR INDIRECT, UNLESS (A) THE CCO (IN CONSULTATION WITH THE CEO) EXPRESSLY AUTHORIZES SUCH ACTIVITY AFTER FULL DISCLOSURE OF SUCH PROPOSEDACTIVITY BY THE EMPLOYEE OR (B) SOLELY IN THE CASE OF INTERNS, PART-TIME EMPLOYEES AND OTHERS WHO FOR SIMILAR REASONS ARE EXPECTED TO ENGAGE IN OUTSIDEBUSINESS ACTIVITIES, SUCH OUTSIDE ACTIVITY IS FULLY DISCLOSED AND CLEARLY KNOWN TO THE CCO PRIOR TO THE EMPLOYEE JOINING THE FIRM AND THE CCO IS INFORMED OFANY MATERIAL ADDITIONS OR CHANGES TO SUCH OUTSIDE ACTIVITY. THE CCO AND THE CEO MAY SUBJECT ANY SUCH OUTSIDE BUSINESS ACTIVITY TO SUCH RESTRICTIONS ORlimitations as they deem appropriate. 1.2.5Confidentiality MAINTAINING THE CONFIDENTIALITY OF CLIENTS’ BUSINESS INFORMATION, CONFIDENTIAL PERSONAL AND BUSINESS INFORMATION THAT IS PROVIDED TO THE FIRM BY OTHER THIRDPARTIES WITH WHOM THE FIRM DOES BUSINESS (INCLUDING INVESTORS IN THE CLIENTS), AND THE FIRM’S OWN PROPRIETARY INFORMATION IS FUNDAMENTAL TO THE SUCCESS OF THEFIRM. IT IS THE RESPONSIBILITY OF EVERY EMPLOYEE TO PROTECT CONFIDENTIAL INFORMATION AND TO LIMIT DISCLOSURE TO THOSE PERSONS WHO HAVE A BUSINESS NEED TO KNOWthat information. Employees should consider all information they come in contact with in the course of their employment to be confidential unless the information is known tobe public and the Employee knows that the source of the information does not expect it to be treated confidentially. Examples of information that is confidential include: ·all personal, financial, business or other information provided to the Firm by any investor or prospective investor in any Client; ·INFORMATION ABOUT PORTFOLIO COMPANIES NOT GENERALLY KNOWN TO THE PUBLIC, AND INFORMATION ABOUT THE CLIENTS’ INVESTMENTS IN PORTFOLIOCompanies; ·due diligence information obtained by the Firm; ·TO THE EXTENT NOT ALREADY DESCRIBED ABOVE, INFORMATION RELATING TO OTHER THIRD PARTIES WITH WHOM THE FIRM DOES BUSINESS, SUCH AS FINANCIALCOUNTERPARTIES, ADMINISTRATORS, PLACEMENT OR REFERRAL AGENTS, AND INFORMATION ABOUT THE SERVICES PROVIDED, RELATIONSHIP WITH SUCH PARTIES, ANDtheir business, financial or other information; ·all information contained in proprietary databases; and 7  ·THE FIRM’S OWN BUSINESS, FINANCIAL AND TECHNOLOGICAL INFORMATION, AND INFORMATION ABOUT THE FIRM’S PRODUCTS OR SERVICES, TO THE EXTENT NOTclearly made public by authorized officers of the Firm. Some practical steps Employees should consider in carrying out their confidentiality obligations include: ·maintaining work spaces so that unauthorized persons are not likely to intentionally or unintentionally have access to confidential information; ·BEING AWARE OF THE POTENTIAL FOR CONVERSATIONS TO BE OVERHEARD, WHETHER IN THE OFFICE OR IN PUBLIC PLACES, AND HOLDING CONVERSATIONS WITH THIS INmind; ·IF AN EMPLOYEE IS NOT CERTAIN WHETHER A PERSON REQUESTING INFORMATION IS AUTHORIZED TO REQUEST IT OR HAVE IT PROVIDED TO THEM, CONSULTING WITH THECCO or another supervisory person; ·where appropriate, marking information as “confidential” or “for internal use only” before providing it to another person; and ·NOT READING, WORKING ON COMPUTERS OR DISCUSSING THE FIRM’S BUSINESS IN PUBLIC PLACES IF IT IS POSSIBLE THAT THIRD PARTIES COULD READ THE DOCUMENTSor overhear the conversation. The obligation to preserve confidential information continues even after employment ends. Section 1.5 of this Code of Ethics specifically addresses the confidentiality of “inside information” and should be read together with this Section 1.2.5. 1.2.6Protection and Proper Use of Firm Assets ALL EMPLOYEES SHOULD ENDEAVOR TO PROTECT THE FIRM’S ASSETS AND ENSURE THEIR EFFICIENT USE. THEFT, CARELESSNESS, AND WASTE HAVE A DIRECT IMPACT ON THE FIRM’SPROFITABILITY. ANY SUSPECTED INCIDENT OF FRAUD OR THEFT SHOULD BE IMMEDIATELY REPORTED FOR INVESTIGATION. THE FIRM’S EQUIPMENT SHOULD NOT BE USED FOR NON-Firm business, though incidental personal use is permitted. The obligation of Employees to protect the Firm’s assets includes its proprietary information. Proprietary information includes intellectual property, business,MARKETING AND SERVICE PLANS, INVESTMENT PROPOSALS AND STRATEGIES, DATABASES, RECORDS, SALARY INFORMATION AND UNPUBLISHED FINANCIAL DATA AND REPORTS.Unauthorized use or distribution of this information would violate Firm policy. It could also be illegal and result in civil or criminal penalties. 1.2.7Timely and Truthful Public Disclosure IN REPORTS AND DOCUMENTS FILED WITH OR SUBMITTED TO THE SEC AND OTHER REGULATORS BY THE FIRM, AND IN OTHER PUBLIC COMMUNICATIONS MADE BY THE FIRM, THEEMPLOYEES INVOLVED IN THE PREPARATION OF SUCH REPORTS AND DOCUMENTS (INCLUDING THOSE WHO ARE INVOLVED IN THE PREPARATION OF FINANCIAL OR OTHER REPORTS ANDTHE INFORMATION INCLUDED IN SUCH REPORTS AND DOCUMENTS) SHALL MAKE DISCLOSURES THAT ARE FULL, FAIR, ACCURATE, TIMELY AND UNDERSTANDABLE. WHERE APPLICABLE,EMPLOYEES SHALL PROVIDE THOROUGH AND ACCURATE FINANCIAL AND ACCOUNTING DATA FOR INCLUSION IN SUCH DISCLOSURES. THEY SHALL NOT KNOWINGLY CONCEAL OR FALSIFYINFORMATION, MISREPRESENT MATERIAL FACTS OR OMIT MATERIAL FACTS NECESSARY TO AVOID MISLEADING THE FIRM’S INDEPENDENT PUBLIC AUDITORS, INVESTORS OR THE SBA.EMPLOYEES MUST COOPERATE WITH THE CCO WHEN THE CCO IS COMPILING INFORMATION FOR SEC FILINGS, REQUIRED INTERNAL RECORDKEEPING AND REPORTS, INTERNALinvestigations, and other compliance matters. 8  1.2.8Accounting ALL EMPLOYEES (AND NOT JUST THE FIRM’S ACCOUNTING STAFF) ARE RESPONSIBLE FOR REPORTING COMPLETE AND ACCURATE INFORMATION ABOUT THE BUSINESS, EARNINGS ANDFINANCIAL CONDITION OF THE FIRM AND ITS CLIENTS, AS APPLICABLE. THE FINANCIAL STATEMENTS OF THE FIRM AND EACH CLIENT, AS APPLICABLE, MUST FAIRLY AND COMPLETELYreflect its operations and financial condition. EACH EMPLOYEE IS RESPONSIBLE FOR ENSURING THAT ALL TRANSACTIONS IN WHICH HE OR SHE IS INVOLVED ARE REPORTED COMPLETELY, ACCURATELY AND IN SUFFICIENT DETAIL.THIS INFORMATION IS OF CRITICAL IMPORTANCE FOR PREPARING SUCH FINANCIAL STATEMENTS AND REPORTS TO ITS MEMBERS AND CLIENT INVESTORS. EVERY EMPLOYEE SHOULDalways cooperate fully with the Firm’s finance team and its independent auditors. FIRM FINANCIAL RECORDS MUST BE PREPARED AND MAINTAINED IN ACCORDANCE WITH ALL APPLICABLE LAWS AND REGULATIONS. EACH EMPLOYEE INVOLVED IN PREPARINGFINANCIAL STATEMENTS WILL FOLLOW GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND OTHER APPLICABLE ACCOUNTING STANDARDS AND RULES, INCLUDING THOSE OF THE SBA,each as applicable. THE FIRM’S RECORDS BELONG TO THE FIRM. EMPLOYEES MAY NOT REMOVE ANY SUCH RECORDS OR COPIES THEREOF FROM FIRM PROPERTY UNLESS THEY HAVE A LEGITIMATEbusiness reason for doing so. Any documents or records that are removed for a legitimate business purpose must be returned as soon as reasonably possible. NO EMPLOYEE MAY ENGAGE IN, ALLOW, OR CONCEAL ANY IRREGULARITY IN THE FIRM’S BOOKKEEPING OR ACCOUNTING. EACH EMPLOYEE MUST PROMPTLY BRING TO THEATTENTION OF THE CCO AND FOR THE BDC, THE BDC’S AUDIT COMMITTEE, ANY INFORMATION HE OR SHE MAY HAVE CONCERNING (I) SIGNIFICANT DEFICIENCIES IN THE DESIGNOR OPERATION OR INTERNAL CONTROL OVER FINANCIAL REPORTING THAT COULD ADVERSELY AFFECT THE FIRM’S ABILITY TO RECORD, PROCESS, SUMMARIZE AND REPORT FINANCIAL DATA,(II) ANY FRAUD, WHETHER OR NOT MATERIAL, THAT INVOLVES MANAGEMENT OR OTHER EMPLOYEES WHO HAVE A SIGNIFICANT ROLE IN THE FIRM’S FINANCIAL REPORTING, DISCLOSURESor internal control over financial reporting, and (iii) any other actual or suspected irregularity or concealment thereof. 