Capitala Group
Annual Report 2018

Plain-text annual report

TABLE OF CONTENTSUNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549​FORM 10-K​☒Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the Fiscal Year Ended December 31, 2018☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934​​Commission File NumberExact name of registrant as specified in its charter, address of principal executive office, telephone number and state or other jurisdiction of incorporation or organizationI.R.S. Employer Identification Number​​814-01022Capitala Finance Corp.90-0945675​4201 Congress St., Suite 360 Charlotte, North Carolina 28209 Telephone: (704) 376-5502 State of Incorporation: Maryland​Securities registered pursuant to Section 12(b) of the Act:​Title of Each ClassName of Each Exchange on Which Registered​​Common Stock, par value $0.01 per share 5.75% Convertible Notes due 2022 6.00% Notes due 2022NASDAQ Global Select Market NASDAQ Capital Market NASDAQ Global Select Market​Securities registered pursuant to Section 12(g) of the Act: None​Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of1933.Yes ☐ No ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of theSecurities Exchange Act 1934.Yes ☐ No ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was requiredto file such reports) and (2) has been subject to such filing requirements for the past 90 days.Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to besubmitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for suchshorter period that the registrant was required to submit such files).Yes ☐ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of thischapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, asmaller reporting company, or an emerging growth company. See the definitions of  “large accelerated filer,” “acceleratedfiler,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one):Large accelerated filer ☐Accelerated filer ☒Non-accelerated filer ☐Smaller reporting company ☐Emerging growth company ☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transitionperiod for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of theExchange Act ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐ No ☒The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $121.3 millionbased on the number of shares held by non-affiliates of the registrant as of June 29, 2018, which was the last business dayof the registrant’s most recently completed second fiscal quarter. For the purposes of calculating this amount only, alldirectors and executive officers of the registrant have been treated as affiliates.The number of shares of Capitala Finance Corp.’s common stock, $0.01 par value, outstanding as of March 1, 2019was 16,072,386.Documents Incorporated by ReferencePortions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commissionpursuant to Regulation 14A relating to the registrant’s 2019 Annual Meeting of Stockholders, to be filed with the Securitiesand Exchange Commission within 120 days following the end of the Company’s fiscal year, are incorporated by reference inPart III of this Annual Report on Form 10-K as indicated herein.TABLE OF CONTENTSItem 1.BusinessItem 1A.Risk FactorsItem 1B.Unresolved Staff CommentsItem 2.PropertiesItem 3.Legal ProceedingsItem 4.Mine Safety DisclosuresItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity SecuritiesItem 6.Selected Consolidated Financial DataItem 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsItem 7A.Quantitative and Qualitative Disclosures About Market RiskItem 8.Consolidated Financial Statements and Supplementary DataItem 9.Changes in and Disagreements with Accountants on Accounting and FinancialDisclosureItem 9A.Controls and ProceduresItem 9B.Other InformationItem 10.Directors, Executive Officers and Corporate GovernanceItem 11.Executive CompensationItem 12.Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder MattersItem 13.Certain Relationships and Related Transactions, and Director IndependenceItem 14.Principal Accountant Fees and ServicesItem 15.Exhibits and Consolidated Financial Statement SchedulesItem 16.Form 10-K SummaryTABLE OF CONTENTSPAGEPART I13063636363PART II6466679495969696PART III9797979797PART IV98101Signatures102i• “we,” “us,” “our,” “Capitala Finance” and the “Company” refer to Capitala Finance Corp.,together with its consolidated subsidiaries;• The “Investment Advisor” and “Capitala Investment Advisors” refer to Capitala Investment Advisors,LLC, our investment adviser; and•The “Administrator” refers to Capitala Advisors Corp., our administrator.TABLE OF CONTENTSPART IIn this Annual Report on Form 10-K, except as otherwise indicated, the terms:ITEM 1. BUSINESSFORMATION OF OUR COMPANYWe are an externally managed non-diversified closed-end management investment company incorporatedin Maryland that has elected to be regulated as a business development company (“BDC”) under the InvestmentCompany Act of 1940, as amended (the “1940 Act”). We commenced operations on May 24, 2013 andcompleted 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 adviserunder the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and Capitala Advisors Corp. (the“Administrator”) provides the administrative services necessary for us to operate. For United States (“U.S.”).federal income tax purposes, we have elected to be treated, and intend to comply with the requirements tocontinue to qualify annually, as a regulated investment company (“RIC”) under subchapter M of the InternalRevenue Code of 1986, as amended (the “Code”).Our investment objective is to generate both current income and capital appreciation through debt andequity investments. Both directly and through our subsidiaries that are licensed by the U.S. Small BusinessAdministration (“SBA”) under the Small Business Investment Company (“SBIC”) Act, we offer customizedfinancing to business owners, management teams and financial sponsors for change of ownership transactions,recapitalizations, strategic acquisitions, business expansion and other growth initiatives. We invest in first lienloans, second lien loans and subordinated loans, and, to a lesser extent, equity securities issued by 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 portfoliofrom the following entities: CapitalSouth Partners Fund I Limited Partnership (“Fund I”); CapitalSouth PartnersFund II Limited Partnership (“Fund II”); CapitalSouth Partners Fund III, L.P. (“Fund III Parent”); CapitalSouthPartners SBIC Fund III, L.P. (“Fund III”) and CapitalSouth Partners Florida Sidecar Fund I, L.P. (“FloridaSidecar” and, collectively with Fund I, Fund II, Fund III and Fund III Parent, the “Legacy Funds”); (ii) raisingcapital in the IPO and (iii) continuing and expanding the business of the Legacy Funds by making additionaldebt 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 andFlorida Sidecar and each of their respective general partners, as well as certain assets from Fund I and Fund IIIParent, in exchange for an aggregate of 8,974,420 shares of our common stock (the “Formation Transactions”).Fund II, Fund III and Florida Sidecar became our wholly owned subsidiaries. Fund II and Fund III retained theirSBIC licenses, continued to hold their existing investments at the time of the IPO and have continued to makenew investments. The IPO consisted of the sale of 4,000,000 shares of our common stock at a price of  $20.00 pershare 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 thelimited partners of the Legacy Funds. During the fourth quarter of 2017, Florida Sidecar transferred all of itsassets to Capitala Finance Corp. and was legally dissolved as a standalone partnership.The Company has formed and expects to continue to form certain consolidated taxable subsidiaries (the“Taxable Subsidiaries”), which are taxed as corporations for income tax purposes. These Taxable Subsidiariesallow the Company to make equity investments in companies organized as pass-through entities whilecontinuing to satisfy the requirements of a RIC under the Code.1TABLE OF CONTENTSOUR INVESTMENT STRATEGYOur investment objective is to generate both current income and capital appreciation through debt andequity investments. We expect the companies in which we invest will generally have between $4.5 million and$30.0 million in trailing twelve month earnings before interest, tax, depreciation and amortization (“EBITDA”).We believe our focus on direct lending to private companies enables us to receive higher interest rates and moresubstantial equity participation. As part of that strategy, we may invest in first lien loans, which have a firstpriority security interest in all or some of the borrower’s assets. In addition, our first lien loans may includepositions 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 andsecurity in the primary collateral of a borrower and potentially mitigating loss of principal should a borrowerdefault. We also may invest in second lien loans, which have a second priority security interest in all orsubstantially all of the borrower’s assets. In addition to first and second lien loans, we invest in subordinatedloans, which may include mezzanine and other types of junior debt investments. Like second lien loans, oursubordinated loans typically have a second lien on all or substantially all of the borrower’s assets; however, theprincipal difference between subordinated loans and second lien loans is that in a subordinated loan, we may besubject to the interruption of cash interest payments, at the discretion of the first lien lender, upon certain eventsof default. In addition to debt securities, we may acquire equity or detachable equity-related interests (includingwarrants) from a borrower. Typically, the debt in which we invest is not initially rated by any rating agency;however, we believe that if such investments were rated, they would be rated below investment grade. Belowinvestment 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. 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 assetsthat serve as collateral for our loan, although we attempt to protect against risk of loss on our debt investmentsby structuring, underwriting and pricing loans based on anticipated cash flows of our borrowers. As ofDecember 31, 2018, our Investment Advisor underwrote investments in 134 lower middle-market and traditionalmiddle-market companies totaling more than $1.4 billion of invested capital since 2000, and we believe that acontinuation of this strategy allows us to make structured investments with more attractive pricing and greateropportunities for meaningful equity participation than traditional asset-based, senior secured loans. Further, webelieve that we benefit from our Investment Advisor’s long-standing relationships with many private equityfund sponsors, whose participation in portfolio companies, we believe, makes repayment from refinancing, assetsales and/or sales of the borrowers themselves more likely than a strategy whereby we consider investments onlyin founder-owned or non-sponsored borrowers.OUR INVESTMENT ADVISORWe are managed by the Investment Advisor, whose investment team members have significant and diverseexperience financing, advising, operating and investing in lower middle-market and middle-market companies.Moreover, our Investment Advisor’s investment team has refined its investment strategy by sourcing, reviewing,acquiring and monitoring 134 portfolio companies totaling more than $1.4 billion of invested capital from 2000through December 31, 2018. The Investment Advisor’s investment team also manages CapitalSouth PartnersSBIC Fund IV, L.P. (“Fund IV”), a private investment limited partnership providing financing solutions tosmaller and lower middle-market companies. Fund IV 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 maymanage several affiliated funds whereby institutional limited partners in Fund IV have the opportunity to co-invest with Fund IV in portfolio investments. An affiliate of the Investment Advisor also manages CapitalaPrivate Credit Fund V, L.P. (“Fund V”), a private investment limited partnership, and a private investmentvehicle (referred to herein as “Capitala Specialty Lending Corp.” or “CSLC”), both of which provide financingsolutions to lower middle-market and traditional middle-market companies. The Investment Advisor and itsaffiliates may also manage other funds in the future that may have investment mandates that are similar, in wholeand in part, with ours. To the extent permitted by the 1940 Act and interpretation of the staff of the U.S.Securities and Exchange Commission (the “SEC”), the Investment Advisor and its affiliates may determine thatan investment is appropriate for2TABLE OF CONTENTSus and for one or more of those other funds. In such event, depending on the availability of such investment andother appropriate factors, the Investment Advisor or its affiliates may determine that we should invest side-by-side with one or more other funds. Any such investments will be made only to the extent permitted by applicablelaw and interpretive positions of the SEC and its staff, and consistent with the Investment Advisor’s allocationprocedures. We expect to make, and have made, co-investments with Fund V and/or CSLC given their similarinvestment strategies.On June 1, 2016, the SEC issued an exemptive order (the “Order”), which permits the Company to co-investin portfolio companies with certain funds or entities managed by the Investment Advisor or its affiliates incertain negotiated transactions where co-investing would otherwise be prohibited under the 1940 Act, subject tothe conditions of the Order. Pursuant to the Order, the Company is permitted to co-invest with its affiliates if a“required majority” (as defined in Section 57(o) of the 1940 Act) of the Company’s independent directors makecertain conclusions in connection with a co-investment transaction, including, but not limited to, that (1) theterms of the potential co-investment transaction, including the consideration to be paid, are reasonable and fairto the Company and its stockholders and do not involve overreaching in respect of the Company or itsstockholders on the part of any person concerned, and (2) the potential co-investment transaction is consistentwith the interests of the Company’s stockholders and 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 ofDirectors (the “Board”), and the managing partner and chief investment officer of our Investment Advisor, M.Hunt Broyhill, a member of the Board and a partner of our Investment Advisor, Stephen A. Arnall, our chieffinancial officer and chief operating officer, and John F. McGlinn, a managing director of our InvestmentAdvisor. Messrs. Alala, Broyhill and McGlinn serve as our Investment Advisor’s investment committee. They areassisted by nineteen investment professionals.Our Investment Advisor’s investment committee, as well as certain key investment team members that areinvolved in screening and underwriting portfolio transactions, have worked together for more than 15 years.These investment professionals have 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 havecollectively developed a broad network of contacts that can offer us investment opportunities. Much of ourInvestment Advisor’s investment team has worked together screening opportunities, underwriting newinvestments and managing a portfolio of investments in lower middle-market and traditional middle-marketcompanies through two recessions, a credit crunch, the dot-com boom and bust and a historic, leverage-fueledasset valuation bubble.INVESTMENTSWe will engage in various investment strategies from time to time in order to achieve our overall lendingand investment objectives. Our strategies will generally require current cash yields and sensible leverage andfixed charge coverage ratios and either a first or second lien position (subject to limited instances in which wewill not obtain security) in the collateral of the portfolio company. The strategy we select will depend upon,among other things, market opportunities, the skills and experience of our Investment Advisor’s investmentteam, the result of our financial, operational and strategic evaluation of the opportunity, and our overallportfolio 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 warrantparticipation, direct equity ownership or otherwise, and many notes that we purchase will require the borrower topay an early termination fee. Collectively, these attributes have been, and are expected to be, importantcontributors to the returns generated by our Investment Advisor’s investment team.The Investment Advisor’s investment team uses a disciplined investment portfolio monitoring and riskmanagement process that emphasizes strict underwriting standards and guidelines, strong due diligenceinvestigation, regular portfolio review, analysis and performance-guided responses, and proper investmentdiversification. We allocate capital among different industries, geographies and private equity sponsors on thebasis of relative risk/reward profiles as a function of their associated downside risk, volatility, perceivedfundamental risk and our ability to obtain favorable investment protection terms.3•Established Companies With Positive Cash Flow. We seek to invest in established companies with ahistory of generating revenues and positive cash flows. We intend to focus on companies with ahistory of profitability and minimum trailing twelve month EBITDA of between $4.5 million and$30.0 million. We do not intend to invest in start-up companies, distressed or “turn-around” situationsor companies with business plans that we do not understand.•Experienced Management Teams with Meaningful Investment. We seek to invest in companies inwhich senior or key managers have significant company or industry-level experience and havesignificant equity ownership. It has been our experience that these management teams are morecommitted to the company’s success and more likely to manage the company in a manner that protectsour debt and equity investments.•Significant Invested Capital. We believe that the existence of an appropriate amount of equitybeneath our debt capital provides valuable support for our investment. In addition, the degree towhich the particular investment is a meaningful one for the portfolio company’s financial sponsor, andthe financial sponsor’s ability and willingness to invest additional equity capital as and to the extentnecessary, are also important considerations.•Appropriate Capital Structures. We seek to invest in companies that are appropriately capitalized.First, we examine the amount of equity that is being invested by the company’s private equity sponsorto determine whether there is a sufficient capital cushion beneath our invested capital. We alsoanalyze the amount of leverage and the characteristics of senior debt with lien priority over ourinvestment.•Strong Competitive Position. We intend to invest in companies that have developed strong,defensible product or service offerings within their respective market segments. These companiesshould be well positioned to capitalize on organic and strategic growth opportunities, and shouldcompete in industries with strong fundamentals and meaningful barriers to entry. We further analyzeprospective portfolio investments in order to identify competitive advantages within their respectiveindustries, which may result in superior operating margins or industry-leading growth.•Customer and Supplier Diversification. We expect to invest in companies with sufficiently diversecustomer and supplier bases. We believe these companies will be better able to endure industryconsolidation, economic contraction and increased competition than those that are not sufficientlydiversified. However, we also recognize that from time to time, an attractive investment opportunitywith some concentration among its customer base or supply chain will present itself. We believe thatconcentration issues can be evaluated and, in some instances (whether due to supplier or customerproduct or platform diversification, the existence and quality of long-term agreements with suchcustomers or suppliers or other select factors), mitigated, thus presenting a superior risk-adjustedpricing scenario.TABLE OF CONTENTSTypes of InvestmentsWe will target debt investments that yield meaningful current income and, in many cases, provide theopportunity for capital appreciation through equity securities. In each case, the following criteria and guidelinesare applied to the review of a potential investment; however, not all criteria are met in every single investment inour portfolio, nor do we guarantee that all criteria will be met in the investments we will make in the future.Debt InvestmentsThe Investment Advisor’s investment team tailors the terms of each debt investment to the facts andcircumstances of the transaction, the needs of the prospective portfolio company and, as applicable, its financialsponsor, negotiating a structure that seeks to protect our rights and manage our risk while creating incentives forthe portfolio company to achieve its business plan. As of December 31, 2018, 69.2% of our debt investmentswere secured by a first lien on the assets of the portfolio company, and 30.8% of our debt investments weresecured by a second lien on the assets of the portfolio company. We expect our primary source of return to be themonthly 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)4TABLE OF CONTENTSmanagerial and strategic assistance to these companies. We seek to further protect invested principal bynegotiating appropriate affirmative, negative and financial covenants in our debt documents that areconservative 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 growtheir businesses. Typical covenants include default triggers and remedies (including penalties), lien protection,leverage and fixed charge coverage ratios, change of control provisions and put rights. Most of our loans featurecall protection to enhance our total return on debt investments that are repaid prior to maturity.Most of our debt investments are structured as first lien loans, and as of December 31, 2018, 69.2% of thefair value of our debt investments consisted of such investments. First lien loans may contain some minimumamount of principal amortization, excess cash flow sweep feature, prepayment penalties, or any combination ofthe foregoing. First lien loans are secured by a first priority lien in existing and future assets of the borrower andmay take the form of term loans or delayed draw facilities. In some cases, first lien loans may be subordinated,solely with respect to the payment of cash interest, to an asset based revolving credit facility. Unitranche debt, aform of first lien loan, typically involves issuing one debt security that blends the risk and return profiles of bothsenior secured and subordinated debt in one debt security, bifurcating the loan into a first-out tranche and last-out tranche. As of December 31, 2018, 13.7% of the fair value of our first lien loans consisted of last-out loans.We believe that unitranche debt can be attractive for many lower middle-market and traditional middle-marketbusinesses, given the reduced structural complexity, single lender interface and elimination of intercreditor orpotential agency conflicts among lenders.We may also invest in debt instruments structured as second lien loans. On a fair market value basis, 9.5%of our debt investments consisted of second lien loans as of December 31, 2018. Second lien loans are loanswhich have a second priority security interest in all or substantially all of the borrower’s assets, and which arenot subject to the blockage of cash interest payments 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 valuebasis, 21.3% of our debt investments consisted of subordinated loans as of December 31, 2018. Subordinatedloans typically have a second lien on all or substantially all of the borrower’s assets, but unlike second lienloans, may be subject to the interruption of cash interest payments upon certain events of default, at thediscretion of the first lien lender.Some of our debt investments have payment-in-kind (“PIK”) interest, which is a form of interest that is notpaid currently in cash, but is accrued and added to the loan balance until paid at the end of the term. While wegenerally seek to minimize the percentage of our fixed return that is in the form of PIK interest, we sometimesreceive PIK interest due to prevailing market conditions that do not support the overall blended interest yield onour debt investments being paid in all-cash interest. As of December 31, 2018, our weighted average PIK yieldwas 0.5%. As of December 31, 2018, the weighted average annualized cash yield on our debt portfolio was11.4%. 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.The weighted annualized yield is calculated based on the effective interest rate as of period end, divided bythe fair value of our debt investments. The weighted average annualized yield of our debt investments is not thesame as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolioand is calculated before the payment of all of our fees and expenses. There can be no assurance that the weightedaverage yield will remain at its current level.Equity InvestmentsWhen we make a debt investment, we may be granted equity participation in the form of detachablewarrants to purchase common equity in the company in the same class of security that the owners or equitysponsors receive upon funding. In addition, we may make non-control equity co-investments in conjunctionwith a loan transaction with a borrower. The Investment Advisor’s investment team generally seeks to structureour equity investments, such as direct equity co-investments, to provide us with minority rights5•A comprehensive financial model that we prepare based on quantitative analysis of historical financialperformance, financial projections made by management or the financial sponsor, and pro formafinancial ratios assuming an investment consistent with possible structures. In analyzing our model,we test various investment structures, pricing options, downside scenarios and other sensitivities inorder to better understand potential risks and possible financial covenant ratios;•The competitive landscape and industry dynamics impacting the potential portfolio company;•Strengths and weaknesses of the potential investment’s business strategy and industry outlook; andTABLE OF CONTENTSprovisions and, to the extent available, event-driven put rights. They also seek to obtain limited registrationrights in connection with these investments, which may include “piggyback” registration rights. In addition towarrants and equity co-investments, our debt investments in the future may contain a synthetic equity position.INVESTMENT PROCESSOur Investment Advisor’s investment team is led by its investment committee and is responsible for allaspects of our investment process. The current members of the investment committee are Joseph B. Alala, III, ourchief executive officer, chairman of our Board and the managing partner and chief investment officer of ourInvestment Advisor, M. Hunt Broyhill, a partner of our Investment Advisor, and John F. McGlinn, a managingdirector of our Investment Advisor. They are assisted by a team of nineteen investment professionals. While theinvestment strategy involves a team approach, whereby potential transactions are screened by various membersof the investment team, Mr. Alala and one other member of the investment committee of the Investment Advisormust approve investments in order for them to proceed. Messrs. Alala and McGlinn meet weekly and, togetherwith Mr. Broyhill, on an as needed basis, depending on the nature and volume of investment opportunities. TheInvestment Advisor’s investment committee has worked together for over fifteen years. The stages of ourinvestment selection process are as follows:Deal Generation/OriginationDeal generation and origination is maximized through long-standing and extensive relationships withindustry contacts, brokers, commercial and investment bankers, entrepreneurs, service providers (such as lawyersand accountants), as well as current and former clients, portfolio companies and investors. Our InvestmentAdvisor’s investment team supplements these lead generators by also utilizing broader marketing efforts, such asattendance at prospective borrower industry conventions, an active calling effort to investment bankingboutiques, private equity firms and independent sponsors that are also investing in high quality 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 134 investments inlower middle-market and traditional middle-market businesses and equity co-investments with reputed privateequity firms since 2000. We believe we have developed a reputation as a knowledgeable and reliable source ofcapital, providing value-added industry advice and financing assistance to borrowers’ businesses and inexecuting financial sponsors’ growth strategies. Furthermore, with offices throughout the United States, we havethe ability to cover a large geographical area and to market to unique groups from each office. Specifically, ourCharlotte, Raleigh, Fort Lauderdale, Atlanta, Los Angeles, and Dallas 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 investmentcriteria (see “— Due Diligence and Underwriting,” below). In screening potential investments, our InvestmentAdvisor’s investment team utilizes the same value-oriented investment philosophy they employed in their workwith the Legacy Funds and commits resources to managing downside exposure. If a potential investment meetsour basic investment criteria, a deal team is assigned to perform preliminary due diligence. In doing so, weconsider some or all of the following factors:6•Results of a broad qualitative analysis of the company’s products or services, market position andoutlook, customers, suppliers and quality of management.