1.3Compliance With Laws OBEYING THE LAW IS ONE OF THE FOUNDATIONS ON WHICH THE FIRM’S ETHICAL STANDARDS ARE BUILT. IN CONDUCTING THE BUSINESS OF THE FIRM, EMPLOYEES MUST COMPLYWITH APPLICABLE GOVERNMENTAL LAWS, RULES AND REGULATIONS AT ALL LEVELS OF GOVERNMENT IN THE UNITED STATES AND IN ANY NON-U.S. JURISDICTION IN WHICH THE FIRMdoes business. SPECIFICALLY, EMPLOYEES MAY NOT TAKE ANY OF THE FOLLOWING ACTIONS IN CONNECTION WITH ANY SECURITIES TRANSACTION TO BE UNDERTAKEN BY THE FIRM FOR ITSELF OR ONbehalf of any Client or any other party, all of which are prohibited by law: ·Employ any device, scheme or artifice to defraud the person or entity making the purchase or sale; ·MAKE ANY UNTRUE STATEMENT OF A MATERIAL FACT OR OMIT TO STATE A MATERIAL FACT NECESSARY IN ORDER TO MAKE THE STATEMENT, IN LIGHT OF THEcircumstances under which it was made, not misleading; 9  ·Engage in an act, practice, or course of conduct that operates or would operate as a fraud or deceit; ·ENGAGE IN ANY MANIPULATIVE PRACTICE WITH RESPECT TO ANY PERSON OR ENTITY THAT IS A PARTY TO THE TRANSACTION OR WITH RESPECT TO ANY SECURITY OR OTHERinterest held or to be acquired by the Firm or a Client (including price manipulation); or ·CONSUMMATE A PURCHASE OR SALE OF A SECURITY OR OTHER INTEREST WHILE IN POSSESSION OF MATERIAL NON-PUBLIC INFORMATION REGARDING SUCH SECURITY ORinterest, or communicate such information to any person, in violation of any applicable securities law or other applicable laws and regulations. ALTHOUGH NOT ALL EMPLOYEES ARE EXPECTED TO KNOW THE DETAILS OF ALL LAWS, IT IS IMPORTANT FOR EACH EMPLOYEE TO KNOW ENOUGH ABOUT THE APPLICABLE LOCAL, STATEAND NATIONAL LAWS IMPLICATED BY THEIR BUSINESS ACTIVITIES TO KNOW WHEN TO SEEK ADVICE FROM THE CCO OR OTHER APPROPRIATE PERSONNEL, INCLUDING THE FIRM’SLEGAL COUNSEL. THE CODE OF ETHICS DOES NOT ATTEMPT TO IDENTIFY OR EXPLAIN ALL LAWS TO WHICH THE FIRM AND ITS OPERATIONS ARE SUBJECT, BUT BRIEF SUMMARIES OFcertain laws applicable to the Firm’s business are as follows: 1.3.1Investment Advisers Act of 1940 THE INVESTMENT ADVISERS ACT REQUIRES THE REGISTRATION OF AND IMPOSES VARIOUS OTHER SUBSTANTIVE REGULATORY REQUIREMENTS ON INVESTMENT ADVISERS, WHICH AREGENERALLY DEFINED AS PERSONS IN THE BUSINESS OF PROVIDING ADVICE TO OTHERS WITH RESPECT TO INVESTMENTS IN SECURITIES. CAPITALA IS AN INVESTMENT ADVISER BECAUSEIT PROVIDES SUCH ADVICE TO THE CLIENTS, WHICH ARE ITS CLIENTS UNDER THE INVESTMENT ADVISERS ACT. ACCORDINGLY, CAPITALA HAS REGISTERED WITH THE SEC AS ANINVESTMENT ADVISER UNDER THE INVESTMENT ADVISERS ACT. THIS CODE OF ETHICS IS DESIGNED TO SATISFY CERTAIN REQUIREMENTS UNDER, AND OTHERWISE HELP ENSUREcompliance with, the Investment Advisers Act and other federal securities laws. 1.3.2Investment Company Act of 1940 THE INVESTMENT COMPANY ACT REQUIRES THE REGISTRATION OF AND IMPOSES VARIOUS OTHER SUBSTANTIVE REGULATORY REQUIREMENTS ON INVESTMENT COMPANIES, WHICH AREGENERALLY DEFINED AS ISSUERS PRIMARILY ENGAGED IN THE BUSINESS OF INVESTING IN SECURITIES. THE FIRM, WITH THE ASSISTANCE OF ITS LEGAL COUNSEL, ENSURES THAT ALL OFTHE PRIVATE FUNDS MANAGED BY THE FIRM ARE EXEMPT FROM REGISTRATION UNDER THE INVESTMENT COMPANY ACT BY ENSURING THAT THE CLIENTS CAN AVAIL THEMSELVES OFCERTAIN EXCEPTIONS FROM THE DEFINITION OF “INVESTMENT COMPANY” SET FORTH IN SECTION 3(C) OF THE INVESTMENT COMPANY ACT. BDCS, FOR WHICH THE FIRM SERVES ASthe investment adviser, are registered under the Investment Company Act. 1.3.3Securities Act of 1933 THE SECURITIES ACT REQUIRES THAT ANY OFFER OR SALE OF SECURITIES USING THE MEANS AND INSTRUMENTALITIES OF INTERSTATE COMMERCE BE REGISTERED WITH THE SECPURSUANT TO THE SECURITIES ACT, UNLESS AN EXEMPTION FROM REGISTRATION EXISTS. ITS PRIMARY PURPOSE IS TO ENSURE THAT BUYERS OF SECURITIES RECEIVE COMPLETE ANDACCURATE INFORMATION BEFORE THEY INVEST. THE FIRM, WITH THE ASSISTANCE OF ITS LEGAL COUNSEL, ENSURES THAT ALL OFFERINGS OF INTERESTS IN PRIVATE FUNDS ARE EXEMPTfrom registration under the Securities Act, typically pursuant to Regulation D thereunder. 1.3.4Securities Exchange Act of 1934 THE EXCHANGE ACT PROVIDES FOR, AMONG OTHER THINGS, THE REGISTRATION AND REGULATION OF SECURITIES EXCHANGES, THE REGISTRATION OF SECURITIES LISTED ON SUCHEXCHANGES, FINANCIAL AND OTHER REPORTING REQUIREMENTS FOR COMPANIES WHOSE SECURITIES ARE SO REGISTERED, AND THE REGISTRATION AND REGULATION OF NATIONALSECURITIES ASSOCIATIONS AND OF BROKERS AND DEALERS IN SECURITIES. THE PRIVATE FUNDS DO NOT HAVE SECURITIES REGISTERED ON ANY EXCHANGE. THE BDCS MANAGED BYTHE FIRM ARE EXPECTED TO HAVE SECURITIES TRADED ON THE NASDAQ STOCK MARKET, THE NEW YORK STOCK EXCHANGE OR SIMILAR NATIONAL SECURITIES EXCHANGE. THEFirm conducts its business so as to avoid any requirement that it register as a broker or dealer. 10  1.3.5State Securities Laws THE VARIOUS STATES WHERE THE FIRM CONDUCTS BUSINESS HAVE LAWS CONCERNING THE OFFER AND SALE OF SECURITIES THAT ARE APPLICABLE TO THE FIRM’S BUSINESS WITHIN THErespective states. Federal securities laws preempt these state securities laws in many, but not all, respects. 1.3.6Anti-Money Laundering Regulations CONGRESS HAS ENACTED A NUMBER OF STATUTES TO COMBAT MONEY LAUNDERING INCLUDING THE BANK SECRECY ACT, WHICH PROVIDES FOR THE DEPARTMENT OF TREASURY TOMONITOR DOMESTIC AND INTERNATIONAL MONEY FLOWS; THE MONEY LAUNDERING CONTROL ACT; THE MONEY LAUNDERING SUPPRESSION ACT; AND THE USA PATRIOT ACT.SEVERAL AGENCIES OF THE DEPARTMENT OF TREASURY ASSIST IN PREVENTING AND DETECTING MONEY LAUNDERING, MOST NOTABLY THE FINANCIAL CRIMES ENFORCEMENTNETWORK (“FinCEN”) AND THE TREASURY’S OFFICE OF FOREIGN ASSETS CONTROL (“OFAC”). A NUMBER OF FOREIGN COUNTRIES ALSO HAVE MONEY LAUNDERING LAWS ANDregulation. See Section 6 of the Firm’s Joint Compliance Manual for additional information. 