•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.•On-site visits with management and relevant key employees;•In-depth review of historical and projected financial statements, including covenant calculation worksheets;•Interviews with customers and suppliers;•Management background checks;•Review of reports by third-party accountants, outside counsel and other industry, operational orfinancial experts, whether retained by us or the financial sponsor;•Review of material contracts; and•Review of financial sponsor’s due diligence package and internal executive summaries.TABLE OF CONTENTSIf the results of this preliminary due diligence are satisfactory, the deal team prepares an executive summarythat is presented to our Investment Advisor’s investment committee in a meeting that includes all members ofthe portfolio and investment teams. This executive summary includes the following areas:If our investment committee recommends moving forward, we will issue a non-binding term sheet orindication of interest to the potential portfolio company and, when applicable, its financial sponsor. If a termsheet is successfully negotiated, we will begin more formal due diligence and underwriting as we progresstowards the ultimate investment approval and closing.Due Diligence and UnderwritingThe completion of due diligence deliverables is led by at least two investment professionals. However, allinvestment and portfolio team members are regularly updated with due diligence progress, especially any issuesthat emerge. The investment professionals leading the due diligence efforts are typically assigned to the originaldeal team that worked on the executive summary. However, post-term sheet deal teams sometimes contain one ormore additional investment professionals and may include other professionals from business development,portfolio or other areas if a particular skill or experience set would be especially valuable in the due diligenceprocess. The members of the underwriting team complete due diligence and analyze the relationships among theprospective portfolio company’s business plan, operations and expected financial performance. Due diligenceconsists of some or all of the following:Typically, we utilize outside experts to analyze the legal affairs, accounting systems and financial resultsand, where appropriate, we engage specialists to investigate certain issues. During the underwriting process,significant, ongoing attention is devoted to sensitivity analyses regarding whether a company might bear asignificant “downside” case and remain profitable and in compliance with assumed financial covenants. These“downside” scenarios typically involve assumptions regarding the loss of key customers and/or suppliers, aneconomic downturn, adverse regulatory changes and other relevant stressors that we attempt to simulate in ourquantitative and qualitative analyses. Further, we continually examine the effect of these scenarios on financialratios and other metrics.7•Assessment of success in adhering to each portfolio company’s business plan and compliance withcovenants;•Periodic and regular contact with portfolio company management and, if appropriate, the financial orstrategic sponsor, to discuss 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 portfoliocompanies.TABLE OF CONTENTSDuring the underwriting process, the executive summary that was completed for the initial investmentcommittee presentation is updated and changes are presented at subsequent, weekly meetings of the investmentcommittee for continued discussion and, to the extent applicable, the investment committee issues newinstructions to the underwriting team from the investment committee.Approval, Documentation and ClosingThe underwriting team for the proposed investment presents the updated executive summary and keyfindings from due diligence to the investment committee on an ongoing, weekly basis. Prior to thecommencement of documentation, approval from the investment committee is sought and, if approved, theunderwriting professionals heretofore involved proceed to documentation.At all times during the documentation process, the underwriting professionals who conducted the duediligence remain involved; likewise, all extensively negotiated documentation decisions are made by the leadunderwriting team member, in accordance with input from at least one investment committee member andguidance from outside counsel. As and to the extent necessary, key documentation challenges are broughtbefore the investment committee for prompt discussion and resolution. Upon the completion of satisfactorydocumentation and the satisfaction of closing conditions, final approval is sought from the investmentcommittee before closing and funding.ONGOING RELATIONSHIPS WITH PORTFOLIO COMPANIESMonitoringOur Investment Advisor monitors our portfolio companies on an ongoing basis. It monitors the financialtrends of each portfolio company to determine if it is meeting its business plan and to assess the appropriatecourse of action for each company. We generally require our portfolio companies to provide annual auditedfinancial statements and quarterly unaudited financial statements, in each case, with management discussion andanalysis and covenant compliance certificates, and monthly unaudited financial statements. Using the monthlyfinancial statements, we calculate and evaluate all financial covenants and additional financial coverage ratiosthat might not be part of our covenant package in the loan documents. For purposes of analyzing a portfoliocompany’s financial performance, we may adjust their financial statements to reflect pro forma results in theevent of a recent change of control, sale, acquisition or anticipated cost savings.Our Investment Advisor has several methods of evaluating and monitoring the performance and fair valueof our investments, including the following:In addition to various risk management and monitoring tools, our Investment Advisor also uses aninvestment rating system to characterize and monitor our expected level of return on each investment in ourportfolio.As part of our valuation procedures, we risk rate all of our investments. In general, our investment ratingsystem uses a scale of 1 to 5, with 1 being the lowest probability of default and principal loss. Our internal ratingis not an exact system but is used internally to estimate the probability of: (i) default on our8TABLE OF CONTENTSdebt securities and (ii) loss of our debt principal, in the event of a default. In general, our internal rating systemmay also assist our valuation team in its determination of the estimated fair value of equity securities or equity-like securities. Our internal risk rating system generally encompasses both qualitative and quantitative aspectsof our portfolio companies.Our internal investment rating system incorporates the following five categories:​Investment RatingSummary Description​​1In general, the investment may be performing above our internal expectations. Fullreturn of principal and interest is expected. Capital gain is expected.​​2In 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.​​3In 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.​​4In 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.​​5In 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 eachinvestment in our portfolio. In connection with our valuation process, our Investment Advisor will review theseinvestment ratings on a quarterly basis. The investment rating of a particular investment should not, however, bedeemed to be a guarantee of the investment’s future performance.The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fairvalue as of December 31, 2018 and December 31, 2017 (dollars in thousands):Investment Rating​​As of December 31, 2018As of December 31, 2017​​Investments at Fair Value​Percentage of Total InvestmentsInvestments at Fair ValuePercentage of Total Investments​1$171,82938.3$191,20438.22194,41143.3186,44537.3373,32516.397,30919.549,3622.124,9815.05————Total$448,927100.0$499,939100.09%%%%•determines the composition of our portfolio, the nature and timing of the changes to our portfolio andthe manner of implementing such changes;•identifies, evaluates and negotiates the structure of the investments we make (including performingdue diligence on our prospective 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 timerequire.TABLE OF CONTENTSAGREEMENTSInvestment Advisory AgreementOur Investment Advisor is registered as an investment adviser under the Advisers Act. Subject to the overallsupervision of our Board, our Investment Advisor manages our day-to-day operations and provides investmentadvisory and management services to us. Under the terms of our Investment Advisory Agreement, the InvestmentAdvisor:The Investment Advisor’s services under the Investment Advisory Agreement are not exclusive, and it isfree to furnish similar services 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 forinvestment advisory and management services consisting of two components — a base management fee and anincentive fee.The base management fee is calculated at an annual rate of 1.75% of our gross assets, which is our totalassets as reflected on our consolidated statements of assets and liabilities and includes any borrowings forinvestment purposes. Although we do not anticipate making significant investments in derivative financialinstruments, the fair value of any such investments, which will not necessarily equal their notional value, will beincluded in our calculation of gross assets. For services rendered under the Investment Advisory Agreement, thebase management fee is payable quarterly in arrears. The base management fee is calculated based on theaverage value of our 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 our pre-incentivefee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee netinvestment income means interest income, dividend income and any other income (including any other fees(other than fees for providing managerial assistance), such as commitment, origination, structuring, diligenceand 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, expenses payable under anadministration 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 net investment income includes, in the case of investments with a deferred interest feature (such asoriginal issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that wehave not yet received in cash. Pre-incentive fee net investment income does not include any realized capitalgains, computed net of all realized capital losses or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of theimmediately 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 fee is also included in the amount of our grossassets used to calculate the 1.75% base management fee. We pay the Investment Advisor an incentive fee withrespect to our pre-incentive fee net investment income in each calendar quarter as follows:10•no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does notexceed the hurdle of 2.0%;•100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentivefee net investment income, if any, that exceeds the hurdle but is less than 2.5% in any calendar quarter(10.0% annualized). We refer to this portion of our pre-incentive fee net investment income (whichexceeds the hurdle but is less than 2.5%) as the “catch-up.” The “catch-up” is meant to provide ourInvestment Advisor with 20% of our pre-incentive fee net investment income as if a hurdle did notapply 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 anycalendar quarter (10.0% annualized) is payable to the Investment Advisor (once the hurdle is reachedand the catch-up is achieved, 20% of all pre-incentive fee investment income thereafter is allocated tothe Investment Advisor).TABLE OF CONTENTSThe Investment Advisor has voluntarily agreed to waive all or such portion of the quarterly incentive feesearned by the Investment Advisor that would otherwise cause our quarterly net investment income to be lessthan the distribution payments declared by our Board. Quarterly incentive fees are earned by the InvestmentAdvisor pursuant to the Investment Advisory Agreement. Incentive fees subject to the waiver cannot exceed theamount of incentive fees earned during the period, as calculated on a quarterly basis. The Investment Advisorwill not be entitled to recoup any amount of incentive fees that it waives. The waiver was effective in the fourthquarter 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 incentivefee:Quarterly Incentive Fee Based on Net Investment Income Pre-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 anyshare issuances or repurchases during the relevant quarter. You should be aware that a rise in the general level ofinterest rates can be expected to lead to higher interest rates applicable to our debt investments. Accordingly, anincrease in interest rates would make it easier for us to meet or exceed the incentive fee hurdle rate and mayresult in a substantial increase of the amount of incentive fees payable to our Investment Advisor with respect topre-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 upon termination of the Investment Advisory Agreement, as of the termination date), and will equal 20% ofour realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year,computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less theaggregate amount of any previously paid capital gain incentive fees with respect to each of the investments inour portfolio.We will defer cash payment of the portion of any incentive fee otherwise earned by our Investment Advisorthat would, when taken together with all other incentive fees paid to our Investment Advisor during the mostrecent 12 full calendar month period ending on or prior to the date such payment is to be made, exceed 20% ofthe sum of  (a) our pre-incentive fee net investment income during such period, (b) our net unrealizedappreciation or depreciation during such period and (c) our net realized capital gains or losses during suchperiod. Any deferred incentive fees will be carried over for payment in subsequent calculation periods to theextent such payment is payable under the Investment Advisory Agreement.11*The hypothetical amount of pre-incentive fee net investment income shown is based on a percentage oftotal net assets.TABLE OF CONTENTSExamples 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 =2.0% Management fee = 0.50% Other expenses (legal, accounting, custodian, transfer agent, etc.) = 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 = 2.0% Management fee = 0.50% Other expenses (legal, accounting, custodian, transfer agent, etc.) = 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” = 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, therefore the income related portion of the incentive fee is 0.20%.Alternative 3:AssumptionsInvestment income (including interest, dividends, fees, etc.) = 3.50% Hurdle rate = 2.0% Management fee = 0.50% Other expenses (legal, accounting, custodian, transfer agent, etc.) = 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” Incentive fee = 100% × “catch-up” + (20% × (pre-incentive fee net investment income – 2.5%))Catch-up = 2.5% – 2.0% = 0.5%12(1)(2)(3)(1)(2)(3)(4)(1)(2)(3)(4)(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% onall of Capitala Finance’s pre-incentive fee net investment income as if a hurdle rate did not apply when itsnet investment income exceeds 2.5% in any calendar quarter.•Year 1: $20 million investment made in Company A (“Investment A”), and $30 million investmentmade in Company B (“Investment B”)•Year 2: Investment A sold for $50 million and fair market value (“FMV”) of Investment B determinedto be $32 million•Year 3: FMV of Investment B determined to be $25 million•Year 4: Investment B sold for $31 million•Year 1: None•Year 2: Capital gains incentive fee of  $6 million ($30 million realized capital gains on sale ofInvestment A multiplied by 20%)•Year 3: None•Year 4: Capital gains incentive fee of  $200,000•Year 1: $20 million investment made in Company A (“Investment A”), $30 million investment madein 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 andFMV of Investment C determined to be $25 million•Year 3: FMV of Investment B determined to be $27 million and Investment C sold for $30 millionTABLE OF CONTENTSIncentive fee = (100% × 0.5%) + (20% × (2.80% – 2.5%)) = 0.5% + (20%× 0.3%) = 0.5% + 0.06% = 0.56%Pre-incentive fee net investment income exceeds the hurdle rate, and fully satisfies the “catch-up”provision, therefore the income related portion of the incentive fee is 0.56%.Example 2: Capital Gains Portion of Incentive FeeAlternative 1:AssumptionsThe capital gains portion of the incentive fee would be:$5 million (20% multiplied by ($30 million cumulative capital gains less $5 million cumulative capitaldepreciation)) less $6 million (previous capital gains fee paid in Year 2).$6.2 million ($31 million cumulative realized capital gains multiplied by 20%) less $6 million (capitalgains fee taken in Year 2).Alternative 2:Assumptions13•Year 4: FMV of Investment B determined to be $24 million•Year 5: Investment B sold for $20 million•Year 1: None•Year 2: $5 million capital gains incentive fee•Year 3: $1.4 million capital gains incentive fee(1)•Year 4: None•Year 5: None(1)As illustrated in Year 3 of Alternative 2 above, if the Company were to be wound up on a date other thanDecember 31 of any year, the Company may have paid aggregate capital gain incentive fees that are morethan the amount of such fees that would be payable if the Company had been wound up on December 31 ofsuch year.•In each of Years 1 through 4 in this example pre-incentive fee net investment income equals$40.0 million per year, which we recognized evenly in each quarter of each year and paid quarterly.This amount exceeds the hurdle rate and the requirement of the “catch-up” provision in each quarter ofsuch year. As a result, the annual income related portion of the incentive fee before the application ofthe deferral mechanism in any year is $8.0 million ($40.0 million multiplied by 20%). 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, nocapital gain-related incentive 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 unrealizedcapital gains or losses.•Year 3: We recognized $5.0 million of unrealized capital depreciation and did not otherwise generaterealized or unrealized capital gains or losses.•Year 4: We realized a $6.0 million capital gain and did not otherwise generate realized or unrealizedcapital gains or losses.TABLE OF CONTENTSThe capital gains incentive fee, if any, would be:20% multiplied by $25 million ($30 million realized capital gains on Investment A less unrealized capitaldepreciation on Investment B).$6.4 million (20% multiplied by $32 million ($35 million cumulative realized capital gains less $3 millionunrealized capital depreciation)) less $5 million capital gains fee received in Year 2.$5 million (20% multiplied by $25 million (cumulative realized capital gains of  $35 million less realizedcapital losses of  $10 million)) less $6.4 million cumulative capital gains fee paid in Year 2 and Year 3.Example 3: Application of the Incentive Fee Deferral MechanismAssumptions14•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 travel expenses incurred in connection with making investments), including fees andexpenses associated with performing due diligence reviews of prospective investments and advisoryfees;TABLE OF CONTENTS​Income Related Incentive Fee Accrued Before Application of Deferral MechanismCapital Gains Related Incentive Fee Accrued Before Application of Deferral MechanismIncentive Fee CalculationsIncentive Fees Paid and DeferredYear 1$8.0 million ($40.0 millionmultiplied by 20%)None$8.0 millionIncentive fees of$8.0 million paid; noincentive fees deferredYear 2$8.0 million ($40.0 millionmultiplied by 20%)$6.0 million (20% of$30.0 million)$14.0 millionIncentive fees of$14.0 million paid; noincentive fees deferredYear 3$8.0 million ($40.0 millionmultiplied by 20%)None (20% ofcumulative net capitalgains of  $25.0 million($30.0 million incumulative realizedgains less $5.0 millionin cumulativeunrealized capitaldepreciation) less$6.0 million of capitalgains fee paid in Year 2)$7.0 million (20% of thesum of  (a) our pre-incentive fee netinvestment income,(b) our net unrealizedappreciation ordepreciation duringsuch period and (c) ournet realized capitalgains or losses duringYear 3)Incentive fees of$7.0 million paid;$8.0 million of incentivefees accrued but paymentrestricted to$7.0 million;$1.0 million of incentivefees deferredYear 4$8.0 million($40.0 millionmultiplied by 20%)$0.2 million (20% ofcumulative net capitalgains of  $31.0 million($36.0 millioncumulative realizedcapital gains less$5.0 million cumulativeunrealized capitaldepreciation) less$6.0 million of capitalgains fee paid in Year 2)$8.2 millionIncentive fees of$9.2 million paid($8.2 million ofincentive fees accrued inYear 4 plus $1.0 millionof deferred incentivefees); no incentive feesdeferredPayment of Our ExpensesThe investment team of our Investment Advisor and their respective staffs, when and to the extent engagedin providing investment advisory and management services, and the compensation and routine overheadexpenses of such personnel allocable to such services, are provided and paid for by the Investment Advisor. Webear all other costs and expenses of our operations and transactions, including (without limitation):15•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 SecuritiesExchange Act of 1934, as amended (the “1934 Act”), and other applicable federal and state securitieslaws, 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 andother insurance premiums;•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 ourbusiness, including payments under the Administration Agreement that will be based upon ourallocable portion of overhead and other expenses incurred by our Administrator in performing itsobligations under the Administration Agreement, including rent, the fees and expenses associated withperforming compliance functions, and our allocable portion of any costs of compensation and relatedexpenses of our chief compliance officer and our chief financial officer and their respectiveadministrative support staff.TABLE OF CONTENTSDuration and TerminationThe Investment Advisory Agreement was initially approved by the Board on June 10, 2013 and signed onSeptember 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 July 26, 2018. Unless earlierterminated as described below, the Investment Advisory Agreement will remain in effect from year to year ifapproved annually by our Board or by the affirmative vote of the holders of a majority of our outstanding votingsecurities, including, in either case, approval by a majority of our directors who are not parties to such agreementor who are not “interested persons” of any such party, as such term is defined in Section 2(a)(19) of the 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’ writtennotice to the other party. See “Risk Factors — Risks Relating to Our Business and Structure — CapitalaInvestment Advisors has the right to resign on 60 days’ notice, and we may not be able to find a suitablereplacement within such time, resulting in a disruption in our operations that could adversely affect our financialcondition, business and results of operations.”IndemnificationThe Investment Advisory Agreement provides that, absent willful misfeasance, bad faith or grossnegligence in the performance of its 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 andany other person or entity affiliated with it are entitled to indemnification from Capitala Finance for anydamages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid insettlement) arising from the rendering of the Investment Advisor’s services under the Investment AdvisoryAgreement 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 theInvestment Advisor are located 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 executiveoffices of our Administrator are located at 4201 Congress Street, Suite 360, Charlotte, North Carolina 28209.The Administrator, pursuant to a sub-administration agreement, has engaged U.S. Bank Global Fund Services toact on behalf of the Administrator in its performance of certain administrative services for us. The principaloffice of U.S. Bank Global Fund Services is 777 East Wisconsin Avenue, Milwaukee,Wisconsin 53202. Pursuantto the Administration Agreement, our administrator furnishes us with office facilities, equipment and clerical,bookkeeping and record keeping services at such facilities. Under the Administration Agreement, ourAdministrator 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 preparingreports to our stockholders. In addition, our Administrator assists us in determining and publishing our net assetvalue, oversees the preparation and filing of our tax returns and the printing and dissemination of reports to ourstockholders, and generally oversees the payment of our expenses and the performance of administrative andprofessional services rendered to us by others. Payments under the Administration Agreement are equal to anamount based upon our allocable portion of our Administrator’s overhead in performing its obligations underthe 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 officerand our allocable portion of the compensation of their respective administrative support staff. Under theAdministration Agreement, our Administrator will also provide on our behalf managerial assistance to thoseportfolio companies that request such assistance. Unless terminated earlier in accordance with its terms, theAdministration Agreement will remain in effect if approved annually by our Board. On July 26, 2018, the Boardapproved the renewal of the Administration Agreement. The Administration Agreement may be terminated byeither party without penalty upon 60 days’ written notice to the other party. To the extent that our Administratoroutsources 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 AdministrationAgreement.Our Administrator also provides administrative services to our Investment Advisor. As a result, theInvestment Advisor will also reimburse our Administrator for its allocable portion of our Administrator’soverhead, including rent, the fees and expenses associated with performing compliance functions for theInvestment Advisor, and its allocable portion of the compensation of any administrative support staff.The Administration Agreement provides that, absent willful misfeasance, bad faith or negligence in theperformance of its duties or by reason of the reckless disregard of its duties and obligations, our Administratorand its officers, managers, partners, agents, employees, controlling persons, members and any other person orentity affiliated with it are entitled to indemnification from Capitala Finance for any damages, liabilities, costsand expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from therendering of our Administrator’s services under the Administration Agreement or otherwise as administrator forCapitala Finance.License AgreementWe have entered into a license agreement with the Investment Advisor pursuant to which the InvestmentAdvisor has agreed to grant us a non-exclusive, royalty-free license to use the name “Capitala.” Under thisagreement, we have a right to use the Capitala name for so long as the Investment Advisory Agreement with theInvestment Advisor is in effect. Other than with respect to this limited 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 a portion of any investment advisory fees paid by Capitala Finance to the Investment Advisor.Our other executive officers are employees of our Administrator and perform their functions under the terms ofour Administration Agreement.Our day-to-day investment operations are managed by the Investment Advisor. The Investment Advisor’sinvestment team currently consists of the members of its investment committee, Messrs. Alala,17•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.