1.4Personal Trading ALL FIRM EMPLOYEES MUST BE FAMILIAR WITH AND ABIDE BY THESE PERSONAL TRADING POLICIES AND PROCEDURES. IN ADDITION, RULE 204A-1 UNDER THE INVESTMENTADVISERS ACT REQUIRES AN INVESTMENT ADVISER’S ACCESS PERSONS (I) TO SUBMIT REPORTS OF THEIR PERSONAL SECURITIES TRANSACTIONS AND HOLDINGS PERIODICALLY TO THEINVESTMENT ADVISOR FOR REVIEW, AND (II) TO OBTAIN PRE-APPROVAL FROM THE ADVISER FOR CERTAIN TYPES OF SECURITIES TRANSACTIONS. RULE 17J-1 OF THE INVESTMENTCompany Act imposes similar securities reporting requirements. THESE PERSONAL TRADING POLICIES AND PROCEDURES SHALL APPLY TO (AND REFERENCES TO AN “EMPLOYEE” IN THESE PERSONAL TRADING POLICIES AND PROCEDURES SHALL BEDEEMED TO INCLUDE, AS APPLICABLE) ALL EMPLOYEES (WHETHER OR NOT THEY ARE ACCESS PERSONS, AS DEFINED IN THE INVESTMENT ADVISERS ACT), THEIR SPOUSES/PARTNERS(UNLESS SEPARATED) AND ANY OTHER FAMILY MEMBERS RESIDING IN THE SAME HOUSEHOLD WITH THEM. THE ONLY EXCEPTION TO THE FOREGOING IS IF THE CCO AFFIRMATIVELYDETERMINES (AND DOCUMENTS ITS DETERMINATION) THAT AN EMPLOYEE IS NOT AN ACCESS PERSON AND DOES NOT NEED TO BE SUBJECTED TO THESE PERSONAL TRADING POLICIESand procedures, it being expected that the CCO would rarely, if ever, make such a determination. 1.4.1Securities Holdings and Transaction Reports Each Employee must provide to the CCO a current securities holdings report (“Holdings Report”) in the form attached hereto as Appendix E-1: ·IN THE CASE OF EXISTING EMPLOYEES, WITHIN TEN DAYS AFTER THE EFFECTIVENESS OF THIS CODE OF ETHICS (UNLESS PREVIOUSLY PROVIDED WITH RESPECT TO THEmost recently ended calendar year); ·in the case of new Employees, no later than ten days after initial employment with the Firm; and 11  ·in the case of all Employees, annually not later than 45 days after the end of the fiscal year. Each Holdings Report must set forth: ·FOR EACH REPORTABLE SECURITY (AS DEFINED BELOW) IN WHICH THE EMPLOYEE HAS ANY DIRECT OR INDIRECT BENEFICIAL OWNERSHIP, (I) THE TITLE AND TYPE OFsecurity, (ii) the exchange ticker symbol or CUSIP number (if applicable), and (iii) the number of shares and principal amount of such security; ·FOR EACH ACCOUNT IN WHICH ANY SECURITIES (INCLUDING SECURITIES THAT ARE NOT REPORTABLE SECURITIES) ARE HELD FOR THE EMPLOYEE’S DIRECT OR INDIRECTbenefit, the name of any broker, dealer or bank with which the employee maintains such account; and ·the date the Employee submits the statement. INFORMATION IN A HOLDINGS REPORT MUST BE CURRENT AS OF A DATE NO MORE THAN 45 DAYS PRIOR TO THE DATE THE REPORT IS SUBMITTED. IF THE EMPLOYEE (INCLUDING THEEMPLOYEE’S FAMILY MEMBERS, AS APPLICABLE) HAS NO HOLDINGS TO REPORT, THEN HE/SHE MUST NEVERTHELESS SUBMIT A HOLDINGS REPORT IN THE FORM ATTACHED HERETO ASAppendix E-1 indicating that they have no reportable holdings. AN EMPLOYEE MAY SATISFY THE REQUIREMENT THAT HE OR SHE PROVIDE CERTAIN OF THE INFORMATION ON A HOLDINGS REPORT BY PROVIDING ONE OR MORE BROKERAGESTATEMENTS, PROVIDED THAT SUCH BROKERAGE STATEMENTS SET FORTH ALL THE INFORMATION THAT IS REQUIRED TO BE SET FORTH IN THE EMPLOYEE’S HOLDINGS REPORT.EMPLOYEES EXERCISING THIS OPTION MUST NEVERTHELESS SUBMIT A HOLDINGS REPORT EACH YEAR AS PROVIDED ABOVE. SEE THE FORM OF HOLDINGS REPORT ATTACHED HERETOas Appendix E-1 for more detail. Each Employee must provide to the CCO a quarterly transaction report (“Transaction Report”) in the form attached hereto as Appendix E-2 within thirty daysAFTER THE END OF EACH CALENDAR QUARTER. EACH TRANSACTION REPORT MUST SET FORTH THE FOLLOWING INFORMATION ABOUT EACH TRANSACTION DURING SUCH CALENDAR QUARTERinvolving any Reportable Security in which the Employee had, or as a result of the transaction acquired, any direct or indirect beneficial ownership: ·THE DATE OF THE TRANSACTION, THE TITLE AND TICKER SYMBOL OR CUSIP NUMBER, INTEREST RATE AND MATURITY DATE, NUMBER OF SHARES AND THE PRINCIPALamount of each reportable security; ·the nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition); ·the price of the security at which the transaction was effected; ·the name of the broker, dealer or bank with or through which the transaction was effected; and ·the date the Employee submits the report. IF THE EMPLOYEE (INCLUDING THE EMPLOYEE’S FAMILY MEMBERS, AS APPLICABLE) HAS NO TRANSACTIONS TO REPORT, THEN HE/SHE MUST NEVERTHELESS SUBMIT A TRANSACTIONReport in the form attached hereto as Appendix E-2 indicating that they have no reportable transactions. 12  AN EMPLOYEE MAY SATISFY THE REQUIREMENT THAT HE OR SHE PROVIDE CERTAIN OF THE INFORMATION ON A TRANSACTION REPORT BY PROVIDING ONE OR MORE BROKERAGESTATEMENTS OR BY PROVIDING TRADE CONFIRMATIONS, PROVIDED THAT SUCH BROKERAGE STATEMENTS OR TRADE CONFIRMATIONS SET FORTH ALL THE INFORMATION THAT IS REQUIRED TOBE SET FORTH IN THE EMPLOYEE’S TRANSACTION REPORT. EMPLOYEES EXERCISING THIS OPTION MUST NEVERTHELESS SUBMIT A TRANSACTION REPORT EACH QUARTER AS PROVIDEDabove. See the form of Transaction Report attached hereto as Appendix E-2 for more detail. The CCO shall review all Holdings and Transaction Reports to ensure compliance with these personal trading policies and procedures. THE FIRM REQUESTS THAT ALL EMPLOYEES HAVE THE BROKERS OR OTHER CUSTODIANS OF THEIR SECURITIES ACCOUNTS PROVIDE PERIODIC STATEMENTS AND TRANSACTIONconfirmations directly to the CCO. Attached as Appendix E-3 IS A FORM OF LETTER TO THE FIRM IN WHICH AN EMPLOYEE CONFIRMS THAT IT HAS INSTRUCTED THE BROKER OROTHER CUSTODIAN OF AN ACCOUNT TO DO SO. WHILE NOT REQUIRED, THE FIRM ENCOURAGES EMPLOYEES TO PROVIDE SUCH INSTRUCTIONS TO THEIR BROKERS OR OTHER CUSTODIANSand, after doing so with respect to an account, to provide the Firm a letter regarding such account in the form attached as Appendix E-3. No less frequently than annually, the BDC’s CCO must furnish to its Board, and the Board must consider, a written report that: ·DESCRIBES ANY ISSUES ARISING UNDER THE CODE OF ETHICS OR PROCEDURES SINCE THE LAST REPORT TO THE BOARD, INCLUDING BUT NOT LIMITED TO, INFORMATION ABOUTmaterial violations of the Code of Ethics or procedures and sanctions imposed in response to the material violations; and ·certifies that the BDC has adopted procedures reasonably necessary to prevent Employees from violating the Code of Ethics. “Reportable Security” means any and all securities, except for the following exempted securities and transactions: ·direct obligations of the government of the United States; ·BANKERS’ ACCEPTANCES, BANK CERTIFICATES OF DEPOSIT, COMMERCIAL PAPER AND HIGH QUALITY SHORT-TERM DEBT INSTRUMENTS, INCLUDING REPURCHASEagreements; ·shares issued by money market funds; ·shares issued by open-end funds to which none of the Firm or any of its affiliates provide investment advice; ·SHARES ISSUED BY