•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;TABLE OF CONTENTSMcGlinn and Broyhill, and a team of nineteen additional investment professionals. The Investment Advisor mayhire additional investment professionals, based upon its needs, in the future. See “— Investment AdvisoryAgreement.”In addition, we reimburse our Administrator for our allocable portion of overhead and other expensesincurred by it in performing its obligations under the Administration Agreement, including rent, the fees andexpenses associated with performing compliance functions, and the compensation of our chief financial officer,chief compliance officer, and their respective administrative 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 liabilitiesfrom the fair value of our gross assets.We conduct the valuation of our assets, pursuant to which our net asset value shall be determined, at alltimes consistent with U.S. generally accepted accounting principles (“U.S. GAAP”) and the 1940 Act. Ourvaluation procedures are set forth in more detail below:Securities for which market quotations are readily available on an exchange shall be valued at such price asof the closing price on the day of valuation. We may also obtain quotes with respect to certain of ourinvestments from pricing services or brokers or dealers in order to value assets. When doing so, we determinewhether the quote obtained is sufficient according to U.S. GAAP to determine the fair value of the security. Ifdetermined adequate, we use the quote obtained.Securities for which reliable market quotations are not readily available or for which the pricing source doesnot provide a valuation or methodology or provides a valuation or methodology that, in the judgment of ourInvestment Advisor or the Board, does not represent fair value, which we expect will represent a substantialmajority of the investments in our portfolio, shall be valued as follows: (i) each portfolio company or investmentis initially valued by the investment professionals responsible for the portfolio investment; (ii) preliminaryvaluation conclusions are documented and discussed with our senior management; (iii) independent third-partyvaluation 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 selectedbasis such that each portfolio investment shall be independently reviewed at least annually (investments willnot be selected for such review, however, if they (a) have a value as of the previous quarter of less than 1.0% ofour gross assets as of the previous quarter, or (b) have a value as of the current quarter of less than 1.0% of ourgross assets as of the previous quarter, after taking into account any repayment of principal during the currentquarter); and (iv) the Board will discuss valuations and determine the fair value of each investment in ourportfolio in good faith based on the input of the Investment Advisor and, where appropriate, the respective third-party valuation firms.The recommendation of fair value will generally be based on the following factors, as relevant:Securities for which market quotations are not readily available or for which a pricing source is notsufficient may include, but are not limited to, the following:18•securities affected by significant events; and•securities that the Investment Advisor believes were priced incorrectly.•the net asset value of our common stock disclosed in the most recent periodic report that we filed withthe SEC;•our management’s assessment of whether any material change in the net asset value of our commonstock has occurred (including through the realization of gains on the sale of our portfolio securities)during the period beginning on the date of the most recently disclosed net asset value of our commonstock and ending as of a time within 48 hours (excluding Sundays and holidays) of the sale of ourcommon stock; andTABLE OF CONTENTSDetermination of fair value involves subjective judgments and estimates not susceptible to substantiationby auditing procedures. Accordingly, under current auditing standards, the notes to our financial statements willrefer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations,on our financial statements. In addition, the SBA has established certain valuation guidelines for SBICs tofollow when valuing portfolio investments.In making the good faith determination of the value of these securities, we start with the cost basis of thesecurity, which includes the amortized original issue discount and PIK interest or dividends, if any. We preparethe valuations of our investments in portfolio companies using the most recent portfolio company financialstatements and forecasts. We also consult updates that we receive from senior management members at portfoliocompanies, whether solicited for valuation purposes, or received in the ordinary course of our portfoliomonitoring or due diligence process. These updates include information such as industry trends, new productdevelopment 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 investmentrating of the security as described above. Using this investment rating, we seek to determine the value of thesecurity as if we intended to sell the security in a current sale. The factors that may be taken into account inarriving at fair value include the following, as applicable: the portfolio company’s ability to service its interestand principal payment obligations, its estimated earnings and projected discounted cash flows, the nature andrealizable value of any collateral, the financial environment in which the portfolio company 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 theindependent valuation firm engaged by the Board, as well as management’s valuation recommendations.Management and the independent valuation firm respond to the preliminary evaluation to reflect commentsprovided by the audit committee. The audit committee reviews the final valuation report and management’svaluation recommendations and makes a recommendation to the Board based on its analysis of themethodologies 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 evaluationprocess. The Board then evaluates the audit committee recommendations and undertakes a similar analysis todetermine the fair value of each investment in the portfolio in good faith.Due to the inherent uncertainty of determining the fair value of investments that do not have a readilyavailable market value, the fair value of our investments may differ significantly from the values that wouldhave been used had a ready market existed for such investments, and the differences could be material.Additionally, changes in the market environment and other events that may occur over the life of theinvestments may cause the gains or losses ultimately realized on these investments to differ from the valuationsassigned at any time. For a discussion of the risks inherent in determining the fair value of securities for whichreadily available 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 authorizedcommittee thereof, will be required to make the determination that we are not selling shares of our commonstock at a price below the then current net asset value of our common stock at the time at which the sale is made.Our Board, or an authorized committee thereof, will consider the following factors, among others, in makingsuch a determination:19•the magnitude of the difference between (i) a value that our Board, or an authorized committee thereof,has determined reflects the current (as of a time within 48 hours, excluding Sundays and holidays) netasset value of our common stock, which is based upon the net asset value of our common stockdisclosed in the most recent periodic report that we filed with the SEC, as adjusted to reflect ourmanagement’s assessment of any material change in the net asset value of our common stock since thedate of the most recently disclosed net asset value of our common stock, and (ii) the offering price ofthe shares of our common stock in the proposed offering.TABLE OF CONTENTSMoreover, to the extent that there is even a remote possibility that we may (i) issue shares of our commonstock at a price per share below the then current net asset value per share of our common stock at the time atwhich the sale is made or (ii) trigger the undertaking (which we provide in certain registration statements we filewith the SEC) to suspend the offering of shares of our common stock if the net asset value per share of ourcommon stock fluctuates by certain amounts in certain circumstances until the prospectus is amended, our Boardwill elect, in the case of clause (i) above, either to postpone the offering until such time that there is no longerthe 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 currentnet asset value per share and, in the case of clause (ii) above, to comply with such undertaking or to undertake todetermine the net asset value per share of our common stock to ensure that such undertaking has not beentriggered.These processes and procedures are part of our compliance policies and procedures. Records will be madecontemporaneously with all determinations described in this section and these records will be maintained withother records that we are required to maintain under the 1940 Act.COMPETITIONWe compete for investments with other BDCs and investment funds (including private equity funds, privatecredit funds, mezzanine funds and other SBICs), as well as traditional financial services companies such ascommercial banks and other sources of funding. Additionally, competition for investment opportunities hasemerged among alternative investment vehicles, such as collateralized loan obligations (“CLOs”) and otherBDCs, some of which are sponsored by other alternative asset investors, as these entities have begun to focus onmaking investments in lower middle-market and traditional middle-market companies. As a result of these newentrants, 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 entitiesprimarily on the basis of our experience and reputation, our willingness to make smaller investments than otherspecialty finance companies, the contacts and relationships of our Investment Advisor, our responsive andefficient investment analysis and decision-making processes, and the investment terms we offer.We believe that certain of our competitors may make first lien and second lien loans with interest rates andreturns that will be comparable to or lower than the rates and returns that we will target. Therefore, we will notseek to compete solely on the interest rates and returns that we offer to potential portfolio companies. Foradditional information concerning the competitive risks we face, see “Risk Factors — Risks Relating to OurBusiness and Structure — We operate in a highly competitive market for investment opportunities, which couldreduce 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 continueto qualify annually, as a RIC under subchapter M of the Code. As a RIC, we generally will not have to paycorporate-level U.S. federal income taxes on any income that we distribute to our stockholders as dividends. Toqualify as a RIC, we must, among other things, meet certain source-of-income and asset diversificationrequirements (as described below). In addition, to qualify for RIC tax treatment we must distribute to ourstockholders, for each taxable year, at least 90% of our “investment company taxable income,” which generallyis our ordinary income plus the excess of our realized net short-term capital gains over our realized net long-termcapital losses (the “Annual Distribution Requirement”).20•qualify as a RIC; and•satisfy the Annual Distribution Requirement,•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 withrespect to loans of certain securities, gains from the sale or other disposition of stock, securities orforeign currencies, net income from certain “qualified publicly traded partnerships,” or other incomederived with respect to our business of investing in such stock or securities (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. Governmentsecurities, securities of other RICs, and other securities if such other securities of any one issuerdo not represent more than 5% of the value of our assets or more than 10% of the outstandingvoting 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 or securities of other RICs, of one issuer, of two or more issuers that arecontrolled, as determined under applicable Code rules, by us and that are engaged in the same orsimilar or related trades or businesses or of certain “qualified publicly traded partnerships” (the“Diversification Tests”).TABLE OF CONTENTSTAXATION AS A RICFor any taxable year in which we:we generally will not be subject to U.S. federal income tax on the portion of our income we distribute tostockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any income orcapital gains not distributed to our stockholders.We will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless wedistribute in a timely manner an amount at least equal to the sum of  (1) 98% of our net ordinary income for eachcalendar year, (2) 98.2% of our capital gain net income for the one-year period ending October 31 in thatcalendar year and (3) any income recognized, but not distributed, in preceding years and on which we paid nocorporate-level U.S. federal income tax (the “Excise Tax Distribution Requirement”).In order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things:Qualified earnings may exclude such income as management fees received in connection with our SBICsubsidiaries or other potential outside managed funds and certain other fees.In accordance with certain applicable Treasury regulations and other guidance issued by the InternalRevenue Service (“IRS”), a RIC may treat a distribution of its own stock as fulfilling its RIC distributionrequirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of theRIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be atleast 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, eachstockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distributionpaid in stock). In no event will any stockholder, electing to receive cash, receive less than 20% of his or herentire distribution in cash. If these and certain other requirements are met, for U.S. federal income 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. We have no current intention of paying dividends in shares of our stock in accordance withthese Treasury regulations or other applicable IRS guidance.We may be required to recognize taxable income in circumstances in which we do not receive cash. Forexample, if we hold debt obligations that are treated under applicable tax rules as having original issue discount(such as debt instruments with PIK interest or, in certain cases, increasing interest rates or issued with warrants),we must include in income each year a portion of the original issue discount that accrues over the life of theobligation, regardless of whether cash representing such income is received by us in the same taxable year. Wemay also have to include in income other amounts that we have not yet received in21TABLE OF CONTENTScash, such as PIK interest, deferred loan origination fees that are paid after origination of the loan or are paid innon-cash compensation such as warrants or stock, or certain income with respect to equity investments in foreigncorporations. Because any original issue discount or other amounts accrued will be included in our investmentcompany taxable income for the year of accrual, we may be required to make a distribution to our stockholdersin order to satisfy the Annual Distribution Requirement, even though we will not have received anycorresponding cash amount.Gain or loss realized by us from the sale or exchange of warrants acquired by us as well as any lossattributable to the lapse of such warrants generally will be treated as capital gain or loss. Such gain or lossgenerally 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 orderto satisfy distribution requirements. However, under the 1940 Act, we are not permitted to make distributions toour stockholders while our debt obligations and other senior securities are outstanding unless certain “assetcoverage” tests are met. Moreover, our ability to dispose of assets to meet our distribution requirements may belimited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status as a RIC,including the Diversification Tests. If we dispose of assets in order to meet the Annual Distribution Requirementor the Excise Tax Distribution Requirement, we may make such dispositions at times that, from an investmentstandpoint, are not advantageous. If we are prohibited from making distributions or are unable to obtain cashfrom other sources to make the distributions, we may fail to qualify as a RIC, which would result in us becomingsubject 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 tomeet the RIC distribution requirements. Our SBIC subsidiaries may be limited by the Small Business InvestmentAct of 1958, and SBA regulations governing SBICs, from making certain distributions to us that may benecessary to maintain our tax treatment as a RIC. We may have to request a waiver of the SBA’s restrictions forour SBIC subsidiaries to make certain distributions to maintain our RIC tax treatment. We cannot assure you thatthe SBA will grant such waiver. If our SBIC subsidiaries are unable to obtain a waiver, compliance with the SBAregulations may cause us to fail to qualify for tax treatment as a RIC, which would result in us becoming subjectto corporate-level U.S. federal income tax.The remainder of this discussion assumes that we will qualify as a RIC and have satisfied the AnnualDistribution Requirement.Any transactions in options, futures contracts, constructive sales, hedging, straddle, conversion or similartransactions, and forward contracts will be subject to special tax rules, the effect of which may be to accelerateincome to us, defer losses, cause adjustments to the holding periods of our investments, convert long-termcapital gains into short-term capital gains, convert short-term capital losses into long-term capital losses or haveother tax consequences. These rules could affect the amount, timing and character of distributions tostockholders. 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 a given year exceed gross taxable income (e.g., as the result of largeamounts of equity-based compensation), we would experience a net operating loss for that year. However, a RICis not permitted to carry forward net operating losses to subsequent years. In addition, expenses can be used onlyto offset investment company taxable income, not net capital gain. Due to these limits on the deductibility ofexpenses, 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 weactually earned during those years. Such required distributions may be made from our cash assets or byliquidation of investments, if necessary. We may realize gains or losses from such liquidations. In the event werealize net capital gains from such transactions, you may receive a larger capital gain distribution than youwould have received in the absence of such transactions.Investment income received from sources within foreign countries, or capital gains earned by investing insecurities of foreign issuers, may be subject to foreign income taxes withheld at the source. In this regard,withholding tax rates in countries with which the United States does not have a tax treaty are often as high22TABLE OF CONTENTSas 30%. The United States has entered into tax treaties with many foreign countries that may entitle us to areduced rate of tax or exemption from tax on this related income and gains. The effective rate of foreign taxcannot be determined at this time since the amount of our assets to be invested within various countries is notnow known. We do not anticipate being eligible for the special election that allows a RIC to treat foreignincome taxes 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 incomefrom passive sources (such as interest, dividends, rents, royalties or capital gain) or hold at least 50% of theirtotal assets in investments producing such passive income (“passive foreign investment companies”), we couldbe subject to U.S. federal income tax and additional interest charges on “excess distributions” received fromsuch companies or gain from the sale of stock in such companies, even if all income or gain actually received byus is timely distributed to our stockholders. We would not be able to pass through to our stockholders any creditor deduction for such a tax. Certain elections may, if available, ameliorate these adverse tax consequences, butany such election requires us to recognize taxable income or gain without the concurrent receipt of cash. Weintend to limit and/or manage our holdings in passive foreign investment companies to minimize our taxliability. In addition, under recently proposed regulations, income required to be included as a result of such anelection would not be qualifying income for purposes of the 90% Income Test unless we receive a distribution ofsuch income from the passive foreign investment company in the same taxable year to which the inclusionrelates.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, foreigncurrency forward contracts, foreign currencies, or payables or receivables denominated in a foreign currency aresubject to Code provisions that generally treat such gains and losses as ordinary income and losses and mayaffect the amount, timing and character of distributions to our stockholders. Any such transactions that are notdirectly related to our investment in securities (possibly including speculative currency positions or currencyderivatives not used for hedging purposes) could, under future Treasury regulations, produce income not amongthe types of  “qualifying income” from which a RIC must derive at least 90% of its annual gross income.FAILURE TO QUALIFY AS A RICIf we fail to satisfy the 90% Income Test or the Diversification Tests for any taxable year, we maynevertheless continue to qualify as a RIC for such year if certain relief provisions are applicable (which may,among other things, require us to pay certain corporate-level U.S. federal income taxes or to dispose of certainassets).If we were unable to qualify for treatment as a RIC and the foregoing relief provisions are not applicable, wewould be subject to tax on all of our taxable income at regular corporate rates, regardless of whether we makeany distributions to our stockholders. Distributions would not be required, and any distributions would betaxable to our stockholders as ordinary dividend income to the extent of our current and accumulated earningsand profits and, subject to certain limitations, may be eligible for the 20% maximum rate for noncorporatetaxpayers provided certain holding period and other requirements were met. Subject to certain limitations underthe 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 ofthe stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. To requalify as aRIC in a subsequent taxable year, we would be required to satisfy the RIC qualification requirements for thatyear and dispose of any earnings and profits from any year in which we failed to qualify as a RIC. Subject to alimited exception applicable to RICs that qualified as such under the Code for at least one year prior todisqualification and that requalify as a RIC no later than the second year following the nonqualifying year, wecould be subject to tax on any unrealized net built-in gains in the assets held by us during the period in whichwe failed to qualify as a RIC that are recognized within the subsequent five years, unless we made a specialelection to pay corporate-level U.S. federal income tax on such built-in gain at the time of our requalification asa RIC.23TABLE OF CONTENTSREGULATIONA BDC is regulated under the 1940 Act. A BDC must be organized in the U.S. for the purpose of investingin or lending to primarily private companies and making significant managerial assistance available to them. ABDC may use capital provided by public stockholders and from other sources to make long-term, privateinvestments in businesses. A BDC provides stockholders the ability to retain the liquidity of a publicly tradedstock while sharing in the possible benefits, if any, of investing in primarily privately owned companies.We may not change the nature of our business so as to cease to be, or withdraw our election as, a BDCunless authorized by vote of a majority of the outstanding voting securities, as required by the 1940 Act. Amajority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of:(a) 67% or more of such company’s voting securities present at a meeting if more than 50% of the outstandingvoting securities of such company are present or represented by proxy, or (b) more than 50% of the outstandingvoting securities of such company. We do not anticipate any substantial change in the nature of our business.As with other companies regulated by the 1940 Act, a BDC must adhere to certain substantive regulatoryrequirements. A majority of our directors must be persons who are not interested persons, as that term is definedin the 1940 Act. Additionally, we are required to provide and maintain a bond issued by a reputable fidelityinsurance company to protect the BDC. Furthermore, as a BDC, we are prohibited from protecting any director orofficer against any liability to us or our stockholders arising from willful misfeasance, bad faith, grossnegligence 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 ratioof our gross assets (less all liabilities and indebtedness not represented by senior securities) to our outstandingsenior securities, of at least 200% (or, after November 1, 2019, 150%, if certain conditions are met) after eachissuance of senior securities. On March 23, 2018, the Small Business Credit Availability Act (the “SBCA”) wassigned into law, which included various changes to regulations under the federal securities laws that impactBDCs. The SBCA included changes to the 1940 Act to allow BDCs to decrease their asset coverage requirementfrom 200% to 150% (i.e. the amount of debt may not exceed 66.7% of the value of our total assets), if certainrequirements are met. On November 1, 2018, the Board, including a “required majority” (as such term is definedin Section 57(o) of the 1940 Act) approved the application of the modified asset coverage. As a result, our assetcoverage requirements for senior securities will be changed from 200% to 150%, effective November 1, 2019.We may also be prohibited under the 1940 Act from knowingly participating in certain transactions withour affiliates without the prior approval of our directors who are not interested persons and, in some cases, priorapproval by the SEC. On June 1, 2016, the SEC issued the Order, which permits us and certain of our affiliates toco-invest with one or more other affiliated investment funds, including future affiliated investment funds, whereco-investing would otherwise be prohibited under the 1940 Act. 