UNIT INVESTMENT TRUSTS THAT ARE INVESTED EXCLUSIVELY IN ONE OR MORE OPEN-END FUNDS, NONE OF WHICH ARE FUNDS TO WHICH THE FIRMor any of its affiliates provides investment advice; and ·FOR PURPOSES OF TRANSACTION REPORTS ONLY, SECURITIES HELD IN INVESTMENT ACCOUNTS OVER WHICH AN EMPLOYEE HAS NO DIRECT OR INDIRECT INFLUENCE ORcontrol or pursuant to an automatic investment plan. 13  1.4.2Pre-Approval of Certain Transactions RULE 204A-1 UNDER THE INVESTMENT ADVISERS ACT AND RULE 17J-1 UNDER THE INVESTMENT COMPANY ACT REQUIRES THAT ACCESS PERSONS OF AN INVESTMENT ADVISEROBTAIN PRE-APPROVAL OF THE ADVISER BEFORE PARTICIPATING IN AN INITIAL PUBLIC OFFERING OR A LIMITED SECURITIES OFFERING. IN FURTHERANCE OF THE FOREGOING, AND INfurtherance of the Firm’s policies regarding insider trading, it is the policy of the Firm that all Employees obtain the prior approval from the CCO before: ·purchasing or selling the securities of any company set forth on the Restricted List (as defined below); ·acquiring any securities in an initial public offering; or ·purchasing securities in a Limited Offering (as defined below, and generally including any private placement). “LIMITED OFFERING” MEANS ANY OFFERING THAT IS EXEMPT FROM REGISTRATION UNDER SECTION 4(2) OR 4(6) OF THE SECURITIES ACT OR REGULATION D THEREUNDER ANDINCLUDES, BUT IS NOT LIMITED TO, OFFERINGS OF INTERESTS IN HEDGE, VENTURE CAPITAL AND OTHER TYPES OF FUNDS, START-UP AND OTHER PRIVATELY HELD COMPANIES, AND REALestate investment partnerships. PRIOR APPROVAL SHALL BE SOUGHT BY SUBMITTING TO THE CCO AN APPROVAL REQUEST SETTING FORTH THE DETAILS OF THE PROPOSED TRANSACTION, IN THE FORM ATTACHED HERETOas Appendix E-4 OR IN SUCH OTHER FORM AS TO WHICH THE CCO MAY PRESCRIBE OR AGREE. EMPLOYEES SHALL PROVIDE SUCH ADDITIONAL DETAIL AS MAY BE REQUESTED BYthe CCO or else not participate in the proposed transaction. Purchases will be approved by the CCO only when the CCO believes such purchases and sales areNOT IN CONFLICT WITH THE HOLDINGS AND BEST INTERESTS OF THE FIRM OR ANY CLIENT OF THE FIRM. IN CONSIDERING SUCH PRE-CLEARANCE, THE CCO OR HIS OR HER DESIGNEEwill consider whether the opportunity is being offered to the Employee by virtue of his or her position with the Firm. Employees who have acquired securitiesIN A LIMITED OFFERING ARE REQUIRED TO DISCLOSE SUCH INVESTMENT TO THE FIRM WHEN THEY PARTICIPATE IN ANY CLIENT’S SUBSEQUENT CONSIDERATION OF AN INVESTMENT INthe issuer. No Employee should purchase a security held or being considered for investment by a Client. 14  1.4.3Prohibited Transactions GENERAL PROHIBITION. NO ACCESS PERSON SHALL PURCHASE OR SELL, DIRECTLY OR INDIRECTLY, ANY COVERED SECURITY IN WHICH HE OR SHE HAS, OR BY REASON OF SUCHTRANSACTION ACQUIRES, ANY DIRECT OR INDIRECT BENEFICIAL OWNERSHIP AND WHICH SUCH ACCESS PERSON KNOWS OR SHOULD HAVE KNOWN AT THE TIME OF SUCH PURCHASE ORSALE IS BEING CONSIDERED FOR PURCHASE OR SALE BY THE COMPANY OR ITS ADVISORY CLIENTS, OR IS HELD IN THE PORTFOLIO OF THE COMPANY UNLESS SUCH ACCESS PERSONshall have obtained prior written approval for such purpose from the Designated Officer. AN ACCESS PERSON WHO BECOMES AWARE THAT THE COMPANY IS CONSIDERING THE PURCHASE OR SALE OF, OR THE RECOMMENDATION TO AN ADVISORY CLIENT OF THE PURCHASEOR SALE OF, ANY COVERED SECURITY BY ANY PERSON MUST IMMEDIATELY NOTIFY THE DESIGNATED OFFICER OF ANY INTEREST THAT SUCH ACCESS PERSON MAY HAVE IN ANYOUTSTANDING COVERED SECURITIES OF THE ISSUER THEREOF. AN ACCESS PERSON SHALL SIMILARLY NOTIFY THE DESIGNATED OFFICER OF ANY OTHER INTEREST OR CONNECTION THATSUCH ACCESS PERSON MIGHT HAVE IN OR WITH SUCH ISSUER. ONCE AN ACCESS PERSON BECOMES AWARE THAT THE COMPANY IS CONSIDERING OR RECOMMENDING THE PURCHASEor sale of a Covered Security or that the Company or an advisory client holds a Covered Security in its portfolio, such Access Person may not engage, withoutPRIOR APPROVAL OF THE DESIGNATED OFFICER, IN ANY TRANSACTION IN ANY COVERED SECURITIES OF THAT ISSUER. THE FOREGOING NOTIFICATIONS OR PERMISSION MAY BEprovided verbally, but should be confirmed in writing as soon and with as much detail as possible. INITIAL PUBLIC OFFERINGS AND LIMITED OFFERINGS. INVESTMENT PERSONNEL OF THE COMPANY MUST OBTAIN APPROVAL FROM THE COMPANY BEFORE DIRECTLY OR INDIRECTLYacquiring Beneficial Ownership in any securities in an Initial Public Offering or in a Limited Offering. BLACKOUT PERIODS. NO INVESTMENT PERSONNEL SHALL EXECUTE A SECURITIES TRANSACTION IN ANY SECURITY THAT THE COMPANY OR AN ADVISORY CLIENT OWNS OR ISconsidering or recommending for purchase or sale. COMPANY ACQUISITION OF SHARES IN COMPANIES THAT INVESTMENT PERSONNEL HOLD THROUGH LIMITED OFFERINGS. INVESTMENT PERSONNEL WHO HAVE BEEN AUTHORIZEDTO ACQUIRE SECURITIES IN A LIMITED OFFERING MUST DISCLOSE THAT INVESTMENT TO THE DESIGNATED OFFICER WHEN THEY ARE INVOLVED IN THE COMPANY’S SUBSEQUENTCONSIDERATION OF AN INVESTMENT IN THE ISSUER, AND THE COMPANY’S DECISION TO PURCHASE SUCH SECURITIES MUST BE INDEPENDENTLY REVIEWED BY INVESTMENTPersonnel with no personal interest in that issuer. Gifts. GENERALLY, NO ACCESS PERSON MAY ACCEPT, DIRECTLY OR INDIRECTLY, ANY GIFT, FAVOR, OR SERVICE OF MORE THAN A de minimis VALUE (e.g., $500) FROM ANY PERSONwith whom he or she transacts business on behalf of the Company or any advisory client. Please refer to our Code of Business Conduct and Ethics. Service as Director. NO ACCESS PERSON SHALL SERVE ON THE BOARD OF DIRECTORS OF A PORTFOLIO COMPANY OF THE COMPANY WITHOUT PRIOR WRITTEN AUTHORIZATION OF THEDESIGNATED OFFICER BASED UPON A DETERMINATION THAT THE BOARD SERVICE WOULD BE CONSISTENT WITH THE INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND ANYadvisory clients. 1.4.4Restricted List THE FIRM WILL MAINTAIN A LIST (THE “Restricted List”) IDENTIFYING COMPANIES ABOUT WHICH THE FIRM HAS MATERIAL NON-PUBLIC INFORMATION OR AS TO WHICH THE FIRMOTHERWISE DESIRES THAT EMPLOYEES (AND IN SOME CASES, THE CLIENT) NOT ENGAGE IN, OR OBTAIN PRIOR APPROVAL FOR, SECURITIES TRANSACTIONS. EMPLOYEES SHALL OBTAINPRIOR APPROVAL AS SPECIFIED ABOVE, USING THE FORM ATTACHED HERETO AS Appendix E-4, PRIOR TO ENGAGING IN ANY TRANSACTION INVOLVING THE SECURITIES OF ANYcompany set forth on the Restricted List. 15  MAINTENANCE OF THE RESTRICTED LIST SHALL PRIMARILY BE THE RESPONSIBILITY OF THE CCO, BUT ALL EMPLOYEES SHARE RESPONSIBILITY FOR ENSURING THAT THE RESTRICTEDLIST INCLUDES COMPANIES ABOUT WHICH THE FIRM HAS MATERIAL NON-PUBLIC INFORMATION AND COMPANIES FALLING WITHIN SUCH OTHER CATEGORIES AS THE CCO MAYDETERMINE NEED TO BE SET FORTH ON THE RESTRICTED LIST. SUCH CATEGORIES MAY INCLUDE, FOR EXAMPLE, COMPANIES WITH WHICH THE FIRM HAS ENTERED INTOCONFIDENTIALITY AGREEMENTS PROTECTING THE OTHER COMPANIES’ CONFIDENTIAL INFORMATION, PROSPECTIVE PORTFOLIO COMPANIES UNDER ACTIVE CONSIDERATION FORINVESTMENT BY THE FIRM FOR A CLIENT, AND COMPANIES CONSIDERING ENTER MATERIAL TRANSACTIONS WITH PORTFOLIO COMPANIES. EMPLOYEES WHO RECEIVE, INTEND TORECEIVE, OR REASONABLY EXPECT TO RECEIVE MATERIAL, NON-PUBLIC INFORMATION ABOUT A COMPANY ARE REQUIRED TO PROMPTLY REPORT THIS FACT TO THE CCO SO THAT THEcompany can be added to the Restricted List unless they know such company already to be on the Restricted List. COMPANIES INCLUDED ON THE RESTRICTED LIST MUST NOT BE DISCUSSED WITH PERSONS OUTSIDE THE FIRM WITHOUT THE PRIOR CONSENT OF THE CCO. WHEN A COMPANY ISPLACED ON THE RESTRICTED LIST, NO EMPLOYEE MAY TRADE IN THE SECURITIES OR OTHER INSTRUMENTS OF THE COMPANY ABSENT AUTHORIZATION FROM THE CCO (WHICH EXCEPTIN RARE CASES WILL BE DENIED) UNTIL THAT COMPANY IS REMOVED FROM THE RESTRICTED LIST. IN ADDITION, NO EMPLOYEE OF THE FIRM MAY RECOMMEND TRADING IN SUCHcompany, or otherwise disclose material nonpublic information, to anyone. The Restricted List is a highly confidential LIST OF COMPANIES THAT IS MAINTAINED INthe possession of the CCO, and its contents must not be communicated directly or indirectly to anyone outside the Firm. THE RESTRICTED LIST WILL BE PERIODICALLY REVIEWED BY THE CCO, WITH SUCH EMPLOYEE ASSISTANCE AS THE CCO DEEMS NECESSARY, TO ENSURE THE APPROPRIATENESS OFcompanies on the list and whether or not any companies need to be added or deleted. 1.5Insider Trading 1.5.1Legal Background EMPLOYEES OF THE FIRM, IN THE CONDUCT OF THEIR INVESTMENT RESPONSIBILITIES, MAY OCCASIONALLY OBTAIN MATERIAL NON-PUBLIC INFORMATION ABOUT SECURITIES ORFINANCIAL INSTRUMENTS OR THE ISSUERS THEREOF. SUCH INFORMATION MAY NOT BE ACTED UPON BY AN EMPLOYEE FOR HIS OR HER BENEFIT OR FOR THE BENEFIT OF THE FIRM OROTHERS. THE FIRM STRICTLY PROHIBITS AN EMPLOYEE FROM BUYING, SELLING, RECOMMENDING OR OTHERWISE TRANSACTING IN OR LEADING OR CAUSING OTHERS TO TRANSACT IN ANYSECURITY WHERE SUCH EMPLOYEE POSSESSES OR IS DEEMED TO POSSESS MATERIAL NON-PUBLIC INFORMATION RELEVANT TO SUCH SECURITY. PROHIBITED ACTIONS INCLUDE, BUT ARENOT LIMITED TO, ACTUAL TRADING, TIPPING, FRONT RUNNING AND SCALPING. THE FIRM’S INSIDER TRADING POLICY AND PROCEDURES ARE ATTACHED TO ITS JOINT COMPLIANCEManual as Appendix T. 1.5.2Firm Procedures for Preventing the Misuse of Material, Nonpublic Information THE FIRM’S POLICY REQUIRES STRINGENT AVOIDANCE OF THE MISUSE OF INSIDE INFORMATION. ACCORDINGLY, THE FOLLOWING PROCEDURES, WHICH ARE DESIGNED TO PREVENTsuch misuse, are to be followed by all Employees: ·THOSE IN POSSESSION OF MATERIAL, NONPUBLIC INFORMATION MUST PRESERVE THE CONFIDENTIALITY OF SUCH INFORMATION AND ABSTAIN FROM TRADING UNTIL THEinside information is disclosed and made public. ·GIVEN THE POTENTIALLY SEVERE CONSEQUENCES TO THE FIRM AND ITS PERSONNEL OF A WRONG DECISION, ANY EMPLOYEE WHO IS UNCERTAIN AS TO WHETHER ANYINFORMATION HE OR SHE POSSESSES IS MATERIAL “INSIDE” INFORMATION MUST CONTACT THE CCO FOR ADVICE RATHER THAN RELYING ON HIS OR HER OWN JUDGMENTor interpretation. 16  ·THE CCO MUST MAKE A DETERMINATION THAT MATERIAL “INSIDE” INFORMATION HAS BECOME PUBLIC, AND ONLY THEN WILL TRADING IN THE AFFECTED SECURITIESbe authorized. ·NO EMPLOYEE, WHILE IN POSSESSION OF MATERIAL INSIDE INFORMATION RELEVANT TO A SECURITY OF A COMPANY, SHALL PURCHASE OR SELL, OR RECOMMEND ORdirect the purchase or sale of any securities issued by that company. ·NO EMPLOYEE SHALL USE MATERIAL INSIDE INFORMATION TO PURCHASE OR SELL SECURITIES FOR HIS OR HER OWN ACCOUNT, OR FOR ANY ACCOUNT IN WHICH HE OR SHEhas a beneficial interest. ·The CCO or his designee will periodically review Employee trades for evidence of insider trading and will investigate suspected inside trades. ·Inside information shall only be discussed within the Firm and then only on a need-to-know basis. No employee of the Firm shall disclose insideINFORMATION CONCERNING ANY COMPANY TO ANY PERSON OUTSIDE THE FIRM, EXCEPT IN THE ORDINARY COURSE OF HIS OR HER DUTIES FOR THE FIRM OR ITSaffiliates or otherwise with the authorization of the CCO. ·IF AN EMPLOYEE OBTAINS INFORMATION THAT THE EMPLOYEE BELIEVES MAY BE MATERIAL, NONPUBLIC INFORMATION, THE EMPLOYEE MUST IMMEDIATELY NOTIFYTHE CCO OF THE INFORMATION. IF THE CCO DETERMINES THAT THE INFORMATION CONSTITUTES MATERIAL, NONPUBLIC INFORMATION THAT MIGHT EXPOSE THE FIRMor any of its affiliates to liability for “insider trading,” the company to which the information relates will be placed on the Restricted List. IF INSIDE INFORMATION IS LATER DISCLOSED TO THE GENERAL PUBLIC, ANY EMPLOYEE IN POSSESSION OF INSIDE INFORMATION MUST ALLOW SUFFICIENT TIME (AS DETERMINED BYTHE CCO) TO ELAPSE FOR THE INVESTING PUBLIC TO ASSIMILATE AND EVALUATE THE INFORMATION BEFORE TAKING ANY ACTION FOR HIS OR HER PERSONAL ACCOUNT ON THE BASIS OFTHE DISCLOSED FACTS. THESE PROHIBITIONS APPLY NOT ONLY TO THE SECURITIES OF THE ISSUERS TO WHICH THE INSIDE INFORMATION IS DIRECTLY RELATED BUT ALSO TO ANY OTHERSECURITIES (FOR EXAMPLE, SECURITIES OF COMPANIES IN THE SAME INDUSTRY) THAT MAY REASONABLY BE EXPECTED TO BE AFFECTED BY THE PUBLIC DISCLOSURE OF THE INSIDEinformation. 1.6Gifts and Entertainment THE PURPOSE OF BUSINESS ENTERTAINMENT AND GIFTS IN A COMMERCIAL SETTING IS TO CREATE GOODWILL AND SOUND WORKING RELATIONSHIPS TO BETTER SERVE THE FIRM AND ITSCLIENTS AND INVESTORS, NOT FOR PERSONAL GAIN OR TO GAIN AN UNFAIR BUSINESS ADVANTAGE. IN PROVIDING OR ACCEPTING GIFTS OR ENTERTAINMENT, EMPLOYEES OF THE FIRMmust abide by the following principles: ·Employees should not provide or accept any gift or participate in any entertainment activity that would reflect poorly on the Firm. ·GIFTS AND ENTERTAINMENT MUST COMPLY WITH ALL APPLICABLE LAWS, INCLUDING LAWS REGARDING INTERACTIONS WITH REPRESENTATIVES OF GOVERNMENTALentities. 