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) ofthe Company’s independent 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 theconsideration to be paid, are reasonable and fair to the Company and its stockholders and do not involveoverreaching in respect of the Company or its stockholders on the part of any person concerned, and (2) thepotential co-investment transaction is consistent with the interests of the Company’s stockholders and isconsistent with 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 pershare. See “Risk Factors — Risks Relating to Our Business and Structure — Regulations governing ouroperation as a BDC affect our ability to raise additional capital and the way in which we do so. As a BDC, thenecessity of raising additional capital may expose us to risks, including the typical risks associated withleverage.” We may, however, sell our common stock, or warrants, options or rights to acquire our common stock,at a price below the then-current net asset value of our common stock if our Board determines that such sale is inour best interests and the best interests of our stockholders, and our stockholders approve24•Securities purchased in transactions not involving any public offering, the issuer of which is aneligible portfolio company;•Securities received in exchange for or distributed with respect to securities described in the bulletabove or pursuant to the exercise of options, warrants or rights relating to such securities; and•Cash, cash items, government securities or high quality debt securities (within the meaning of the1940 Act), maturing in one year or less from the time of investment.•does not have a class of securities with respect to which a broker may extend margin credit at the timethe acquisition is made;•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 marketcapitalization of less than $250 million; or•meets such other criteria as may be established by the SEC.TABLE OF CONTENTSour policy and practice of making such sales. In any such case, under such circumstances, the price at which ourcommon stock is to be issued and sold may not be less than a price which, in the determination of our Board,closely approximates the market value of such common stock. In addition, we may generally issue new shares ofour common stock at a price below net asset value in rights offerings to existing stockholders, in payment ofdividends 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 OurBusiness and Structure.”QUALIFYING ASSETSUnder the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) ofthe 1940 Act, which are referred to as qualifying assets, unless, immediately after such acquisition is made,qualifying assets represent at least 70% of the BDC’s gross assets. The principal categories of qualifying assetsrelevant to our proposed business are the following:An eligible portfolio company is generally a domestic company that is not an investment company (otherthan a SBIC wholly owned by a BDC) and that:Control, as defined by the 1940 Act, is presumed to exist where a BDC beneficially owns more than 25% ofthe outstanding voting 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 mustbe operated for the purpose of making investments in eligible portfolio companies, or in other securities that areconsistent 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 in circumstances where either (i) the BDC controls such issuer of securities or (ii) the BDC purchases suchsecurities in conjunction with one or more other persons acting together and one of the other persons in thegroup makes available such managerial assistance. Making available significant managerial assistance means,among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers toprovide, and, if accepted, does so provide, significant guidance and counsel concerning 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 consistof cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or lessfrom the time of investment, which we refer to, collectively, as temporary investments, so that25•pursuant to Rule 13a-14 of the 1934 Act, our chief executive officer and chief financial officer mustcertify the accuracy of the financial statements contained in our periodic reports;•pursuant to Item 307 of Regulation S-K, our periodic reports must disclose our conclusions about theeffectiveness of our disclosure controls and procedures;•pursuant to Rule 13a-15 of the 1934 Act, our management is required to prepare an annual reportregarding its assessment of our internal control over financial reporting, and is required to obtain anaudit of the effectiveness of internal control over financial reporting performed by our independentregistered public accounting firm; andTABLE OF CONTENTS70% of our assets are qualifying assets. Typically, we will invest in U.S. Treasury bills or in repurchaseagreements, provided that such agreements are fully collateralized by cash or securities issued 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 dateand at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate.There is no percentage restriction on the proportion of our assets that may be invested in such repurchaseagreements. However, if more than 25% of our gross assets constitute repurchase agreements from a singlecounterparty, we would not meet the diversification tests in order to qualify as a RIC under the Code. Thus, wedo not intend to enter into repurchase agreements with a single counterparty in excess of this limit. OurInvestment Advisor will monitor the creditworthiness of the counterparties with which we enter into repurchaseagreement transactions.SENIOR SECURITIESWe are permitted, under specified conditions, to issue multiple classes of indebtedness and one class ofstock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% (or150%, if certain requirements are met, after November 1, 2019) immediately after each such issuance. OnJune 10, 2014, we received an exemptive order from the SEC granting relief from the asset coveragerequirements for certain indebtedness issued by Fund II and Fund III as SBICs. In addition, while any seniorsecurities remain outstanding, we must make provisions to prohibit any distribution to our stockholders or therepurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of thedistribution or repurchase. We may also borrow amounts up to 5% of the value of our gross assets for temporaryor emergency purposes without regard to asset coverage. For a discussion of the risks associated with leverage,see “Risk Factors — Risks Relating to Our Business and Structure.”CODE OF ETHICSWe and our Investment Advisor have adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Actand Rule 204A-1 under the Advisers Act that establishes procedures for personal investments and restrictscertain transactions by our personnel. Our code of ethics generally does not permit investments by ouremployees in securities that may be purchased or held by us. Our code of ethics is also available on our websiteat www.Capitalagroup.com.COMPLIANCE POLICIES AND PROCEDURESWe and our Investment Advisor have adopted and implemented written policies and procedures reasonablydesigned to detect and prevent violation of the federal securities laws and are required to review thesecompliance policies and procedures annually for their adequacy and the effectiveness of their implementationand designate a chief compliance officer to be responsible for administering 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 regulatoryrequirements on publicly-held companies and their insiders. Many of these requirements affect us. For example:26•pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the 1934 Act, our periodic reports mustdisclose whether there were significant changes in our internal controls over financial reporting or inother factors that could significantly affect these controls subsequent to the date of their evaluation,including any corrective actions with regard to significant deficiencies and material weaknesses.TABLE OF CONTENTSThe Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether wecomply with the Sarbanes-Oxley Act and the regulations promulgated thereunder. We will continue to monitorour compliance with all regulations that are adopted under the Sarbanes-Oxley Act and will take actionsnecessary 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 policiesand procedures of the Investment Advisor are set forth below. The guidelines will be reviewed periodically bythe Investment Advisor and our non-interested directors, and, accordingly, are subject to change. For purposes ofthe proxy voting policies and procedures described below, “we,” “our” and “us” refers to the InvestmentAdvisor.IntroductionAn investment adviser registered under the Advisers Act has a fiduciary duty to act solely in the bestinterests of its clients. As part of this duty, we recognize that we must vote client securities in a timely mannerfree of conflicts of interest and in the best interests of our clients.These policies and procedures for voting proxies for our investment advisory clients are intended to complywith Section 206 of, 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 ourclients’ stockholders. We will review on a case-by-case basis each proposal submitted to a stockholder vote todetermine its impact on the portfolio securities held by our clients. Although we will generally vote againstproposals that may have a negative impact on our clients’ portfolio securities, we may vote for such a proposal ifthere exist compelling long-term reasons to do so.Our proxy voting decisions will be made by the senior officers who are responsible for monitoring each ofour clients’ investments. To ensure that our vote is not the product of a conflict of interest, we will require that:(1) anyone involved in the decision making process disclose to our managing member any potential conflictthat he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote;and (2) employees involved in the decision making process or vote administration are prohibited from revealinghow we intend to vote on a proposal in order to reduce any attempted influence from interested parties.Proxy Voting RecordsYou may obtain information about how we voted proxies by making a written request for proxyvoting 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-publicpersonal information. The following information is provided to help you understand what personal informationwe collect, how we protect that information and why, in certain cases, we may share information with select otherparties.Generally, we do not receive any non-public personal information relating to our stockholders, althoughcertain non-public personal information of our stockholders may become available to us. We do not disclose anynon-public personal information about our stockholders or former stockholders to anyone, except as permittedby law or as is necessary in order to service stockholder accounts (for example, to a transfer agent or third-partyadministrator).27TABLE OF CONTENTSWe restrict access to non-public personal information about our stockholders to employees of ourInvestment Advisor and its affiliates with a legitimate business need for the information. We maintain physical,electronic and procedural safeguards designed to protect the non-public personal information of ourstockholders.SMALL BUSINESS INVESTMENT COMPANY REGULATIONSFund II and Fund III, which are our wholly owned subsidiaries, are licensed to act as SBICs and areregulated by the SBA. As of December 31, 2018, investments in Fund II and Fund III accounted forapproximately 11.7% and 53.6%, respectively, of the fair value of our portfolio. As of December 31, 2018,Fund II and Fund III had $15.7 million and $150.0 million, respectively, of SBA-guaranteed debenturesoutstanding under the SBIC program. Fund II and Fund III are fully drawn and may not make borrowings inexcess of their aggregate $165.7 million of SBA-guaranteed debentures outstanding as of December 31, 2018.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 anindependent auditor to determine the SBIC’s compliance with the relevant SBA regulations. SBA-guaranteeddebentures are non-recourse, interest-only debentures with interest payable semi-annually and have a ten yearmaturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity butmay be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed at the timeof issuance 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. Undercurrent 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 two most recent fiscal years. In addition, a licensed SBIC must devote 25.0% of itsinvestment activity to those entities that have a tangible net worth not exceeding $6.0 million and an averageannual net income after U.S. federal income taxes not exceeding $2.0 million for the two most recent fiscal years.The SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on theindustry in which the business is engaged and are based on factors such as the number of employees and grosssales. The SBA regulations permit licensed SBICs to make long-term loans to small businesses, invest in theequity securities of such businesses and provide them with consulting and advisory services. The SBA alsoplaces certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibitsSBICs from providing funds for certain purposes or to businesses in a few prohibited industries. Compliancewith SBA requirements may cause Fund II and Fund III to forego attractive investment opportunities that are notpermitted under SBA regulations.Further, the SBA regulations require that a licensed SBIC be periodically examined and audited by the SBAto determine its compliance with the relevant SBA regulations. The SBA prohibits, without prior SBA approval,a “change of control” of an SBIC or transfers that would result in any person (or a group of persons acting inconcert) owning 10.0% or more of a class of capital stock of a licensed SBIC. If either Fund II or Fund III fails tocomply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit orprohibit Fund II’s and Fund III’s use of debentures, declare outstanding debentures immediately due andpayable, 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 IIIwere in compliance with the terms of the SBA’s leverage as of December 31, 2018 as a result of having sufficientcapital as defined under the SBA regulations.The maximum leverage available to a “family” of affiliated SBIC funds is $350.0 million, subject to SBAapproval. SBA regulations currently limit the amount that an SBIC subsidiary may borrow to a maximum of $150 million when it has at least $75 million in regulatory capital. Affiliated SBICs are permitted to issue up toa combined maximum amount of  $350 million when they have at least $175 million in regulatory capital. As ofDecember 31, 2018, Fund II had $26.2 million in regulatory capital and $15.7 million in SBA-guaranteeddebentures outstanding and Fund III had $75.0 million in regulatory capital and $150.0 million in SBA-guaranteed debentures outstanding.28TABLE OF CONTENTSOn June 10, 2014, we received exemptive relief from the SEC to permit us to exclude the debt of our SBICsubsidiaries guaranteed by the SBA from the definition of senior securities in the 200% (or 150%, if certainconditions are met, after November 1, 2019) asset coverage test under the 1940 Act. This provides us withincreased flexibility under the 200% (or 150%, if certain conditions are met, after November 1, 2019) assetcoverage test by permitting us to borrow up to $165.7 million more than we would otherwise be able to absentthe receipt of this exemptive relief.Our SBIC subsidiaries are subject to regulation and oversight by the SBA, including requirements withrespect to maintaining certain minimum financial ratios and other covenants. Receipt of SBIC licenses does notassure that our SBIC subsidiaries will receive SBA-guaranteed debenture funding, which is dependent upon ourSBIC subsidiaries continuing to be in compliance with SBA regulations and policies. The SBA, as a creditor,will have a superior claim to our SBIC subsidiaries’ assets over our stockholders in the event we liquidate ourSBIC subsidiaries or the SBA exercises its remedies under the SBA-guaranteed debentures issued by our SBICsubsidiaries upon an event of default.NASDAQ GLOBAL SELECT MARKET REQUIREMENTSWe have adopted certain policies and procedures intended to comply with the NASDAQ Global SelectMarket’s corporate governance rules. We will continue to monitor our compliance with all future listingstandards that are approved by the SEC and will take actions necessary to ensure that we are in compliancetherewith.AVAILABLE INFORMATIONOur executive offices are located at 4201 Congress Street, Suite 360, Charlotte, NC 28209. We maintain awebsite located at www.Capitalagroup.com and our phone number is (704) 376-5502. We make available free ofcharge on our website our proxy statement, annual report on Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K, and amendments to those reports as soon as reasonably practical after we file such materialwith, or furnish to, the SEC. Information contained on our website is not incorporated by reference into thisAnnual Report on Form 10-K and you should not consider information contained on our website to be part ofthis Annual Report on Form 10-K or any other report we file with the SEC.The SEC also maintains a website that contains reports, proxy and information statements and otherinformation we file with the SEC at www.sec.gov.29TABLE OF CONTENTSITEM 1A. RISK FACTORSInvesting in our securities involves a number of significant risks. Before you invest in our securities, youshould be aware of various risks, including those described below and elsewhere in this Annual Report onForm 10-K. You should carefully consider these risk factors, together with all of the other information includedin this Annual Report on Form 10-K, before you decide whether to make an investment in our securities. Therisks set out below are not the only risks we face. Additional risks and uncertainties not presently known to usor not presently deemed material by us may also impair our operations and performance. If any of the followingevents occur, our business, financial condition, results of operations and cash flows could be materially andadversely affected. In such case, our net asset value and the trading price of our securities could decline, andyou may lose all or part of your investment. The risk factors described below are the principal risk factorsassociated with an investment in us as well as those factors generally associated with an investment companywith investment objectives, investment policies, capital structure, 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 aresult, we are subject to many of the business risks and uncertainties associated with recently formed businesses,including the risk that we will not achieve our investment objective and that the value of your investment coulddecline substantially. As a BDC, we are subject to the regulatory requirements of the SEC, in addition to thespecific regulatory requirements applicable to BDCs under the 1940 Act and RICs under the Code. Ourmanagement and that of the Investment Advisor did not have any prior experience operating under thisregulatory framework, and we incur substantial costs, and expend significant time or other resources, to operateunder this regulatory framework. From time to time, the Investment Advisor may pursue investmentopportunities in which it has more limited experience. We may also be unable to replicate the historicalperformance of prior investment funds managed by our management team. In addition, we may be unable togenerate sufficient revenue from our operations to make or sustain distributions to our stockholders.Our investment portfolio is recorded at fair value, with our Board having final responsibility for overseeing,reviewing and approving, in good faith, its estimate of fair value and, as a result, there may be uncertainty asto the value of our portfolio investments.Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is noreadily available market value, at fair value as determined by us, with our Board having final responsibility foroverseeing, reviewing and approving, in good faith, our estimate of fair value. Typically, there will not be apublic market for the securities of the privately held companies in which we invest. As a result, we value thesesecurities quarterly at fair value based on input from management, a third-party independent valuation firm andour 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 ourportfolio, are to a certain degree, subjective and dependent on a valuation process approved by our Board.Certain factors that may be considered in determining the fair value of our investments include external events,such as private mergers, sales and acquisitions involving comparable companies. Because such valuations, andparticularly valuations of private securities and private companies, are inherently uncertain, they may fluctuateover short periods of time and may be based on estimates. Our fair value determinations may differ materiallyfrom the values that would have been used if a ready market for these securities existed. Due to this uncertainty,our fair value determinations may cause our net asset value on a given date to materially understate or overstatethe value that we may ultimately realize on one or more of our investments. As a result, investors purchasing ourcommon stock based on an overstated net asset value would pay a higher price than the value of our investmentsmight warrant. Conversely, investors selling shares during a period in which the net asset value understates thevalue of our investments would receive a lower price for their shares than the value of our investments mightwarrant. In addition, we may not be able to realize the values on our investments needed to pay interest on ourborrowings.30TABLE OF CONTENTSOur financial condition and results of operations depend on our ability to effectively manage and deploycapital.Our ability to achieve our investment objective depends on our ability to effectively manage and deploycapital, which depends, in turn, on our Investment Advisor’s ability to identify, evaluate and monitor, and ourability 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 InvestmentAdvisor’s handling of the investment process, its ability to provide competent, attentive and efficient servicesand our access to investments offering acceptable terms. In addition to monitoring the performance of ourexisting investments, our Investment Advisor’s investment team may also be called upon, from time to time, toprovide managerial assistance to some of our portfolio companies as well as other funds that they manage. Thesedemands on their time may distract them or slow our rate of investment. See also ‘‘— There are significantpotential 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 growtheffectively could have a material adverse effect on our business, financial condition, results of operations andprospects. The results of our operations depend on many factors, including the availability of opportunities forinvestment, readily accessible short and long-term funding alternatives in the financial markets, and economicconditions. Furthermore, if we cannot successfully operate our business or implement our investment policiesand 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 Broyhilland John F. McGlinn, who serve as the members of the investment committee of the Investment Advisor and leadthe Investment Advisor’s investment team. Our success depends on the continued service of these individualsand the other senior investment professionals available to the Investment Advisor. We cannot assure you thatunforeseen business, medical, personal or other circumstances would not lead Messrs. Alala, Broyhill orMcGlinn or any other such individual to terminate his relationship with us. Additionally, we cannot assure youthat a reduction in revenue to the Investment Advisor, including as a result of fee waivers or a decrease in ourassets, 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 ourability to achieve our investment objective as well as on our financial condition and results of operations. Inaddition, we can offer no assurance that the Investment Advisor will continue indefinitely as our investmentadviser.The members of the Investment Advisor’s investment team are and may in the future become affiliated withentities engaged in business activities similar to those intended to be conducted by us and may have conflicts ofinterest in allocating their time. For example, an affiliate of the Investment Advisor also manages Fund IV, FundV, and CSLC, private investment limited partnerships providing financing solutions to the lower middle-marketand traditional middle-market. Mr. Alala dedicates a significant portion of his time to the activities of CapitalaFinance; however, he may become engaged in other business activities that could divert his time and attentionin the future.We operate in a highly competitive market for investment opportunities, which could reduce returns and resultin losses.We compete for investments with other BDCs with similar investment strategies, private equity funds withsimilar investment strategies, venture lending funds, finance companies with venture lending units and banksfocused on venture lending. Many of our potential competitors are substantially larger and have considerablygreater financial, technical and marketing resources than we have. For example, some competitors may have alower cost of capital and access to funding sources that are not available to us. In addition, some of ourcompetitors have higher risk tolerances or different risk assessments than we have. These characteristics mightallow 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 donot match our competitors’ pricing, terms or structure. If we are forced31TABLE OF CONTENTSto match our competitors’ pricing, terms or structure, we may not be able to achieve acceptable returns on ourinvestments or may bear substantial risk of capital loss. We believe a significant part of our competitiveadvantage stems from the fact that the market for investments in lower and traditional middle-market companiesis underserved by traditional commercial banks and other financing sources. A significant increase in thenumber and/or the size of our competitors in this target market could force us to accept less attractive investmentterms. Furthermore, many of our potential competitors have greater experience operating under, or will not besubject 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 thefailure of these relationships to generate investment opportunities, could adversely affect our business.We depend upon our Investment Advisor to maintain its relationships with venture capital and privateequity firms, placement agents, investment banks, management groups and other financial institutions, and weexpect to rely to a significant extent upon these relationships to provide us with potential investmentopportunities. If our Investment Advisor fails to maintain such relationships, or to develop new relationshipswith other sources of investment opportunities, we will not be able to grow our investment portfolio. In addition,individuals with whom our Investment Advisor has relationships are not obligated to provide us with investmentopportunities, and we can offer no assurance that these relationships will generate investment opportunities forus in the future.Our success depends on the ability of Capitala Investment Advisors to attract and retain qualified personnel ina competitive environment.Our growth requires that the Investment Advisor retain and attract new investment and administrativepersonnel in a competitive market. Its ability to attract and retain personnel with the requisite credentials,experience and skills depends on several factors including, but not limited to, its ability to offer competitivewages, benefits and professional growth opportunities. Many of the entities with which the Investment Advisorcompetes for experienced personnel, including investment funds (such as private equity funds, credit funds andmezzanine funds) and traditional financial services companies, have greater resources than the InvestmentAdvisor 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 affiliatedinvestment funds. In addition, our executive officers and directors, as well as the current and future members ofour Investment Advisor’s investment team may serve as officers, directors or principals of other entities thatoperate in the same or a related line of business as we do. Accordingly, they may have obligations to investors inthose entities, the fulfillment of which obligations may not be in the best interests of us or our stockholders.In the course of our investing activities, we pay management and incentive fees to the Investment Advisorand reimburse the Investment Advisor for certain expenses it incurs. As a result, investors in our common stockinvest on a ‘‘gross’’ basis and receive distributions on a ‘‘net’’ basis after expenses, resulting in a lower rate ofreturn than an investor might achieve through direct investments. Accordingly, there may be times when themanagement team of the Investment Advisor will have interests that differ from those of our stockholders, givingrise to a conflict. The Investment Advisor will not be reimbursed for any performance-related compensation forits employees. We have entered into a royalty-free license agreement with our Investment Advisor, pursuant towhich the Investment Advisor grants us a non-exclusive royalty-free license to use the name ‘‘Capitala.’’ Underthe license agreement, we have the right to use the ‘‘Capitala’’ name for so long as the Investment Advisor orone of its affiliates remains our Investment Advisor. In addition, we pay our Administrator our allocable portionof overhead and other expenses incurred by our Administrator in performing its obligations under theAdministration 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 officerand their respective administrative support staff. These arrangements create conflicts of interest that our Boardmust monitor.32TABLE OF CONTENTSIn addition, an affiliate of the Investment Advisor also manages Fund IV, a private investment limitedpartnership providing financing solutions to smaller and lower middle-market companies that had its firstclosing in March 2013 and obtained SBA approval for its SBIC license in April 2013. In addition to Fund IV,affiliates of the Investment Advisor may manage several affiliated funds whereby institutional limited partners inFund IV have the opportunity to co-invest with Fund IV in portfolio investments. An affiliate of the InvestmentAdvisor also manages Fund V, a private investment limited partnership, and CSLC, both of which providefinancing solutions to the lower middle-market and traditional middle-market. The Investment Advisor and itsaffiliates may also manage other funds in the future that may have investment mandates that are similar, in wholeor in part to ours. To the extent permitted by the 1940 Act and interpretation of the SEC staff, the InvestmentAdvisor and its affiliates may determine that an investment is appropriate for us and for one or more of thoseother funds. In such event, depending on the availability of such investment and other appropriate factors, theInvestment Advisor or its affiliates may determine that we should invest side-by-side with one or more otherfunds. 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 notexpect to make co-investments, or otherwise compete for investment opportunities, with Fund IV because itsfocus and investment strategy differ from our own. However, we do expect to make, and have made, co-investments with Fund V and/or CSLC given their similar investment strategies.As a BDC, we are substantially limited in our ability to co-invest in privately negotiated transactions withaffiliated funds unless we obtain an exemptive order from the SEC. On June 1, 2016, the SEC issued an order(the “Order”) permitting this relief. Subject to satisfaction of certain conditions to the Order, we and certain ofour affiliates are now permitted, together with any future BDCs, registered closed-end funds and certain privatefunds, each of whose investment adviser is our investment adviser or an investment adviser controlling,controlled by, or under common control with our investment adviser, to co-invest in negotiated investmentopportunities where doing so would otherwise be prohibited under the 1940 Act, providing our stockholderswith access to a broader array of investment opportunities. Pursuant to the Order, we are permitted to co-invest insuch investment opportunities with our affiliates if a “required majority” (as defined in Section 57(o) of the 1940Act) of our independent 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 theconsideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching inrespect 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 investmentobjective and strategies.In the ordinary course of business, we may enter into transactions with portfolio companies that may beconsidered related party transactions. In order to ensure that we do not engage in any prohibited transactionswith any persons affiliated with us, we have implemented certain written policies and procedures whereby ourexecutive officers screen each of our transactions for any possible affiliations between the proposed portfolioinvestment and us, companies controlled by us or our executive officers and directors. We will not enter into anyagreements unless and until we are satisfied that doing so will not raise concerns under the 1940 Act or, if suchconcerns exist, we have taken appropriate actions to seek review and approval by our Board or exemptive relieffor 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 timeto time, possess material non-public information about or related to our portfolio companies, limiting ourinvestment discretion.Members of our Investment Advisor’s investment committee and other investment professionals of theInvestment Advisor may serve as directors of, or in a similar capacity to, portfolio companies in which we invest.In the event that material nonpublic information is obtained with respect to such companies, or we becomesubject to trading restrictions under the internal trading policies of those companies or as a result of applicablelaw or regulations, we could be prohibited for a period of time from purchasing or selling the securities of suchcompanies, and this prohibition may have an adverse effect on us.33TABLE OF CONTENTSThe 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 tradedand for which no market-based price quotation is available. As a result, our Board determines the fair value ofthese loans and securities in good faith as described in the section titled ‘‘Valuation of Investments’’ in Note 2to our consolidated financial statements. In connection with that determination, investment professionals fromthe Investment Advisor may provide our Board with valuations based upon the most recent portfolio companyfinancial statements available and projected financial results of each portfolio company. While the valuation forcertain portfolio investments is reviewed by an independent valuation firm quarterly, the ultimate determinationof fair value is made by our Board, including our interested directors, and not by such third-party valuation 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 grossassets, and its incentive fees 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 AdministrationAgreement with our Administrator were not negotiated on an arm’s length basis and may not be as favorableto us as if they had been negotiated with an unaffiliated third-party, including an incentive fee structure thatmay induce Capitala Investment Advisors to pursue speculative investments, and to use leverage when it maybe unwise to do so.The Investment Advisory Agreement and the Administration Agreement were negotiated between relatedparties. Consequently, their terms, including fees payable to the Investment Advisor and the Administrator, maynot be as favorable to us as 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 InvestmentAdvisor to pursue investments on our behalf that are riskier or more speculative than would be the case in theabsence of such compensation arrangement. The incentive fee payable to our Investment Advisor is calculatedbased on a percentage of our return on invested capital. This may encourage our Investment Advisor to useleverage to increase the return on our investments. Under certain circumstances, the use of leverage may increasethe likelihood of default, which would impair the value of our common stock. In addition, our InvestmentAdvisor receives the incentive fee based, in part, upon net capital gains realized on our investments. Unlike thatportion 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 ininvestments that are likely to result in capital gains as compared to income-producing securities. Such a practicecould result in our investing in more speculative securities than would otherwise be the case, which could resultin higher investment losses, particularly during economic downturns.Although we currently do not anticipate doing so, we may invest, to the extent permitted by law, in thesecurities and instruments of other investment companies, including private funds, and, to the extent we soinvest, will bear our ratable share of any such investment company’s expenses, including management andperformance fees. We also remain obligated to pay management and incentive fees to our Investment Advisorwith respect to the assets invested in the securities and instruments of other investment companies. With respectto each of these investments, each of our stockholders will bear his or her share of the management and ourInvestment Advisor’s incentive fee as well as indirectly bearing the management and performance fees and otherexpenses of any investment companies in which we invest.Capitala Investment Advisors’ liability is limited under the Investment Advisory Agreement, and we haveagreed to indemnify Capitala Investment Advisors against certain liabilities, which may lead CapitalaInvestment Advisors to act in a riskier manner 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 tous other than to render the services called for under that agreement. It is not responsible for any action of ourBoard in following or declining to follow the Investment Advisor’s advice or recommendations. Under theInvestment Advisory Agreement, the Investment Advisor, its officers, members and personnel, and any personcontrolling or controlled by the Investment Advisor are not liable to us, any subsidiary of ours, our directors, ourstockholders or any subsidiary’s stockholders or partners34TABLE OF CONTENTSfor acts or omissions performed in accordance with and pursuant to the Investment Advisory Agreement, exceptthose resulting from acts constituting gross negligence, willful misfeasance, bad faith or reckless disregard of theduties that the Investment Advisor owes to us under the Investment Advisory Agreement. In addition, as part ofthe Investment Advisory Agreement, we have agreed to indemnify the Investment Advisor and each of itsofficers, directors, members, managers and employees from and against any claims or liabilities, includingreasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our businessand operations or any action taken or omitted on our behalf pursuant to authority granted by the InvestmentAdvisory Agreement, except where attributable to gross negligence, willful misfeasance, bad faith or recklessdisregard of such person’s duties under the Investment Advisory Agreement. These protections may lead theInvestment Advisor to act in a riskier manner when acting on our behalf than it would when acting for its ownaccount.A general increase in interest rates will likely have the effect of making it easier for our Investment Advisor toreceive incentive fees, without necessarily resulting in an increase in our net earnings.Under the structure of our Investment Advisory Agreement with our Investment Advisor, any generalincrease in interest rates will likely have the effect of making it easier for our Investment Advisor to meet thequarterly hurdle rate for payment of income incentive fees under the Investment Advisory Agreement withoutany additional increase in relative performance on the part of our Investment Advisor. In addition, in view of thecatch-up provision applicable to income incentive fees under the Investment Advisory Agreement, ourInvestment Advisor could potentially receive a significant portion of the increase in our investment incomeattributable to such a general increase in interest rates. If that were to occur, our increase in net earnings, if any,would likely be significantly smaller than the relative increase in our Investment Advisor’s income incentive feeresulting from such a general increase in interest rates.PIK interest payments we receive will increase our assets under management and, as a result, will increase theamount of base management 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 interest results in an increase in the size of the loan balance of the underlying loan, the receipt byus of PIK interest will have the effect of increasing our assets under management. As a result, because the basemanagement fee that we pay to the Investment Advisor is based on the value of our gross assets, the receipt by usof PIK interest will result in an increase in the amount of the base management fee payable by us. In addition,any such increase in a loan balance due to the receipt of PIK interest will cause such loan to accrue interest onthe higher loan balance, which will result in an increase in our pre-incentive fee net investment income and, as aresult, 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 asuitable replacement within such time, resulting in a disruption in our operations that could adversely affectour financial condition, business and results of operations.Our Investment Advisor has the right, under the Investment Advisory Agreement, to resign at any time on60 days’ written notice, whether we have found a replacement or not. If our Investment Advisor resigns, we maynot be able to find a new investment adviser or hire internal management with similar expertise and ability toprovide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do soquickly, our operations are likely to experience a disruption, our financial condition, business and results ofoperations as well as our ability to pay distributions are likely to be adversely affected and the market price ofour shares may decline. In addition, the coordination of our internal management and investment activities islikely to suffer if we are unable to identify and reach an agreement with a single institution or group ofexecutives having the expertise possessed by our Investment Advisor and its affiliates. Even if we are able toretain comparable management, whether internal or external, the integration of such management and their lackof familiarity with our investment objective may result in additional costs and time delays that may adverselyaffect our financial condition, business and results of operations.35TABLE OF CONTENTSCapitala Investment Advisors may not be able to achieve the same or similar returns as those achieved forother funds it currently manages or by its investment team while they were employed at prior positions.The Investment Advisor manages other funds and may manage other entities in the future. The track recordand achievements of these other entities are not necessarily indicative of future results that will be achieved bythe Investment Advisor because these other entities may have investment objectives and strategies that differfrom ours. Additionally, although in the past Mr. Alala and other members of our Investment Advisor’sinvestment team have held senior positions at a number of investment firms, including the Legacy Funds, theirtrack record and achievements are not necessarily indicative of future results that will be achieved by ourInvestment Advisor. We cannot assure you that we will be able to achieve the results realized by prior vehiclesmanaged 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 constraintson the operations of BDCs. For example, BDCs are required to invest at least 70% of their gross assets inspecified 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, any failure to comply with the requirements imposed on BDCs by the 1940 Act could cause theSEC to bring an enforcement action against us and/or expose us to claims of private litigants. In addition, uponapproval of a majority of our stockholders, we may elect to withdraw our status as a BDC. If we decide towithdraw our election, or if we otherwise fail to qualify, or maintain our qualification, as a BDC, we may besubject to the substantially greater regulation under the 1940 Act as a closed-end investment company.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 inwhich we do so. As a BDC, the necessity of raising additional capital may expose us to risks, including thetypical risks associated with leverage.We may issue debt securities or preferred stock and/or borrow money from banks or other financialinstitutions, which we refer to collectively as ‘‘senior securities,’’ up to the maximum amount permitted by the1940 Act. Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities in amountssuch that our asset coverage ratio, as defined in the 1940 Act, equals at least 200% (or 150%, if certainconditions are met, after November 1, 2019), of gross assets less all liabilities and indebtedness not representedby senior securities, after each issuance of senior securities. If the value of our assets declines, we may be unableto satisfy this test. If that happens, we may be required to sell a portion of our investments and, depending on thenature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous.Also, any amounts that we use to service our indebtedness would not be available for distributions to ourcommon stockholders. Furthermore, as a result of issuing senior securities, we would also be exposed to typicalrisks associated with leverage, including an increased risk of loss.As of December 31, 2018, we had $165.7 million of outstanding SBA-guaranteed debentures, $75.0 millionof 6.0% fixed rate notes due May 31, 2022 (the ‘‘2022 Notes’’) outstanding, $52.1 million of 5.75% fixed rateconvertible notes due May 31, 2022 (the ‘‘2022 Convertible Notes’’) outstanding, and $10.0 millionoutstanding under the Credit Facility that provides for borrowings of up to $114.5 million on a revolving basisand may be increased up to $200.0 million pursuant to its ‘‘accordion’’ feature. We have received an exemptiveorder from the SEC granting relief from the asset coverage requirements for certain indebtedness issued by FundII 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 haveother rights, preferences, or privileges more favorable than those of our common stockholders, and the issuanceof preferred stock could have the effect of delaying, deferring or preventing a transaction or a change of controlthat might involve a premium price for holders of our common stock or otherwise be in your best interest.36TABLE OF CONTENTSWe generally may not issue and sell our common stock at a price below net asset value per share. We may,however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below thethen-current net asset value per share of our common stock if our Board determines that such sale is in our bestinterests and in the best interests of our stockholders, and our stockholders approve such sale. In any such case,the price at which our securities are to be issued and sold may not be less than a price that, in the determinationof our Board, closely approximates the market value of such securities (less any commission or discount). If weraise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for,our common stock, then the percentage ownership of our stockholders at that time will decrease, and you mayexperience dilution.At our 2019 Annual Stockholders Meeting, subject to certain determinations required to be made by ourBoard, we will ask our stockholders to approve our ability to sell or otherwise issue shares of our common stock,not exceeding 25% of our then outstanding common stock immediately prior to each such offering, at a pricebelow the then current net asset value per share during a period beginning on May 2, 2019 and expiring on theearlier of the one year anniversary of the date of the 2019 Annual Stockholders Meeting and the date of our2020 Annual Stockholders Meeting, which is expected to be held in April 2020.In certain limited circumstances, pursuant to an SEC staff interpretation, we may also issue shares at a pricebelow net asset value in connection with a transferable rights offering so long as: (1) the offer does notdiscriminate among stockholders; (2) we use our best efforts to ensure an adequate trading market exists for therights; and (3) the ratio of the offering does not exceed one new share for each three rights held. If we raiseadditional funds by issuing more common stock or senior securities convertible into, or exchangeable for, ourcommon stock, the percentage ownership of our stockholders at that time would decrease and they mayexperience dilution. Moreover, we can offer no assurance that we will be able to issue and sell additional equitysecurities in the future, on favorable terms or at all.We borrow money, which magnifies the potential for gain or loss on amounts invested and may increasethe risk of investing in us, and the calculation of our base management fee, which is based upon our grossassets, may have the effect of encouraging our Investment Advisor to utilize leverage when it may not beadvisable to do so.The use of leverage magnifies the potential for gain or loss on amounts invested and, therefore, increasesthe risks associated with investing in our securities. In addition to the existing SBA-guaranteed debentures, the2022 Notes, the 2022 Convertible Notes and the Credit Facility, we may borrow from and issue senior debtsecurities to banks, insurance companies and other lenders in the future. Holders of these senior securities willhave fixed dollar claims on our assets that are superior to the claims of our common stockholders, and we wouldexpect such lenders to seek recovery against our assets in the event of a default. If the value of our assetsdecreases, leverage would cause net asset value to decline more sharply than it otherwise would have had we notbeen leveraged. Similarly, any decrease in our income would cause net income to decline more sharply than itwould have had we not borrowed. Such a decline could also negatively affect our ability to make distributionson our common stock. Leverage is generally considered a speculative investment technique. Our ability toservice any debt that we incur will depend largely on our financial performance and will be subject to prevailingeconomic conditions and competitive pressures. Moreover, as the management fee payable to our InvestmentAdvisor will be payable based on our gross assets, including those assets acquired through the use of leverage,our Investment Advisor will have a financial incentive to incur leverage that may not be consistent with ourstockholders’ interests. In addition, our common stockholders will bear the burden of any increase in ourexpenses as a result of leverage, including any increase in the management fee payable to our InvestmentAdvisor.The Credit Facility, and any other credit facility into which we may enter, imposes financial and operatingcovenants that restrict our business activities, including limitations that could hinder our ability to financeadditional loans and investments or to make the distributions required to maintain our tax treatment as a RICunder the Code. Even though our Board has approved a resolution permitting the Company to be subject to a150% asset coverage ratio to be effective on November 1, 2019, contractual leverage limitations under ourexisting Credit Facility or future borrowings may limit our ability to incur additional indebtedness.37TABLE OF CONTENTSTo the extent we borrow money to finance our investments, changes in interest rates will affect our cost ofcapital and net investment income.To the extent we borrow money to finance our investments, our net investment income will depend, in part,upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As aresult, we can offer no assurance that a significant change in market interest rates will not have a material adverseeffect on our net investment income in the event we borrow money to finance our investments. In periods ofrising interest rates, our cost of funds would increase, which could reduce our net investment income. We expectthat our long-term fixed-rate investments will be financed primarily with equity and long-term debt. We may useinterest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Suchtechniques 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 implementthese techniques to any significant extent with our portfolio. If we do not implement these techniques properly,we could experience losses on our hedging positions, which could be material.A disruption in the capital markets and the credit markets could impair our ability to raise capital andnegatively affect our business.As a BDC, we have to maintain our ability to raise additional capital for investment purposes. Withoutsufficient access to the capital markets or credit markets, we may be forced to curtail our business operations, orwe may not be able to pursue new business opportunities.In the past, the capital markets and the credit markets have experienced periods of extreme volatility anddisruption and, accordingly, there has been and may continue to be uncertainty in the financial markets ingeneral. Continuing U.S. debt ceiling and budget deficit concerns, including automatic spending cuts stemmingfrom sequestration, together with signs of deteriorating sovereign debt conditions in Europe, have increased thepossibility of additional credit-rating downgrades and economic slowdowns, or a recession in the U.S. Theimpact of this or any further downgrades to the U.S. government’s sovereign credit rating or its perceivedcreditworthiness 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 torise, which may negatively impact our ability to access the debt markets on favorable terms. Continued adverseeconomic conditions could have a material adverse effect on our business, financial condition and results ofoperations. Any further disruptive conditions in the financial industry and the impact of new legislation inresponse to those conditions could restrict our business operations and could adversely impact our results ofoperations and financial condition.If the fair value of our assets declines substantially, we may fail to maintain the asset coverage ratiosimposed upon us by the 1940 Act. Any such failure would affect our ability to issue senior securities, includingborrowings, and pay dividends, which could materially impair our business operations. Our liquidity could beimpaired further by an inability to access the capital markets or to consummate new borrowing facilities toprovide capital for normal operations, including new originations. In recent years, reflecting concern about thestability of the financial markets, many lenders and institutional investors have reduced or ceased providingfunding to borrowers.We have fully drawn on our SBA-guaranteed debentures and, absent changes to legislation or regulation,may not make borrowings in excess of their aggregate $165.7 million of SBA-guaranteed debenturesoutstanding as of December 31, 2018. We also had approximately $75.0 million and $52.1 million, respectively,of the 2022 Notes and 2022 Convertible Notes outstanding as of December 31, 2018. In addition, as ofDecember 31, 2018, we had approximately $10.0 million outstanding under the Credit Facility that provides forborrowings of up to $114.5 million on a revolving basis and may be increased up to $200.0 million pursuant toits ‘‘accordion’’ feature. If we are unable to secure additional debt financing on commercially reasonable terms,our liquidity could be reduced significantly. If we are unable to repay amounts outstanding under any debtfacilities we may obtain and are declared in default or are unable to renew or refinance these facilities, we maynot be able to operate our business in the normal course. These situations may arise due to circumstances that wemay be unable to control, such as lack of access to the credit markets, a severe decline in the value of the U.S.dollar, another economic downturn or an operational problem that affects third parties or us and could materiallydamage our business.38TABLE OF CONTENTSYou should also be aware that a rise in the general level of interest rates can be expected to lead to higherinterest rates applicable to our debt investments. Accordingly, an increase in interest rates would make it easierfor us to meet or exceed the incentive fee hurdle rate and may result in a substantial increase of the amount ofincentive fees payable to our Investment Advisor with respect to our pre-incentive fee net investment income.Global economic, political and market conditions may adversely affect our business, results of operations andfinancial condition, including our revenue growth and profitability.The current worldwide financial market situation, as well as various social and political tensions in theUnited States and around the world, may contribute to increased market volatility, may have long-term effectson the United States and worldwide financial markets, and may cause economic uncertainties or deterioration inthe United States and worldwide. The U.S. and global capital markets experienced extreme volatility anddisruption during the economic downturn that began in mid-2007, and the U.S. economy was in a recession forseveral consecutive calendar quarters during the same period. In 2010, a financial crisis emerged in Europe,triggered by high budget deficits and rising direct and contingent sovereign debt, which created concerns aboutthe ability of certain nations to continue to service their sovereign debt obligations. Risks resulting from suchdebt crisis and any future debt crisis in Europe or any similar crisis elsewhere could have a detrimental impact onthe global economic recovery, sovereign and non-sovereign debt in certain countries and the financial conditionof financial institutions generally. In June 2016, the United Kingdom held a referendum in which votersapproved an exit from the European Union (‘‘Brexit’’) and, accordingly, on February 1, 2017, the U.K.Parliament voted in favor of allowing the U.K. government to begin the formal process of Brexit. The initialnegotiations on Brexit commenced in June 2017. Brexit created political and economic uncertainty andinstability in the global markets (including currency and credit markets), and especially in the United Kingdomand the European Union, and this uncertainty and instability may last indefinitely. Because the U.K. Parliamentrejected Prime Minister Theresa May’s proposed Brexit deal with the European Union in January 2019, there isincreased uncertainty on the outcome of Brexit. There is continued concern about national-level support for theEuro and the accompanying coordination of fiscal and wage policy among European Economic and MonetaryUnion member countries. In addition, the fiscal policy of foreign nations, such as Russia and China, may have asevere impact on the worldwide and U.S. financial markets.The Republican Party currently controls the executive branch and the Senate portion of the legislativebranch of government, which increases the likelihood that legislation may be adopted that could significantlyaffect the regulation of U.S. financial markets. Areas subject to potential change, amendment or repeal includethe Dodd-Frank Act and the authority of the Federal Reserve and the Financial Stability Oversight Council. Forexample, in March 2018, the U.S. Senate passed a bill that eased financial regulations and reduced oversight forcertain entities. The United States may also potentially withdraw from or renegotiate various trade agreementsand take other actions that would change current trade policies of the United States We cannot predict which, ifany, of these actions will be taken or, if taken, their effect on the financial stability of the United States. Suchactions could have a significant adverse effect on our business, financial condition and results of operations. Wecannot predict the effects of these or similar events in the future on the U.S. economy and securities markets oron our investments. We monitor developments and seek to manage our investments in a manner consistent withachieving our investment objective, but there can be no assurance that we will be successful in doing so.Further downgrades of the U.S. credit rating, impending automatic spending cuts, another governmentshutdown or a failure to raise the statutory debt limit of the United States could negatively impact ourliquidity, financial condition and earnings.Recent U.S. debt ceiling and budget deficit concerns have increased the possibility of additional credit-rating downgrades and economic slowdowns, or a recession in the U.S. In the future, the U.S. government maynot be able to meet its debt payments unless the federal debt ceiling is raised. If legislation increasing the debtceiling is not enacted, as needed, and the debt ceiling is reached, the U.S. federal government may stop or delaymaking payments on its obligations, which could negatively impact the U.S. economy and our portfoliocompanies. Any default by the U.S. government on its obligations or any prolonged U.S. government shutdowncould negatively impact the U.S. economy and our39TABLE OF CONTENTSportfolio companies. In addition, disagreement over the federal budget has caused the U.S. federal governmentto shut down for periods of time. Continued adverse political and economic conditions could have a materialadverse effect 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 ability or inability to make investments in companies that meet our investment criteria, any sales,dispositions or liquidity events of our portfolio companies, the interest rate payable on the debt securities weacquire, the level of portfolio dividend and fee income, the level of our expenses, variations in and the timing ofthe recognition of realized and unrealized gains or losses, the degree to which we encounter competition in ourmarkets and general economic conditions. Given that the portfolio is concentrated, distributions, dispositions orliquidity events affecting a portfolio company in which we own a significant position may adversely affect ournet asset value and results of operations. As a result of these factors, results for any period should not be reliedupon as being indicative of performance in future periods.Our Board may change our investment objective, operating policies and strategies without prior notice orstockholder approval, the effects of which may be adverse.Our Board has the authority to modify or waive our investment objective, operating policies, investmentcriteria and strategies without prior notice and without stockholder approval. We cannot predict the effect anychanges to our current operating policies, investment criteria and strategies would have on our business, netasset value, operating results and value of our stock. However, the effects might be adverse, which couldnegatively impact our ability to make distributions and cause you to lose all or part of your investment.We will be subject to corporate-level U.S. federal income tax if we are unable to qualify or maintain our RICtax treatment under the Code.Although we have elected to be treated as a RIC beginning with our taxable year ended August 31, 2014,no assurance can be given that we will be able to continue to qualify for and maintain our RIC tax treatmentunder the Code. To continue to maintain our RIC tax treatment under the Code, we must meet the followingsource-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 fromdividends, interest, gains from the sale or other disposition of stock or securities or similar sources. The assetdiversification requirement will be satisfied if we meet certain asset diversification requirements at the end ofeach quarter of our taxable year. Failure to meet those requirements may result in our having to dispose ofcertain investments quickly in order to prevent the loss of our RIC tax treatment under the Code. Because mostof our investments will be in private companies, and therefore will be relatively illiquid, any such dispositionscould 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 anannual basis at least 90% of our net ordinary income and net short-term capital gains in excess of our net long-term capital losses, if any. Because we may use debt financing, we are subject to certain asset coverage ratiorequirements under the 1940 Act, as well as future financial covenants under loan and credit agreements thatcould, under certain circumstances, restrict us from making distributions necessary to satisfy the distributionrequirement. If we are unable to obtain cash from other sources, we could fail to qualify for tax treatment as aRIC under the Code.If we fail to qualify for tax treatment as a RIC under the Code for any reason and remain or become subjectto corporate-level U.S. federal income tax on all of our income, the resulting corporate taxes could substantiallyreduce our net assets, the amount of income available for distribution or reinvestment and the amount of ourdistributions.40TABLE OF CONTENTSWe cannot predict how tax reform legislation will affect us, our investments, or our stockholders, and any suchlegislation could adversely affect our business.Legislative or other actions relating to taxes could have a negative effect on us. The rules dealing with U.S.federal income taxation are constantly under review by persons involved in the legislative process and by theIRS and the U.S. Treasury Department. We cannot predict with certainty how any changes in the tax laws mightaffect us, our stockholders, or our portfolio investments. New legislation and any U.S. Treasury regulations,administrative interpretations or court decisions interpreting such legislation could significantly and negativelyaffect our ability to qualify for tax treatment as a RIC or the U.S. federal income tax consequences to us and ourstockholders of such qualification or could have other adverse consequences. Stockholders are urged to consultwith their tax advisor regarding tax legislative, regulatory, or administrative developments and proposals andtheir potential effect on an investment in our securities.We may not be able to pay our stockholders distributions, our distributions may not grow over time and aportion of our distributions may be a return of capital.We intend to pay distributions 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 cashdistributions or year-to-year increases in cash distributions. Our ability to pay distributions might be adverselyaffected by, among other things, the impact of one or more of the risk factors described herein. In addition, theinability to satisfy the asset coverage test applicable to us as a BDC can limit our ability to pay distributions. Alldistributions will be paid at the discretion of our Board and will depend on our earnings, our financial condition,maintenance of our RIC status, compliance with applicable BDC regulations and such other factors as our Boardmay deem relevant from time to time. We cannot assure you that we will pay distributions to our stockholders inthe future. In the event we liquidate or dispose of a significant equity position in our portfolio, we may distributea special dividend relating to the realized capital gains from such investment in order to minimize to the greatestextent possible our U.S. federal income or excise tax liability.When we make distributions, we will be required to determine the extent to which such distributions arepaid out of current or accumulated earnings and profits. Distributions in excess of current and accumulatedearnings and profits will be treated as a non-taxable return of capital, which is a return of a portion of astockholder’s original investment in our common stock, to the extent of an 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-taxablereturn of capital will reduce an investor’s basis in our stock for U.S. federal income tax purposes, which willresult in higher tax liability when the stock is sold.We may have difficulty paying our required distributions if we recognize income before or without receivingcash representing such income.For U.S. federal income tax purposes, we include in our taxable income certain amounts that we have notyet received in cash, such as PIK interest or original issue discount, which may arise if we receive warrants inconnection with the origination of a loan or possibly in other circumstances. Such original issue discount orincreases in loan balances as a result of contractual PIK arrangements are included in our taxable income beforewe receive any corresponding cash payments. We also may be required to include in our taxable income certainother amounts that we will not receive in cash.Since, in certain cases, we may recognize taxable income before or without receiving corresponding cashpayments, we may have difficulty meeting the annual distribution requirement necessary to maintain our RICtax treatment under the Code. Accordingly, to satisfy our RIC distribution requirements, we may have to sellsome of our investments at times and/or at prices we would not consider advantageous, raise additional debt orequity capital or forgo new investment opportunities. If we are not able to obtain cash from other sources, wemay fail to qualify as a RIC for tax treatment under the Code and thus become subject to corporate-level U.S.federal income tax.41TABLE OF CONTENTSCapitala Investment Advisors is not obligated to reimburse us for any part of the incentive fee it receives that isbased on accrued income that we never receive.Part of the incentive fee payable by us to our Investment Advisor that relates to our net investment incomeis computed and paid on income that may include interest that has been accrued but not yet received in cash,such as market discount, debt instruments with PIK interest, preferred stock with PIK dividends and zero couponsecurities. If a portfolio company defaults on a loan that is structured to provide accrued interest, it is possiblethat accrued interest previously used in the calculation of the incentive fee will become uncollectible. OurInvestment Advisor will not be under any obligation to reimburse us for any part of the incentive fees it receivedthat was based on accrued income that we never receive as a result of a default by an entity on the obligationthat 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 taxin excess of the cash you receive.We may distribute taxable dividends that are payable in part in our stock. In accordance with certainapplicable Treasury regulations and guidance issued by the IRS, a RIC may treat a distribution of its own stockas fulfilling the 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 bedistributed to all stockholders must be at least 20% of the aggregate declared distribution. If too manystockholders elect to receive cash, the cash available for distribution must be allocated among the stockholderselecting to receive cash (with the balance of the distribution paid in stock). In no event will any stockholder,electing to receive cash, receive the lesser of  (a) the portion of the distribution such stockholder has elected toreceive in cash or (b) an amount equal to his or her entire distribution times the percentage limitation on cashavailable for distribution. If these and certain other requirements are met, for U.S. federal income 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 acombination thereof) will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent ofour current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, a U.S.stockholder may be required to pay tax with respect to such dividends in excess 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 proceeds may be less thanthe 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. taxwith respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock.In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxesowed on dividends, it may put downward pressure on the trading price of our stock.If we fail to maintain an effective system of internal control over financial reporting, we may not be able toaccurately report our financial results or prevent fraud. As a result, stockholders and noteholders could loseconfidence in our financial and other public reporting, which would harm our business.Effective internal controls over financial reporting are necessary for us to provide reliable financial reportsand, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure toimplement required new or improved controls, or difficulties encountered in their implementation could causeus to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section404 of the Sarbanes-Oxley Act, or the subsequent testing by our independent registered public accounting firm(when undertaken, as noted below), may reveal deficiencies in our internal controls over financial reporting thatare deemed to be material weaknesses or that may require prospective or retroactive changes to our consolidatedfinancial statements or identify other areas for further attention or improvement. Inferior internal controls couldalso cause investors to lose confidence in our reported financial information, which could have a negative effecton our business.We are required to disclose changes made in our internal controls and procedures over financial reportingon a quarterly basis and our management is required to assess the effectiveness of these controls annually. Ourindependent registered public accounting firm is required to attest to the effectiveness of our internal controlsover financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act.42TABLE OF CONTENTSAn independent assessment of the effectiveness of our internal controls could detect problems that ourmanagement’s assessment might not. Undetected material weaknesses in our internal controls could lead tofinancial statement restatements and require us to incur the expense of remediation. As a public company, mayincur significant additional expenses in the near term, which may negatively impact our financial performanceand our ability to make distributions to our stockholders. This process also will result in a diversion ofmanagement’s time and attention. We cannot be certain as to the timing of completion of any evaluation, testingand 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 timelymanner. In the event that we are unable to maintain or achieve compliance with Section 404 of the Sarbanes-Oxley Act and related rules, the market price of our common stock may be adversely affected.Recent legislation may allow us to incur additional leverage.The 1940 Act generally prohibits us from incurring 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% ofthe value of our total assets). However, on March 23, 2018, the Small Business Credit Availability Act (the“SBCA”) was signed into law, which included various changes to regulations under the federal securities lawsthat impact BDCs. The SBCA included changes to the 1940 Act to allow BDCs to decrease their asset coveragerequirement from 200% to 150% (i.e. the amount of debt may not exceed 66.7% of the value of our total assets),if certain requirements are met. On November 1, 2018, the Board, including a ‘‘required majority’’ (as such termis defined in Section 57(o) of the 1940 Act) approved the application of the modified asset coveragerequirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the SBCA. As a result, our assetcoverage requirements for senior securities will be changed from 200% to 150%, effective November 1, 2019.The Board may also recommend the submission of a proposal for stockholders to approve the application of the150% minimum asset coverage ratio to the Company at an annual or special meeting of stockholders. The Boardhas not recommended the submission of any such proposal. If any such stockholder proposal is approved by therequired votes of the Company’s stockholders at such meeting of stockholders, the Company would becomesubject to the 150% minimum asset coverage ratio the day after such stockholder approval. Changing the assetcoverage ratio would permit the Company to double its leverage, which would result in increased leverage riskand increased expenses.Changes in laws or regulations governing our operations may adversely affect our business or cause us to alterour business strategy.We and our portfolio companies will be subject to applicable local, state and federal laws and regulations.New legislation may be enacted, or new interpretations, rulings or regulations could be adopted, including thosegoverning the types of investments 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 ouroperations relating to permitted investments may cause us to alter our investment strategy in order to availourselves of new or different opportunities. Such changes could result in material differences to the strategiesand plans set forth herein and may result in our investment focus shifting from the areas of expertise of ourInvestment Advisor’s investment team to other types of investments in which the investment team may have lessexpertise or little or no experience. Thus, any such changes, if they occur, could have a material adverse effecton our results of operations and the value of your investment. In addition, any change to the SBA’s currentdebenture SBIC program could have a significant impact 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 creditoutside of the traditional banking sector, raising the possibility that some portion of the non-bank financialsector will be subject to new regulation. While it cannot be known at this time whether these regulations will beimplemented or what form they will take, increased regulation of non-bank credit extension could negativelyimpact our operations, cash flows or financial condition, impose additional costs on us, intensify the regulatorysupervision of us or otherwise adversely affect our business.43TABLE OF CONTENTSTwo of our wholly owned subsidiaries are licensed by the U.S. Small Business Administration, and as a result,we are subject to SBA regulations.Fund II and Fund III, became our wholly owned subsidiaries after the completion of the FormationTransactions. Fund II was licensed to act as an SBIC and was regulated by the SBA until March 1, 2019, whenwe prepaid all remaining SBIC debts related to Fund II and relinquished Fund II’s license to act as an SBIC.Fund III is currently licensed to act as an SBIC and is regulated by the SBA. As of December 31, 2018, Fund IIand Fund III portfolio companies accounted for 65.3% of the fair value of our aggregate portfolio. An SBIClicense allows an SBIC to borrow funds by issuing SBA-guaranteed debentures, subject to the issuance of acapital commitment by the SBA and other customary procedures. The SBA regulations require, among otherthings, that a licensed SBIC be examined periodically and audited by an independent auditor to determine theSBIC’s compliance with the relevant SBA regulations.Under current SBA regulations, a licensed SBIC may provide capital to those entities that have a tangiblenet worth not exceeding $19.5 million and an average annual net income after U.S. federal income taxes notexceeding $6.5 million for the two most recent fiscal years. In addition, a licensed SBIC must devote 25.0% ofits investment activity to those entities that have a tangible net worth not exceeding $6.0 million and an averageannual net income after U.S. federal income taxes not exceeding $2.0 million for the two most recent fiscal years.The SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on theindustry in which the business is engaged and are based on factors such as the number of employees and grosssales. The SBA regulations permit licensed SBICs to make long term loans to small businesses, invest in theequity securities of such businesses and provide them with consulting and advisory services. The SBA alsoplaces certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibitsSBICs from providing funds for certain purposes or to businesses in a few prohibited industries. Compliancewith SBA requirements may cause a Legacy Fund to forego attractive investment opportunities that are notpermitted under SBA regulations.The SBA also prohibits, without prior SBA approval, a ‘‘change of control’’ of an SBIC or transfers thatwould 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. Each of Fund II and Fund III was in compliance with the terms of the SBA’s leveragerequirements as of December 31, 2018 as a result of having sufficient capital as defined under the SBAregulations. If, in the future, Fund III fails to comply with applicable SBA regulations, Fund III could, dependingon the severity of the violation, limit or prohibit Fund III’s use of debentures, declare outstanding debenturesimmediately due and payable, and/or limit Fund III from making new investments. Such actions by Fund IIIwould, in turn, negatively affect us because Fund III is our wholly owned subsidiary.On June 10, 2014, we received an exemptive order from the SEC exempting us, Fund II and Fund III fromcertain provisions of the 1940 Act (including an exemptive order granting relief from the asset coveragerequirements for certain indebtedness issued by Fund II and Fund III as SBICs) and from certain reportingrequirements mandated by the 1934 Act with respect to Fund II and Fund III. We intend to comply with theconditions of the order. As a result, we will generally be permitted to incur a greater amount of leverage relativeto 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 ormaintain RIC tax treatment, 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-levelU.S. federal income taxes, we will be required to distribute substantially all of our net ordinary income and netcapital gain income, including income from certain of our subsidiaries, which includes the income from ourSBIC subsidiaries. We will be partially dependent on our SBIC subsidiaries for cash distributions to enable us tomeet the RIC distribution requirements. Our SBIC subsidiaries may be limited by the Small Business InvestmentAct of 1958, and SBA