17  ·GIFTS AND ENTERTAINMENT SHOULD BE REASONABLE AND NOT OVERLY FREQUENT, LAVISH OR EXTRAVAGANT IN NATURE, AS COMPARED TO SIMILAR ACTIVITIES WITHINthe industry. ·GIFTS AND ENTERTAINMENT SHOULD BE FOR A VALID BUSINESS PURPOSE, PROVIDE AN OPPORTUNITY FOR A MEANINGFUL BUSINESS CONVERSATION, OR BE CONSIDEREDusual or customary for the industry and circumstances at hand. ·NO GIFT OR ENTERTAINMENT SHOULD EVER BE OFFERED OR ACCEPTED BY AN EMPLOYEE OR ANY FAMILY MEMBER OF AN EMPLOYEE UNLESS IT IS CONSISTENT WITHcustomary business practices and cannot be construed as a bribe or payoff. THE OFFER OR ACCEPTANCE OF CASH GIFTS BY ANY EMPLOYEE IS PROHIBITED. EMPLOYEES SHOULD DISCUSS WITH THE CCO ANY GIFTS OR PROPOSED GIFTS THAT THEY THINK MAYbe inappropriate. Gifts and entertainment provided by employees in connection with the business of the Firm with a value in excess of $500.00 must, if reasonably practical, beAPPROVED IN ADVANCE BY THE CCO, AND MUST IN ANY EVENT BE REPORTED IN WRITING TO THE CCO AFTER THE FACT. GIFTS AND ENTERTAINMENT ACCEPTED BY EMPLOYEES INCONNECTION WITH THE BUSINESS OF THE FIRM WITH A VALUE IN EXCESS OF $500.00 MUST BE REPORTED IN WRITING TO THE CCO. EMPLOYEES SHOULD USE COMMON SENSE INESTIMATING THE VALUE OF GIFTS AND ENTERTAINMENT THEY RECEIVE AND IN DETERMINING WHETHER AND WHEN GIFTS SHOULD BE AGGREGATED FOR PURPOSES OF THE FOREGOING,ERRING ON THE SIDE OF AGGREGATION. FOR EXAMPLE, THE ENTIRE COST OF ATTENDING A SPORTING EVENT (TICKETS, PARKING, CONCESSIONS, ETC.) WOULD TYPICALLY BE CONSIDEREDA SINGLE ITEM. ALL GIFTS SHALL BE REFLECTED IN A GIFT LOG, CONTAINING A BASIC DESCRIPTION OF THE GIFT, A GOOD FAITH ESTIMATE OF THE VALUE OF THE GIFT AND A DESCRIPTIONOF ITS DISPOSITION (I.E. GIVEN, ACCEPTED, REJECTED, RETURNED TO SENDER, ETC.). ATTACHED AS Appendix E-5 TO THIS CODE OF ETHICS IS A FORM FOR REQUESTING APPROVALfor, and for reporting, gifts and entertainment with a value in excess of $500.00. 1.7General Provisions 1.7.1Violations of this Code of Ethics ALL EMPLOYEES SHALL PROMPTLY REPORT ANY KNOWN OR SUSPECTED VIOLATIONS OF THIS CODE OF ETHICS, OR ANY KNOWN OR SUSPECTED ILLEGAL OR UNETHICAL BEHAVIOR, TOTHE CCO. ALL REPORTS WILL BE TREATED CONFIDENTIALLY TO THE EXTENT PERMITTED BY LAW AND INVESTIGATED PROMPTLY. NO RETALIATORY ACTION OF ANY KIND WILL BEpermitted against anyone making such a report in good faith, and the CCO will strictly enforce this prohibition. IN THE EVENT OF FAILURE BY ANY EMPLOYEE TO COMPLY WITH THE PROVISIONS OF THIS CODE OF ETHICS OR APPLICABLE SECURITIES LAWS, THE FIRM MAY IMPOSE DISCIPLINARYACTION AS DEEMED APPROPRIATE BY THE CCO IN CONSULTATION WITH THE CEO. IF THE CCO DETERMINES THAT THIS CODE OF ETHICS HAS BEEN VIOLATED, INCLUDING BYFAILURE TO REPORT A VIOLATION OR THE WITHHOLDING OF INFORMATION RELATED TO A VIOLATION, THE OFFENDING EMPLOYEE MAY BE DISCIPLINED FOR NON-COMPLIANCE WITHPENALTIES UP TO AND INCLUDING REMOVAL FROM OFFICE OR DISMISSAL. SUCH PENALTIES MAY INCLUDE WRITTEN NOTICES TO THE INDIVIDUAL INVOLVED AND SUSPENSION WITH ORwithout pay or benefits. Violations of this Code of Ethics may also constitute violations of law and may result in criminal penalties and civil liabilities for theoffending Employee and the Firm. All Employees must cooperate in internal investigations of misconduct. 18  1.7.2Educating Employees about the Code of Ethics The CCO shall: ·PROVIDE EACH EMPLOYEE A COPY OF THIS CODE OF ETHICS, INCLUDING ANY AMENDMENTS HERETO, AND INFORM THEM OF THEIR DUTIES AND OBLIGATIONSthereunder. ·Supervise, along with the CCO, the implementation of this Code of Ethics; and ·Administer and maintain annual Code of Ethics acknowledgements as specified below. 1.7.3Acknowledgement of Receipt of this Code of Ethics EACH EMPLOYEE OF THE FIRM WILL BE REQUIRED, INITIALLY UPON HIS OR HER EMPLOYMENT OR THE APPLICABILITY OF THIS CODE OF ETHICS AND ANNUALLY THEREAFTER, ANDPROMPTLY UPON ANY AMENDMENT TO THIS CODE OF ETHICS, TO ACKNOWLEDGE RECEIPT OF THIS CODE OF ETHICS AND TO CERTIFY THAT HE OR SHE HAS READ AND UNDERSTANDSAND AGREES TO COMPLY, AND HAS COMPLIED, WITH THIS CODE OF ETHICS. SUCH ACKNOWLEDGEMENTS MAY BE CONTAINED WITHIN OTHER ACKNOWLEDGEMENTS PERTAINING TOTHIS CODE OF ETHICS, IT BEING INTENDED THAT THE INITIAL AND ANNUAL FORMS OF CERTIFICATION OF RECEIPT AND COMPLIANCE ATTACHED TO THE FIRM’S JOINT COMPLIANCEMANUAL AS Appendix A AND COVERING OTHER AREAS OF THE FIRM’S JOINT COMPLIANCE MANUAL OF WHICH THIS CODE OF ETHICS IS A PART WILL SERVE THIS PURPOSE. SUCHCERTIFICATIONS SHALL BE DELIVERED TO THE CCO OR HIS OR HER DESIGNEE. IF AN EMPLOYEE IS UNABLE TO MAKE ANY REPRESENTATION OR OTHER STATEMENT CONTAINED IN ANYSUCH CERTIFICATION, THE EMPLOYEE SHALL REPORT TO THE CCO IN WRITING THE REASONS WHY AND THE CCO WILL DOCUMENT SUCH REASONS AND DETERMINE THE APPROPRIATECOURSE OF ACTION, WHICH MAY INCLUDE REMEDYING THE SITUATION, AGREEING TO AN ALTERNATE APPROPRIATE FORM OF CERTIFICATION, OR SUCH OTHER COURSE OF ACTION AS MAYbe determined by the CCO. 1.7.4Recordkeeping RULE 204-2(A)(12) AND (13) OF THE INVESTMENT ADVISERS ACT REQUIRES ADVISORS TO KEEP COPIES OF CERTAIN RECORDS RELATING TO ITS CODE OF ETHICS. IN ACCORDANCEtherewith, the CCO shall maintain or cause to be maintained in an easily accessible place, the following records: ·A copy of all Codes of Ethics and relevant Firm policies and procedures in effect within the 5 years preceding the then-current date; ·A record of any violation of the Code of Ethics and of any action taken as a result of such violation; ·A LIST OF ALL PERSONS WHO ARE, OR WITHIN THE 5 YEARS PRECEDING THE THEN-CURRENT DATE HAVE BEEN, REQUIRED TO MAKE REPORTS PURSUANT TO THIS CODE OFEthics, or who were responsible for reviewing these reports; ·A COPY OF ALL WRITTEN ACKNOWLEDGEMENTS CERTIFYING RECEIPT OF THIS CODE OF ETHICS FOR ALL EMPLOYEES WHO CURRENTLY ARE, OR WITHIN THE 5 YEARSpreceding the then-current date were, employees; ·A RECORD OF ALL PERSONAL TRADING BY EMPLOYEES OF THE FIRM, CONSISTING A COPY OF ALL HOLDINGS AND TRANSACTIONS REPORTS SUBMITTED WITHIN THE 5YEARS PRECEDING THE THEN-CURRENT DATE AND ANY DECISIONS APPROVING THE ACQUISITION OF SECURITIES IN INITIAL PUBLIC OFFERINGS OR LIMITED OFFERINGSand any other securities transactions requiring approval hereunder; and 19  ·Record of approval in connection with any pre-clearance process under this Code of Ethics. NO LESS FREQUENTLY THAN ANNUALLY, THE CORPORATION MUST FURNISH TO THE BOARD, AND THE BOARD MUST CONSIDER, A CORPORATION WRITTEN REPORT THAT (A) DESCRIBES ANYISSUES ARISING UNDER THE CODE OR PROCEDURES SINCE THE LAST REPORT TO THE BOARD, INCLUDING BUT NOT LIMITED TO, INFORMATION ABOUT MATERIAL VIOLATIONS OF THE CODEOR PROCEDURES AND SANCTIONS IMPOSED IN RESPONSE TO THE MATERIAL VIOLATIONS; AND (B) CERTIFIES THAT THE CORPORATION HAS ADOPTED PROCEDURES REASONABLYnecessary to prevent Access Persons from violating the Code. Disclaimer of Beneficial Ownership. Any report required under this Section 1.7 MAY CONTAIN A STATEMENT THAT THE REPORT SHALL NOT BE CONSTRUED AS AN ADMISSIONBY THE PERSON SUBMITTING SUCH DUPLICATE CONFIRMATION OR ACCOUNT STATEMENT OR MAKING SUCH REPORT THAT HE OR SHE HAS ANY DIRECT OR INDIRECT BENEFICIALownership in the Covered Security to which the report relates. THE REPORTS REQUIRED TO BE SUBMITTED UNDER THIS SECTION IV SHALL BE DELIVERED TO THE DESIGNATED OFFICER. THE DESIGNATED OFFICER SHALL REVIEW SUCH REPORTS TODETERMINE WHETHER ANY TRANSACTIONS RECORDED THEREIN CONSTITUTE A VIOLATION OF THE CODE. BEFORE MAKING ANY DETERMINATION THAT A VIOLATION HAS BEENCOMMITTED BY ANY ACCESS PERSON, SUCH ACCESS PERSON SHALL BE GIVEN AN OPPORTUNITY TO SUPPLY ADDITIONAL EXPLANATORY MATERIAL. THE DESIGNATED OFFICER OF THECorporation shall maintain copies of its Access Persons’ reports as required by Rule 17j-1(f) of the 1940 Act. 1.7.5Obligation to Report a Violation EVERY ACCESS PERSON WHO BECOMES AWARE OF A VIOLATION OF THIS CODE BY ANY PERSON MUST REPORT IT TO THE DESIGNATED OFFICER, WHO SHALL REPORT IT TO APPROPRIATEMANAGEMENT PERSONNEL. THE MANAGEMENT PERSONNEL WILL TAKE SUCH DISCIPLINARY ACTION THAT THEY CONSIDER APPROPRIATE UNDER THE CIRCUMSTANCES. IN THE CASE OFOFFICERS OR OTHER EMPLOYEES OF THE COMPANY, SUCH ACTION MAY INCLUDE REMOVAL FROM OFFICE. IF THE MANAGEMENT PERSONNEL CONSIDER DISCIPLINARY ACTION AGAINSTANY PERSON, THEY WILL CAUSE NOTICE THEREOF TO BE GIVEN TO THAT PERSON AND PROVIDE TO THAT PERSON THE OPPORTUNITY TO BE HEARD. THE BOARD WILL BE NOTIFIED, IN Atimely manner, of remedial action taken with respect to violations of the Code. 20  APPENDIX E-1Securities Holdings Report 21  CAPITALA GROUP SECURITIES HOLDINGS REPORT Name:________________________________Date of Submission: __________________ Title:________________________________Information must be current as of no more than 45 daysprior to date of submission.Reporting Period:_________________________ ¨Initial Holdings Report¨Annual Holdings Report (must be submitted by February 14)(check one) Accounts: LIST HERE ALL SECURITIES ACCOUNTS MAINTAINED BY YOU, YOUR SPOUSE/PARTNER, AND ANY OTHER INDIVIDUALS RESIDING IN YOUR HOUSEHOLD, REGARDLESS OF WHATtype of securities are held in the account. Attach additional pages if necessary. Name of Broker, Dealer, Bank orother Custodian Legal Owner Your Relationship WithLegal Owner Account Number Account StatementsProvided toCapitala/Phoenix (Yes orNo) Reportable Securities: PROVIDE THE FOLLOWING INFORMATION FOR ALL REPORTABLE SECURITIES* BENEFICIALLY OWNED BY YOU, YOUR SPOUSE/PARTNER, AND ANY OTHERINDIVIDUALS RESIDING IN YOUR HOUSEHOLD (INCLUDING THOSE IN THE ACCOUNTS NAMED ABOVE). ATTACH ADDITIONAL PAGES IF NECESSARY. WITH RESPECT TO ANY REPORTABLESECURITY HELD IN A BROKERAGE OR SIMILAR ACCOUNT, IN LIEU OF LISTING THAT SECURITY BELOW AND PROVIDING THE FOLLOWING INFORMATION, YOU MAY ATTACH AS AN EXHIBIT TOTHIS REPORT YOUR CURRENT STATEMENT FROM THE RELEVANT BROKERAGE FIRM OR OTHER ACCOUNT CUSTODIAN, PROVIDED THAT IT INCLUDES ALL OF THE INFORMATION LISTED BELOWand is current as of a date no more than 45 days prior to the date of this report. 22  Name of Issuer andType of Security(including TickerSymbol or CUSIPNumber, if applicable) Legal Owner and YourRelationship With LegalOwner Amount Invested (e.g.,Principal Amount) andNumber of SharesOwned (if applicable) Interest Rate andMaturity Date (ifapplicable) Current Value of theInvestment Name of Broker, Dealer,Bank or other Custodian(if applicable) * “REPORTABLE SECURITY” MEANS ANY AND ALL SECURITIES, EXCEPT FOR (I) DIRECT OBLIGATIONS OF THE GOVERNMENT OF THE UNITED STATES; (II) BANKERS’ ACCEPTANCES, BANKCERTIFICATES OF DEPOSIT, COMMERCIAL PAPER AND HIGH QUALITY SHORT-TERM DEBT INSTRUMENTS, INCLUDING REPURCHASE AGREEMENTS; (III) SHARES ISSUED BY MONEY MARKETFUNDS; (IV) SHARES ISSUED BY OPEN-END FUNDS TO WHICH NONE OF THE FIRM OR ANY OF ITS AFFILIATES PROVIDE INVESTMENT ADVICE; (V) SHARES ISSUED BY UNIT INVESTMENTTRUSTS THAT ARE INVESTED EXCLUSIVELY IN ONE OR MORE OPEN-END FUNDS, NONE OF WHICH ARE FUNDS TO WHICH THE FIRM OR ANY OF ITS AFFILIATES PROVIDES INVESTMENTADVICE; AND (VI) SECURITIES HELD IN INVESTMENT ACCOUNTS OVER WHICH THE HOLDER HAS NO DIRECT OR INDIRECT INFLUENCE OR CONTROL OR PURSUANT TO AN AUTOMATICINVESTMENT PLAN. Reportable Securities include most non-publicly traded securities, including without limitation investments in hedge and other privateinvestment funds, privately held businesses, and real estate and other investment partnerships. DIRECT INTERESTS IN REAL ESTATE (I.E., REAL ESTATE AS TO WHICH YOUhold the deed in your name) are not securities and do not need to be listed. CERTIFICATION I HEREBY CERTIFY THAT THE FOREGOING REPORT (INCLUDING BROKERAGE OR SIMILAR STATEMENTS PROVIDED THEREWITH) DISCLOSES ALL ACCOUNTS AND SECURITIES HOLDINGSrequired to be set forth therein. _____________________________________ Name:__________________________ Position:__________________________ Date:_________________, 20__ 23  APPENDIX E-2Securities Transaction Report 24  CAPITALA GROUP SECURITIES TRANSACTION REPORT Name:________________________________Date of Submission: __________________ Title:________________________________Must be submitted within 30 days after the end of eachcalendar quarter.Reporting Period: ________________________ (indicate calendar quarter) Transactions involving Reportable Securities: PROVIDE THE FOLLOWING INFORMATION FOR ALL TRANSACTIONS INVOLVING REPORTABLE SECURITIES* BY YOU, YOURSPOUSE/PARTNER, AND ANY OTHER INDIVIDUALS RESIDING IN YOUR HOUSEHOLD DURING THE REPORTING PERIOD IDENTIFIED ABOVE. WITH RESPECT TO ANY TRANSACTION CONDUCTEDTHROUGH A BROKERAGE OR SIMILAR ACCOUNT, IN LIEU OF LISTING THAT TRANSACTION BELOW AND PROVIDING THE FOLLOWING INFORMATION, YOU MAY ATTACH AS EXHIBITS TO THISREPORT THE RELEVANT TRADE CONFIRMATION AND/OR ACCOUNT STATEMENT, PROVIDED THAT IT INCLUDES ALL OF THE INFORMATION REQUIRED BELOW. ATTACH ADDITIONAL PAGES IFnecessary. Purchases of Reportable Securities Date of Transaction Name of Issuer and Type ofSecurity (including TickerSymbol or CUSIP Number,if applicable) Legal Owner and YourRelationship to Legal Owner Amount Invested or Sold(e.g., Principal Amount) andNumber of Shares Involved(if applicable) Price at which Transactionwas Effected Interest Rate andMaturityDate (if applicable) Name of Person with orthrough whichTransactionwas Effected 25  Sales of Reportable Securities Date of Transaction Name of Issuer and Type ofSecurity (including TickerSymbol or CUSIP Number,if applicable) Legal Owner and YourRelationship toLegal Owner Amount Invested or Sold(e.g., Principal Amount) andNumber of Shares Involved(if applicable) Price at whichTransactionwas Effected Interest Rate andMaturityDate (if applicable) Name of Person with orthrough whichTransactionwas Effected * “REPORTABLE SECURITY” MEANS ANY AND ALL SECURITIES, EXCEPT FOR (I) DIRECT OBLIGATIONS OF THE GOVERNMENT OF THE UNITED STATES; (II) BANKERS’ ACCEPTANCES, BANKCERTIFICATES OF DEPOSIT, COMMERCIAL PAPER AND HIGH QUALITY SHORT-TERM DEBT INSTRUMENTS, INCLUDING REPURCHASE AGREEMENTS; (III) SHARES ISSUED BY MONEY MARKETFUNDS; (IV) SHARES ISSUED BY OPEN-END FUNDS TO WHICH NONE OF THE FIRM OR ANY OF ITS AFFILIATES PROVIDE INVESTMENT ADVICE; (V) SHARES