regulations governing SBICs, from making certain distributions to us that may benecessary to maintain our status as a RIC. We may have to request a waiver of the SBA’s restrictions for our SBICsubsidiaries to make certain distributions to maintain our RIC status. We cannot assure you that the SBA willgrant such waiver and if our SBIC subsidiaries are unable to obtain a waiver, compliance with the SBAregulations may result in loss of RIC tax treatment and a consequent imposition of a corporate-level U.S. federalincome tax on all of our income.44TABLE OF CONTENTSOur business is subject to increasingly complex corporate governance, public disclosure and accountingrequirements that are costly and could adversely affect our business and financial results.As a publicly traded company, we incur legal, accounting and other expenses, including costs associatedwith the periodic reporting requirements applicable to a company whose securities are registered under the 1934Act, or the Exchange Act, as well as additional corporate governance requirements, including requirementsunder the Sarbanes Oxley Act, and other rules implemented by the SEC. Also, we are subject to changing rulesand regulations of federal and state government as well as the stock exchange on which our common stock islisted. These entities, including the Public Company Accounting Oversight Board, the SEC and the NASDAQStock Market, have issued a significant number of new and increasingly complex requirements and regulationsover the course of the last several years and continue to develop additional regulations and requirements inresponse to laws enacted by Congress. Our efforts to comply with these existing requirements, or any revised oramended requirements, have resulted in, and are likely to continue to result in, an increase in expenses and adiversion of management’s time from other business activities.We are highly dependent on information systems and systems failures could significantly disrupt our business,which may, in turn, negatively affect the market price of our common stock and our ability to makedistributions to our stockholders.Our business is highly dependent on the communications and information systems of the InvestmentAdvisor. Certain of these systems are provided to the Investment Advisor by third-party service providers. Anyfailure or interruption of such systems, including as a result of the termination of an agreement with any suchthird-party service provider, sudden electrical or telecommunications outages, natural disasters such asearthquakes, tornadoes, and hurricanes, events arising from local or larger scale political or social matters,including terrorist attacks, and cyber-attacks could cause delays or other problems in our activities. Any of theabove, 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 businesseffectively.The occurrence of a disaster, such as a cyber-attack against us or against a third-party that has access to ourdata or networks, a natural catastrophe, an industrial accident, failure of our disaster recovery systems, orconsequential employee error, could have an adverse effect on our ability to communicate or conduct business,negatively impacting our operations and financial condition. This adverse effect can become particularly acuteif those events affect our electronic data processing, transmission, storage, and retrieval systems, or impact theavailability, integrity, or confidentiality of our data.We depend heavily upon computer systems to perform necessary business functions. Despite ourimplementation of a variety of security measures, our computer systems, networks, and data, like those of othercompanies, could be subject to cyber-attacks and unauthorized access, use, alteration, or destruction, such asfrom physical and electronic break-ins or unauthorized tampering. If one or more of these events occurs, it couldpotentially jeopardize the confidential, proprietary, and other information processed, stored in, and transmittedthrough our computer systems and networks. Such an attack could cause interruptions or malfunctions in ouroperations, 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. Ifunauthorized parties gain access to such information and technology systems, they may be able to steal, publish,delete or modify private and sensitive information, including nonpublic personal information related tostockholders (and their beneficial owners) and material nonpublic information. The systems we haveimplemented to manage risks relating to these types of events could prove to be inadequate and, ifcompromised, could become inoperable for extended periods of time, cease to function properly or fail toadequately secure private information. Breaches such as those involving covertly introduced malware,impersonation of authorized users and industrial or other espionage may not be identified even withsophisticated prevention and detection systems, potentially resulting in further harm and preventing them frombeing addressed appropriately. The failure of these systems or of disaster recovery plans for any reason couldcause significant interruptions in our and our Investment Advisor’s operations and result in a failure to maintainthe security, confidentiality or privacy of sensitive data, including personal information relating to stockholders,material nonpublic information and other sensitive information in our possession.45•OID instruments may have higher yields, which reflect the payment deferral and credit risk associatedwith these instruments;•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 requirecontinuing judgments about 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.TABLE OF CONTENTSA disaster or a disruption in the infrastructure that supports our business, including a disruption involvingelectronic communications or other services used by us or third parties with whom we conduct business, ordirectly affecting our headquarters, could have a material adverse impact on our ability to continue to operateour business without interruption. Our disaster recovery programs may not be sufficient to mitigate the harm thatmay result from such a disaster or disruption. In addition, insurance and other safeguards might only partiallyreimburse us for our losses, if at all.Third parties with which we do business may also be sources of cybersecurity or other technological risk.We outsource certain functions 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 ourexposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure,destruction, or other cybersecurity incident that affects our data, resulting in increased costs and otherconsequences as described above.Terrorist attacks, acts of war or natural disasters may affect the market for our common stock, impact thebusinesses in which we 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 thebusinesses in which we invest. Such acts have created, and continue to create, economic and politicaluncertainties and have contributed to global economic instability. Future terrorist activities, military or securityoperations, or natural disasters could further weaken the domestic/global economies and create additionaluncertainties, which may negatively impact the businesses in which we invest directly or indirectly and, in turn,could have a material adverse impact on our business, operating results and financial condition. Losses fromterrorist 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 totypical risks associated with such income being required to be included in taxable and accounting incomeprior to receipt of cash representing such income.Our investments may include original issue discount (‘‘OID’’) instruments and contractual PIK interest,which represents contractual interest added to a loan balance and due at the end of such loan’s term. To theextent OID or PIK interest constitute a portion of our income, we are exposed to typical risks associated withsuch income being required to be included in taxable and accounting income prior to receipt of cash, includingthe following:If we cannot obtain additional capital because of either regulatory or market price constraints, we could beforced to curtail or cease our new lending and investment activities, our net asset value could decrease and ourlevel of distributions and liquidity could be affected adversely.Our ability to secure additional financing and satisfy our financial obligations under indebtednessoutstanding from time to time will depend upon our future operating performance, which is subject to theprevailing general economic and credit market conditions, including interest rate levels and the availability ofcredit generally, and financial, business and other factors, many of which are beyond our control. The prolongedcontinuation or worsening of current economic and capital market conditions could have a material adverseeffect 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 thepotential for increased returns on equity resulting from leverage to the extent that our investment strategy issuccessful, and we may be limited in our ability to make new commitments or fundings to our portfoliocompanies.46TABLE OF CONTENTSOur Board is authorized to reclassify any unissued shares of common stock into one or more classes ofpreferred stock, which could convey special rights and privileges to its owners.Under Maryland General Corporation Law and our charter, our Board is authorized to classify and reclassifyany authorized but unissued shares of stock into one or more classes of stock, including preferred stock. Prior tothe issuance of shares of each class or series, our Board will be required by Maryland law and our charter to setthe terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or otherdistributions, qualifications and terms or conditions of redemption for each class or series. Thus, our Board couldauthorize the issuance of shares of preferred stock with terms and conditions that could have the effect ofdelaying, deferring or preventing a transaction or a change in control that might involve a premium price forholders of our common stock or otherwise be in their best interest. The cost of any such reclassification would beborne by our common stockholders. Certain matters under the 1940 Act require the separate vote of the holdersof any issued and outstanding preferred stock. For example, holders of preferred stock would vote separatelyfrom the holders of common stock on a proposal to cease operations as a BDC. In addition, the 1940 Actprovides that holders of preferred stock are entitled to vote separately from holders of common stock to elect twopreferred stock directors. We currently have no plans to issue preferred stock. The issuance of preferred sharesconvertible 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 preferredstock to the extent we comply with the requirements of Section 61 of the 1940 Act, including obtainingcommon stockholder approval. These effects, among others, could have an adverse effect on your investment inour common stock.Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeoverattempts and have an adverse impact on the price of our common stock.The Maryland General Corporation Law and our charter and bylaws contain provisions that maydiscourage, delay or make more difficult a change in control of Capitala Finance or the removal of our directors.We are subject to the Maryland Business Combination Act, subject to any applicable requirements of the 1940Act. Our Board has adopted a resolution exempting from the Maryland Business Combination Act any businesscombination between us and any other person, subject to prior approval of such business combination by ourBoard, including approval by a majority of our independent directors. If the resolution exempting businesscombinations 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 ofconsummating such an offer. Our bylaws exempt from the Maryland Control Share Acquisition Act acquisitionsof our stock by any person. If we amend our bylaws to repeal the exemption from the Maryland Control ShareAcquisition Act, the Maryland Control Share Acquisition Act also may make it more difficult for a third-party toobtain control of us and increase the difficulty of consummating such a transaction. It is the position of the staffof the SEC’s Division of Investment Management that if a BDC fails to opt-out of the Maryland Control ShareAcquisition 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, includingprovisions of our charter classifying our Board in three classes serving staggered three-year terms, andauthorizing our Board to classify or reclassify shares of our stock in one or more classes or series, to cause theissuance of additional shares of our stock, to amend our charter without stockholder approval and to increase ordecrease the number of shares of stock that we have authority to issue. These provisions, as well as otherprovisions of our charter and bylaws, may delay, defer or prevent a transaction or a change in control that mightotherwise be in the best interests of our stockholders.The foregoing provisions are expected to discourage certain coercive takeover practices and inadequatetakeover bids and to encourage persons seeking to acquire control of us to negotiate first with our Board.However, these provisions may deprive a stockholder of the opportunity to sell such stockholder’s shares at apremium to a potential acquirer. We believe that the benefits of these provisions outweigh the potentialdisadvantages of discouraging any such acquisition proposals because, among other things, the negotiation ofsuch proposals may improve their terms. Our Board has considered both the positive and negative effects of theforegoing provisions and determined that they are in the best interest of our stockholders.47•these companies may have limited financial resources and may be unable to meet their obligationsunder their debt securities that we hold, which may be accompanied by a deterioration in the value ofany collateral and a reduction in the likelihood of us realizing any guarantees we may have obtainedin connection with our investment;•they typically have shorter operating histories, narrower product lines and smaller market shares thanlarger businesses, which tend to render them more vulnerable to competitors’ actions and marketconditions, as well as general economic downturns;•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 amaterial adverse impact on our portfolio company and, in turn, on us;•they generally have less predictable operating results, may from time to time be parties to litigation,may be engaged in rapidly changing businesses with products subject to a substantial risk ofobsolescence, and may require substantial additional capital to support their operations, financeexpansion or maintain their competitive position;•they may have difficulty accessing the capital markets to meet future capital needs, which may limittheir ability to grow or to repay their outstanding indebtedness upon maturity; andTABLE OF CONTENTSRisks 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 equityinvestments issued by 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 sell in a timely manner, may be difficult to appraise and may fluctuate in value based uponthe success of the business and market conditions, including as a result of the inability of the portfolio companyto raise additional capital, and, in some circumstances, our lien could be subordinated to claims of othercreditors. In addition, deterioration in a portfolio company’s financial condition and prospects, including itsinability to raise additional capital, may be accompanied by deterioration in the value of the collateral for theloan. 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 beforced to enforce our remedies.Second Lien Loans. Our second lien debt investments have a second priority security interest in all orsubstantially all of the assets of the borrower. As such, other creditors may rank senior to us in the event of aninsolvency, which could likely in many cases result in a substantial or complete loss on such investment in thecase of such insolvency. This may result in an above average amount of risk and loss of principal.Subordinated Loans. Our subordinated debt investments are generally subordinated to first lien loans andmay be unsecured. As such, other creditors may rank senior to us in the event of an insolvency, which couldlikely in many cases result in a substantial or complete loss on such investment in the case of such insolvency.This may result in an above average amount of risk and loss of principal.Equity Investments. When we invest in loans, we may acquire equity securities as well. In addition, wemay invest directly in the 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 be able to realize gains from our equity interests, and any gains that we do realize on the dispositionof any equity interests may not be sufficient to offset any other losses we experience. The portfolio currently hasseveral significant equity positions. Distributions, dispositions, or liquidity events of these investments mayaffect our results of operations and cause us to have to pay a special dividend relating to the realized gains fromsuch investment in order to minimize to the greatest extent possible our U.S. federal income or excise taxliability.In addition, investing in lower and traditional middle-market companies involves a number of significantrisks, including:48•our executive officers, directors and our Investment Advisor may, in the ordinary course of business,be named as defendants in litigation arising from our investments in the portfolio companies.TABLE OF CONTENTSAn investment strategy focused primarily on smaller privately held companies involves a high degree of riskand presents certain challenges, including the lack of available information about these companies, adependence on the talents and efforts of only a few key portfolio company personnel and a greatervulnerability 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 invest is not initially rated by any rating agency; however, we believe thatif such investments were rated, they would be rated below investment grade. Below investment grade securities,which are often referred to as ‘‘high yield’’ or ‘‘junk,’’ have predominantly speculative characteristics withrespect to the issuer’s capacity to pay interest and repay principal. Compared to larger publicly ownedcompanies, these venture capital-backed companies may be in a weaker financial position and experience widervariations in their operating results, which may make them more vulnerable to economic downturns. Typically,these companies need more capital to compete; however, their access to capital is limited and their cost ofcapital is often higher than that of their competitors. Our portfolio companies often face intense competitionfrom larger companies with greater financial, technical and marketing resources and their success typicallydepends on the managerial talents and efforts of an individual or a small group of persons. Therefore, any loss ofits 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 toregulatory changes. These factors could impair the cash flow of our portfolio companies and result in otherevents, such as bankruptcy. These events could limit a portfolio company’s ability to repay its obligations to us,which may have an adverse effect on the return on, or the recovery of, our investment in these businesses.Deterioration in a borrower’s financial condition and prospects may be accompanied by deterioration in thevalue of the loan’s collateral.Generally, little public information exists about these companies, and we are required to rely on the abilityof our Investment Advisor’s investment team to obtain adequate information to evaluate the potential returnsfrom investing in these companies. If we 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 smaller market presence than largercompetitors. These factors could adversely affect our investment returns as compared to companies investingprimarily 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 will suffer.Most of the loans in which we invest are not structured to fully amortize during their lifetime. Accordingly,a significant portion of the principal amount of such a loan may be due at maturity. As of December 31, 2018, alldebt instruments in our portfolio, on a fair value basis, will not fully amortize prior to maturity. In order to createliquidity to pay the final principal payment, borrowers typically must raise additional capital. If they are unableto raise sufficient funds to repay us or we have not elected to enter into a new loan agreement providing for anextended maturity, the loan will go into default, which will require us to foreclose on the borrower’s assets, evenif the loan was otherwise performing prior to maturity. This will deprive Capitala Finance from immediatelyobtaining full recovery on the loan and prevent or delay the reinvestment of the loan proceeds in other, moreprofitable investments.Our investments in leveraged portfolio companies may be risky, and you could lose all or part of yourinvestment.Investment in leveraged companies involves a number of significant risks. Leveraged companies in whichwe invest may have limited financial resources and may be unable to meet their obligations under their loansand debt securities that we hold. Such developments may be accompanied by a deterioration in the value of anycollateral and a reduction in the likelihood of our realizing any guarantees that we may49TABLE OF CONTENTShave obtained in connection with our investment. Smaller leveraged companies also may have less predictableoperating 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 suchcompanies.Our portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or insome cases senior to, the debt in which we invest. By their terms, such debt instruments may entitle the holdersto receive payment of interest or principal on or before the dates on which we are entitled to receive paymentswith respect to the debt instruments in which we invest. Also, in the event of insolvency, liquidation,dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior toour investment in that portfolio company would typically be entitled to receive payment in full before wereceive 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 whichwe invest, we would have to share on an equal basis any distributions with other creditors holding such debt inthe event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfoliocompany.Second priority liens on collateral securing loans that we make to our portfolio companies may be subject tocontrol by senior creditors with first priority liens. If there is a default, the value of the collateral may not besufficient to repay in full both the first priority creditors and us.Certain loans that we make are secured by a second priority security interest in the same collateral pledgedby a portfolio company to secure senior debt owed by the portfolio company to commercial banks or othertraditional lenders. Often the senior lender has procured covenants from the portfolio company prohibiting theincurrence of additional secured debt without the senior lender’s consent. Prior to and as a condition ofpermitting the portfolio company to borrow money from us secured by the same collateral pledged to the seniorlender, the senior lender may require assurances that it will control the disposition of any collateral in the eventof bankruptcy or other default. In many such cases, the senior lender requires us to enter into an ‘‘intercreditoragreement’’ prior to permitting the portfolio company to borrow from us. Typically the intercreditor agreementswe are requested to execute expressly subordinate our debt instruments to those held by the senior lender andfurther provide that the senior lender shall control: (i) the commencement of foreclosure or other proceedings toliquidate and collect on the collateral; (ii) the nature, timing and conduct of foreclosure or other collectionproceedings; (iii) the amendment of any collateral document; (iv) the release of the security interests in respectof any collateral; and (v) the waiver of defaults under any security agreement. Because of the control we maycede to senior lenders under intercreditor agreements we may enter, we may be unable to realize the proceeds ofany collateral securing some of our loans.If we make subordinated investments, the obligors or the portfolio companies may not generate sufficient cashflow to service their debt obligations to us.We have made, and may make, subordinated investments that rank below other obligations of the obligor inright of payment. Subordinated investments are subject to greater risk of default than senior obligations as aresult of adverse changes in the financial condition of the obligor or economic conditions in general. If we makea subordinated investment in a portfolio company, the portfolio company may be highly leveraged, and itsrelatively high debt-to-equity ratio may create increased risks that its operations might not generate sufficientcash flow to service all of its debt obligations.The disposition of our investments may result in contingent liabilities.Substantially all of our investments involve loans and private securities. In connection with the dispositionof an investment in loans and private securities, we may be required to make representations about the businessand financial affairs of the portfolio company typical of those made in connection with the sale of a business.We may also be required to indemnify the purchasers of such investment to the extent that any suchrepresentations turn out to be inaccurate or with respect to potential liabilities. These arrangements may result incontingent liabilities that ultimately result in funding obligations that we must satisfy through our return ofdistributions previously made to us.50TABLE OF CONTENTSThere may be circumstances where our debt investments could be subordinated to claims of other creditors orwe could be subject to lender liability claims.Even though we may have structured most of our investments as secured loans, if one of our portfoliocompanies were to go bankrupt, depending on the facts and circumstances, and based upon principles ofequitable subordination as defined by existing case law, a bankruptcy court could subordinate all or a portion ofour claim to that of other creditors and transfer any lien securing such subordinated claim to the bankruptcyestate. The principles of equitable subordination defined by case law have generally indicated that a claim maybe subordinated only if its holder is guilty of misconduct or where the senior loan is re-characterized as anequity investment and the senior lender has actually provided significant managerial assistance to the bankruptdebtor. We may also be subject to lender liability claims for actions taken by us with respect to a borrower’sbusiness or instances where we exercise control over the borrower. It is possible that we could become subject toa lender’s liability claim, including as a result of actions taken in rendering significant managerial assistance oractions to compel and collect payments from the borrower outside the ordinary course of business. Such risk ofequitable subordination may be potentially heightened with respect to various portfolio investments that wemay be deemed to control. See also ‘‘— Because we will not hold controlling equity interests in most of ourportfolio 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 torepay our loans during this period. Therefore, assets may become non-performing and the value of our portfoliomay decrease during this period. The adverse economic conditions also may decrease the value of collateralsecuring some of our loans and the value of our equity investments. A recession could lead to financial losses inour portfolio and a decrease in our revenues, net income and the value of our