ISSUED BY UNIT INVESTMENTTRUSTS THAT ARE INVESTED EXCLUSIVELY IN ONE OR MORE OPEN-END FUNDS, NONE OF WHICH ARE FUNDS TO WHICH THE FIRM OR ANY OF ITS AFFILIATES PROVIDES INVESTMENTADVICE; AND (VI) SECURITIES HELD IN INVESTMENT ACCOUNTS OVER WHICH THE HOLDER HAS NO DIRECT OR INDIRECT INFLUENCE OR CONTROL OR PURSUANT TO AN AUTOMATICINVESTMENT PLAN. Reportable Securities include most non-publicly traded securities, including without limitation investments in hedge and other privateinvestment funds, privately held businesses, and real estate and other investment partnerships. DIRECT INTERESTS IN REAL ESTATE (I.E., REAL ESTATE AS TO WHICH YOUhold the deed in your name) are not securities and do not need to be listed. CERTIFICATION I HEREBY CERTIFY THAT THE FOREGOING REPORT (INCLUDING BROKERAGE OR SIMILAR STATEMENTS OR TRADE CONFIRMATIONS PROVIDED THEREWITH) DISCLOSES ALL SECURITIEStransactions required to be set forth therein. _____________________________________ Name:__________________________ Position:__________________________ Date:_________________, 20__ 26  APPENDIX E-3Form of Letter Regarding Brokerage Statements 27  FORM OF LETTER REGARDING BROKERAGE STATEMENTS ____________________, 20__ Capitala Group4201 Congress Street, Suite 360Charlotte, NC 28209Attention: Richard G. Wheelahan, Chief Compliance Officer Re:Personal Securities Account Dear Richard: This letter is to notify you that I, my spouse/partner, or a member of my family residing with me has a beneficial interest in a securities account as follows: Name of owner of the account:__________________________________ My relation to the owner (if not me):__________________________________ Account Number:______________________ Name of broker:______________________ Address of broker:______________________ ______________________ ______________________ Broker contact:______________________ (name) ______________________ (telephone number) I HAVE NOTIFIED THE BROKER THAT I AM EMPLOYED BY A FIRM REQUIRED BY THE INVESTMENT ADVISERS ACT TO COLLECT CERTAIN INFORMATION FROM ME ABOUT MY PERSONALSECURITIES HOLDINGS AND TRANSACTIONS ON A QUARTERLY AND ANNUAL BASIS, AND I HAVE REQUESTED THAT DUPLICATE COPIES OF ALL ACCOUNT STATEMENTS AND TRANSACTIONCONFIRMATIONS FOR THIS ACCOUNT BE MAILED DIRECTLY TO YOUR ATTENTION. I HEREBY CONSENT TO YOUR CONTACTING THE BROKER AS INDICATED ABOVE WITH ANY INQUIRIES YOUmay have about this account. Sincerely, Name: 28  APPENDIX E-4Securities Transaction Approval Request Form 29  SECURITIES TRANSACTION APPROVAL REQUEST FORM ____________________, 20__ Capitala Group4201 Congress Street, Suite 360Charlotte, NC 28209Attention: Richard G. Wheelahan, Chief Compliance Officer Re:Personal Securities Transaction Approval Dear Richard: THIS LETTER IS TO NOTIFY YOU THAT I, MY SPOUSE/PARTNER, OR A MEMBER OF MY FAMILY RESIDING WITH ME DESIRES TO PARTICIPATE IN THE FOLLOWING TRANSACTION INVOLVINGsecurities for which prior approval is required pursuant to the Code of Ethics (the “Code of Ethics”) of Capitala Group (the “Group”). Name of person to participate in the transaction: My relation to such person (if not me): DESCRIPTION OF TRANSACTION (INCLUDING NAME OF ISSUER, TYPE OF TRANSACTION, AND ANY OTHER DETAILS THAT MAY BE RELEVANT TO YOUR CONSIDERATION):__________________________________________ Reason approval is required (check one): Purchase or sale of securities of a company on the Group’s restricted securities list. Acquisition of securities in an initial public offering. Purchase of securities in a Limited Offering (as defined in the Code of Ethics). Date on or about which transaction is expected to be consummated: _______________________ I HEREBY AGREE TO PROVIDE YOU SUCH INFORMATION AS YOU MAY REQUEST ABOUT THE TRANSACTION DESCRIBED ABOVE AND REPRESENT THAT ANY AND ALL INFORMATION I HAVEPROVIDED YOU OR MAY PROVIDE YOU ABOUT THIS TRANSACTION IS OR WILL BE (AND DOES NOT AND WILL NOT OMIT ANY INFORMATION NECESSARY TO MAKE SUCH INFORMATION)truthful, accurate and not misleading. Sincerely, Name: Approval grantedApproval denied ___________________________________Richard G. Wheelahan, Chief Compliance Officer 30  APPENDIX E-5Gift/Entertainment Approval Request and Reporting Form 31  GIFT/ENTERTAINMENT APPROVAL REQUEST AND REPORTING FORM ____________________, 20__ Capitala Group4201 Congress Street, Suite 360Charlotte, NC 28209Attention: Richard G. Wheelahan, Chief Compliance Officer Re:Gift/Entertainment Approval Request or Report Dear Richard: THIS LETTER IS TO NOTIFY YOU (AND, IF APPLICABLE AS INDICATED BELOW, REQUEST YOUR APPROVAL) OF THE GIFT(S) AND/OR ENTERTAINMENT DESCRIBED BELOW AND RECEIVED ORgiven by me, as required pursuant to the Code of Ethics (the “Code of Ethics”) of Capitala Group. Reason this letter is submitted (check one): 1.Request approval to provide gifts and/or entertainment with a value in excess of $500.00. 2.REPORT AFTER THE FACT (E.G., BECAUSE PRIOR APPROVAL WAS NOT REASONABLY PRACTICAL) THE PROVISION OF GIFTS AND/OR ENTERTAINMENT WITH A VALUEin excess of $500.00. 3.Report receipt of gifts and/or entertainment with a value in excess of $500.00. Name and employer of recipient of gifts/entertainment (for items 1 and 2 above): Name and employer of party providing gifts/entertainment (for item 3 above): Description of gifts/entertainment: Estimated value:$__________________ Date on or about which gifts/entertainment were or are expected to be provided: ________________, 20__ 32  I HEREBY AGREE TO PROVIDE YOU SUCH INFORMATION AS YOU MAY REQUEST ABOUT THE GIFTS/ENTERTAINMENT DESCRIBED ABOVE AND REPRESENT THAT ANY AND ALL INFORMATION IHAVE PROVIDED YOU OR MAY PROVIDE YOU ABOUT THIS TRANSACTION IS OR WILL BE (AND DOES NOT AND WILL NOT OMIT ANY INFORMATION NECESSARY TO MAKE SUCHinformation) truthful, accurate and not misleading. Sincerely, Name: For requests for approval only: Approval grantedApproval denied _________________________________Richard G. Wheelahan, Chief Compliance Officer 33 Exhibit 21.1List of SubsidiariesCapitalSouth 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)CPTA Master Blocker, Inc. (Georgia)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: February 27, 2018/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: February 27, 2018/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, 2017, 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: February 27, 2018/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, 2017, 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: February 27, 2018/s/ Stephen A. ArnallStephen A. ArnallChief Financial Officer(Principal Financial and Accounting Officer)Capitala Finance Corp.

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