assets.Adverse economic conditions also may decrease the value of collateral securing some of our loans and thevalue of our equity investments at fair value. Unfavorable economic conditions also could increase our fundingcosts, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. Theseevents could prevent us from increasing investments and harm our operating results.A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenderscould lead to defaults and, potentially, acceleration of the time when the loans are due and foreclosure on itssecured assets, which could trigger cross-defaults under other agreements and jeopardize the portfoliocompany’s ability to meet its obligations under the debt that we hold. We may incur additional expenses to theextent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company. Inaddition, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances,including the extent to which we actually provided significant managerial assistance to that portfolio company,a bankruptcy court might re-characterize our debt holdings and subordinate all or a portion of our claim to thatof other creditors.These portfolio companies may face intense competition, including competition from companies withgreater financial resources, more extensive research and development, manufacturing, marketing and servicecapabilities and greater number of qualified and experienced managerial and technical personnel. They mayneed additional financing which they are unable to secure and which we are unable or unwilling to provide, orthey may be subject to adverse developments unrelated to the technologies they acquire.The health and performance of our portfolio companies could be adversely affected by political and economicconditions in the countries in which they conduct business.Some of the products of our portfolio companies are developed, manufactured, assembled, tested ormarketed outside the U.S. Any conflict or uncertainty in these countries, including due to natural disasters,public health concerns, political unrest or safety concerns, could harm their business, financial condition andresults of operations. In addition, if the government of any country in which their products are developed,manufactured or sold sets technical or regulatory standards for products developed or manufactured in orimported into their country that are not widely shared, it may lead some of their51TABLE OF CONTENTScustomers to suspend imports of their products into that country, require manufacturers or developers in thatcountry to manufacture or develop products with different technical or regulatory standards and disrupt cross-border manufacturing, marketing or business relationships which, in each 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 besubject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities.There is no established trading market for the securities in which we invest. The illiquidity of these investmentsmay make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate allor a portion of our portfolio quickly, we may realize significantly less than the value at which we had previouslyrecorded these investments. As a result, we do not expect to achieve liquidity in our investments in the near-term. Further, we may face other restrictions on our ability to liquidate an investment in a portfolio company tothe 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 thatportfolio company as ‘‘follow-on’’ investments, in order to: (i) increase or maintain in whole or in part ourequity ownership percentage; (ii) exercise warrants, options or convertible securities that were acquired in theoriginal or a subsequent financing; or (iii) attempt to preserve or enhance the value of our investment. We mayelect not to make follow-on investments or otherwise lack sufficient funds to make those investments. We willhave the discretion to make any follow-on investments, subject to the availability of capital resources. Thefailure to make follow-on investments may, in some circumstances, jeopardize the continued viability of aportfolio company and our initial investment, or may result in a missed opportunity for us to increase ourparticipation in a successful operation. Even if we have sufficient capital to make a desired follow-oninvestment, we may elect not to make a follow-on investment because we do not want to increase ourconcentration of risk, we prefer other opportunities, we are subject to BDC requirements that would prevent suchfollow-on investments, or the follow-on investment would affect our qualification as a RIC. For example, wemay 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 inportfolio companies that we are deemed to ‘‘control’’ under the 1940 Act, will be restricted by the 1940 Act,which may limit the scope of investment opportunities available to us.We are prohibited under the 1940 Act from participating in certain transactions with our affiliates withoutthe prior approval of our independent directors and, in some cases, the Securities Exchange Commission(‘‘SEC’’). Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities will beour affiliate for purposes of the 1940 Act and we are generally prohibited from buying or selling any securityfrom or to such affiliate without the prior approval of our independent directors. The 1940 Act also prohibitscertain ‘‘joint’’ transactions with certain of our affiliates, which could include concurrent investments in thesame company, without prior approval of our independent directors and, in some cases, the SEC. We areprohibited from buying or selling any security from or to any person that controls us or who owns more than25% of our voting securities or certain of that person’s affiliates, or entering into prohibited joint transactionswith such persons, absent the prior approval of the SEC. As a result of these restrictions, we may be prohibitedfrom buying or selling any security (other than any security of which we are the issuer) from or to any companythat is advised or managed by our Investment Advisor or its affiliates without the prior approval of the SEC,which may limit the scope of investment opportunities that would otherwise be available to us.In the future, we may co-invest with investment funds, accounts and vehicles managed by our InvestmentAdvisor or its affiliates when doing so is consistent with our investment strategy as well as applicable law andSEC staff interpretations. We generally will only be permitted to co-invest with such52TABLE OF CONTENTSinvestment funds, accounts and vehicles where the only term that is negotiated is price. On June 1, 2016, theSEC issued the Order. Subject to satisfaction of certain conditions to the Order, we and certain of our affiliatesare now permitted, together with any future BDCs, registered closed-end funds and certain private funds, each ofwhose investment adviser is our investment adviser or an investment adviser controlling, controlled by, or undercommon control with our investment adviser, to co-invest in negotiated investment opportunities where doingso would otherwise be prohibited under the 1940 Act, providing our stockholders with access to a broader arrayof investment opportunities. Pursuant to the Order, we are permitted to co-invest in such investmentopportunities with our affiliates if a “required majority” (as defined in Section 57(o) of the 1940 Act) of ourindependent directors make certain conclusions in connection with a co-investment transaction, including, butnot limited to, that (1) the terms of the potential co-investment transaction, including the consideration to bepaid, are reasonable and fair to us and our stockholders and do not involve overreaching in respect of us or ourstockholders on the part of any person concerned, and (2) the potential co-investment transaction is consistentwith the interests of our stockholders and is consistent with our then-current investment objective and strategies.In addition, within our portfolio there are investments that may be deemed to be ‘‘controlled’’ investmentsunder the 1940 Act. To the extent that our investments in such portfolio companies need to be restructured orthat we choose to exit these investments in the future, our ability to do so may be limited if such restructuring orexit also involves the affiliates of our Investment Advisor because such a transaction could be considered a jointtransaction prohibited by the 1940 Act in the absence of our receipt of relief from the SEC in connection withsuch transaction. For example, if an affiliate of our Investment Advisor were required to approve a restructuringof an investment in the portfolio and the affiliate of our Investment Advisor was deemed to be our affiliate, sucha 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 ofsignificant loss if one or more 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 assetdiversification requirements associated with our RIC tax treatment under the Code, we do not have fixedguidelines for diversification, and our investments may be concentrated in relatively few companies. As ourportfolio is less diversified than the portfolios of some larger funds, we are more susceptible to failure if a singleloan fails. The disposition or liquidity of a significant investment may also adversely impact our net asset valueand our results of operations. Similarly, the aggregate returns we realize may be significantly adversely affectedif 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 notlimited with respect to 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, whichmeans that we are not limited by the 1940 Act with respect to the proportion of our assets that we may invest insecurities of a single issuer. Beyond the asset diversification requirements associated with our RIC tax treatmentunder the Code, we do not have fixed guidelines for diversification. To the extent that we assume large positionsin the securities of a small number of issuers or our investments are concentrated in relatively few industries, ournet asset value may fluctuate to a greater extent than that of a diversified investment company as a result ofchanges in the financial condition or the market’s assessment of the issuer. We may also be more susceptible toany 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 ofsignificant loss if there is a downturn in a particular industry in which a number of our investments areconcentrated.Our portfolio may be concentrated in a limited number of industries. A downturn in any particular industryin which we are invested could significantly impact the aggregate returns we realize. If an industry in which wehave significant investments suffers from adverse business or economic conditions, as these industries have tovarying degrees, a material portion of our investment portfolio could be affected adversely, which, in turn, couldadversely affect our financial position and results of operations.53TABLE OF CONTENTSBecause we will not hold controlling equity interests in most of our portfolio companies, we may not be in aposition to exercise control over our portfolio companies or to prevent decisions by management of ourportfolio companies that could decrease the value of our investments.We currently hold controlling equity positions in six portfolio companies. Although we may do so in thefuture, we expect that we will not hold controlling equity positions in most of our portfolio companies. If we donot hold a controlling equity position in a portfolio company, we are subject to the risk that the portfoliocompany may make business decisions with which we disagree, and that the management and/or stockholders ofthe portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack ofliquidity of the debt and equity investments that we typically hold in our portfolio companies, we may not beable to dispose of our investments in the event we disagree with the actions of a portfolio company and maytherefore 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 controlinvestment in a timely 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 todivest ourselves from a debt or equity investment in a controlled portfolio company could be restricted due toilliquidity in a private stock, limited trading volume on a public company’s stock, inside information on acompany’s performance, insider blackout periods, or other factors that could prohibit us from disposing of theinvestment as we would if it were not a control investment. Additionally, we may choose not to take certainactions to protect a debt investment in a control investment portfolio company. As a result, we could experiencea 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 coverlosses.To attempt to mitigate credit risks, we will typically take a security interest in the available assets of ourportfolio 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 sellin a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of thebusiness and market conditions, including as a result of the inability of a portfolio company to raise additionalcapital. In some circumstances, our lien could be subordinated to claims of other creditors. Consequently, thefact that a loan is secured does not guarantee that we will receive principal and interest payments according tothe loan’s terms, or that we will be able to collect on the loan should we be forced to enforce our remedies.In addition, because we may invest in technology-related companies, a substantial portion of the assetssecuring our investment may be in the form of intellectual property, if any, inventory and equipment and, to alesser extent, cash and accounts receivable. Intellectual property, if any, that is securing our loan could losevalue if, among other things, the company’s rights to the intellectual property are challenged or if the company’slicense to the intellectual property is revoked or expires, the technology fails to achieve its intended results or anew technology makes the intellectual property functionally obsolete. Inventory may not be adequate to secureour loan if our valuation of the inventory at the time that we made the loan was not accurate or if there is areduction in the demand for the inventory.Similarly, any equipment securing our loan may not provide us with the anticipated security if there arechanges in technology or advances in new equipment that render the particular equipment obsolete or of limitedvalue, or if the company fails to adequately maintain or repair the equipment. Any one or more of the precedingfactors could materially impair our ability to recover 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 lenderscould lead to defaults and, potentially, termination of its loans and foreclosure on its secured assets, which couldtrigger cross-defaults under other agreements and jeopardize our portfolio company’s ability to meet itsobligations under the debt securities that we hold. We may incur expenses to the extent necessary to54TABLE OF CONTENTSseek recovery upon default or to negotiate new terms with a defaulting portfolio company. Any extension orrestructuring of our loans could adversely affect our cash flows. In addition, if one of our portfolio companieswere to go bankrupt, even though we may have structured our interest as senior debt, depending on the facts andcircumstances, including the extent to which we actually provided managerial assistance to that portfoliocompany, a bankruptcy court might recharacterize our debt holding and subordinate all or a portion of our claimto that of other creditors. If any of these occur, it could materially and adversely affect our operating results andcash flows.If our portfolio companies are unable to protect their proprietary, technological and other intellectualproperty rights, our business and prospects could be harmed, and if portfolio companies are required to devotesignificant resources to protecting their intellectual property rights, the value of our investment could bereduced.Our future success and competitive position will depend in part upon the ability of our portfolio companiesto obtain, maintain and protect proprietary technology used in their products and services. The intellectualproperty held by our portfolio companies often represents a substantial portion of the collateral securing ourinvestments and/or constitutes a significant portion of the portfolio companies’ value that may be available in adownside scenario to repay our loans. Our portfolio companies will rely, in part, on patent, trade secret andtrademark law to protect that technology, but competitors may misappropriate their intellectual property, anddisputes as to ownership of intellectual property may arise. Portfolio companies may, from time to time, berequired to institute litigation to enforce their patents, copyrights or other intellectual property rights, protecttheir trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims ofinfringement. Such litigation could result in substantial costs and diversion of resources. Similarly, if a portfoliocompany is found to infringe or misappropriate a third-party’s patent or other proprietary rights, it could berequired to pay damages to the third-party, alter its products or processes, obtain a license from the third-partyand/or cease activities utilizing the proprietary rights, including making or selling products utilizing theproprietary rights. Any of the foregoing events could negatively affect both the portfolio company’s ability toservice our debt investment and the value of any related debt and equity securities that we own, as well as anycollateral securing our investment.Any unrealized depreciation we experience on our loan portfolio may be an indication of future realizedlosses, which could reduce 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, atthe fair value as determined in good faith by our Board. Decreases in the market values or fair values of ourinvestments will be recorded as unrealized depreciation. Any unrealized depreciation in our loan portfolio couldbe an indication of a portfolio company’s inability to meet its repayment obligations to us with respect to theaffected loans. This could result in realized losses in the future and ultimately in reductions of our incomeavailable for distribution in future periods.Prepayments of our debt investments by our portfolio companies could adversely impact our results ofoperations and reduce our return on equity.We are subject to the risk that the investments we make in our portfolio companies may be repaid prior tomaturity. When this occurs, we will generally reinvest these proceeds in temporary investments or repay anyrevolving credit facility, depending on expected future investment in new portfolio companies. Temporaryinvestments will typically have substantially lower yields than the debt being prepaid, and we could experiencesignificant delays in reinvesting these amounts. Any future investment in a new portfolio company may also beat lower yields than the debt that was repaid. As a result, our results of operations could be materially adverselyaffected 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 ofour common stock.We may not realize gains from our equity investments.Certain investments that we may make include warrants or other equity securities. Investments in equitysecurities involve a number of significant risks, including the risk of further dilution as a result of additionalissuances, inability to access additional capital and failure to pay current distributions.55TABLE OF CONTENTSInvestments in preferred securities involve special risks, such as the risk of deferred distributions, 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 equityinterests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value.Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize onthe disposition of any equity interests may not be sufficient to offset any other losses we experience. We alsomay be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of thebusiness, recapitalization or public offering, which would allow us to sell the underlying equity interests. Wewill often seek puts or similar rights to give us the right to sell our equity securities back to the portfoliocompany 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 utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars andfloors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes incurrency exchange rates and market interest rates. Hedging against a decline in the values of our portfoliopositions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if thevalues of such positions decline. However, such hedging can establish other positions designed to gain fromthose same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedgingtransactions may also limit the opportunity for gain if the values of the underlying portfolio positions increase.It may not be possible to hedge against an exchange rate or interest rate fluctuation that is so generallyanticipated that we are not able to enter into a hedging transaction at an acceptable price. Moreover, for a varietyof reasons, we may not seek to establish a perfect correlation between such hedging instruments and theportfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intendedhedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly againstcurrency 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 toinclude any swap, security-based swap, futures contract, forward contract, option or any similar instrument) aswell as financial commitment transactions (defined to include reverse repurchase agreements, short saleborrowings and any firm or standby commitment agreement or similar agreement) by BDCs. Under the proposedrule, a BDC would be required to comply with one of two alternative portfolio limitations and manage the risksassociated with derivatives transactions and financial commitment transactions by segregating certain assets.Furthermore, a BDC that engages in more than a limited amount of derivatives transactions or that uses complexderivatives would be required to establish a formalized derivatives risk management program. If the SEC adoptsthis 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 behindered, which could have an adverse effect on our business, financial condition and results of operations.Uncertainty relating to the LIBOR calculation process may adversely affect the value of our portfolio of theLIBOR-indexed, floating-rate debt securities.In the recent past, concerns have been publicized that some of the member banks surveyed by the BritishBankers’ Association (“BBA”) in connection with the calculation of LIBOR across a range of maturities andcurrencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable tothem in order to profit on their derivatives positions or to avoid an appearance of capital insufficiency or adversereputational or other consequences that may have resulted from reporting inter-bank lending rates higher thanthose they actually submitted. A number of BBA member banks have entered into settlements with theirregulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations byregulators and governmental authorities in various jurisdictions are ongoing.56TABLE OF CONTENTSActions by the BBA, regulators or law enforcement agencies may result in changes to the manner in whichLIBOR is determined. Uncertainty as to the nature of such potential changes may adversely affect the market forLIBOR-based securities, including our portfolio of LIBOR-indexed, floating-rate debt securities. In addition,any further changes or reforms to the determination or supervision of LIBOR may result in a sudden orprolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market forLIBOR-based securities or the value of our portfolio of LIBOR-indexed, floating-rate debt securities. Forexample, on July 27, 2017, the U.K.’s Financial Conduct Authority, which regulates LIBOR, announced that itintends to phase out LIBOR by the end of 2021. It is unclear if at that time whether or not LIBOR will cease toexist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. TheU.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committeecomprised of large US financial institutions, is considering replacing U.S. dollar LIBOR with a new indexcalculated by short-term repurchase agreements, backed by Treasury securities. The future of LIBOR at this timeis uncertain. If LIBOR ceases to exist, we may need to renegotiate the credit agreements extending beyond 2021with our portfolio companies that utilize LIBOR as a factor in determining the interest rate to replace LIBORwith the 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 andsome of our portfolio companies may be adversely affected by climate change. For example, the needs ofcustomers of energy companies vary with weather conditions, primarily temperature and humidity. To the extentweather conditions are affected by climate change, energy use could increase or decrease depending on theduration and magnitude of any changes. Increases in the cost of energy could adversely affect the cost ofoperations of our portfolio companies if the use of energy products or services is material to their business. Adecrease 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 tocosts, and can contribute to increased system stresses, including service interruptions. Energy companies couldalso be affected by the potential for lawsuits against or taxes or other regulatory costs imposed on greenhousegas emitters, based on links drawn between greenhouse gas emissions and climate change.In December 2015 the United Nations, of which the U.S. is a member, adopted a climate accord (the ‘‘ParisAgreement’’) with the long-term goal of limiting global warming and the short-term goal of significantlyreducing greenhouse gas emissions. Although the U.S. ratified the Paris Agreement on November 4, 2016, thecurrent administration announced the U.S. would cease participation. As a result, some of our portfoliocompanies 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 their operatingcosts and/or decrease their revenues.We may choose to waive or defer enforcement of covenants in the debt securities held in our portfolio, whichmay cause us to lose all or part of our investment in these companies.We structure the debt investments in our portfolio companies to include business and financial covenantsplacing affirmative and negative obligations on the operation of the company’s business and its financialcondition. However, from time to time we may elect to waive breaches of these covenants, including our right topayment, or waive or defer enforcement of remedies, such as acceleration of obligations or foreclosure oncollateral, depending upon the financial condition and prospects of the particular portfolio company. Theseactions may reduce the likelihood of our receiving the full amount of future payments of interest or principaland be accompanied by a deterioration in the value of the underlying collateral as many of these companies mayhave limited financial resources, may be unable to meet future obligations and may go bankrupt. This couldnegatively impact our ability to pay dividends, could adversely affect our results of operations and financialcondition and cause the loss of all or part of your investment.57•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 companiesin our sector, which are 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 orsecurities analysts;•changes, or perceived changes, in the value of our portfolio investments;•departures of the Investment Advisor’s key personnel;TABLE OF CONTENTSOur investments in securities rated below investment grade are speculative in nature and are subject toadditional risk factors such as increased possibility of default, illiquidity of the security, and changes in valuebased on changes in interest rates.The securities that we invest in are typically rated below investment grade. Securities rated belowinvestment grade are often referred to as ‘‘leveraged loans,’’ ‘‘high yield’’ or ‘‘junk’’ securities and may beconsidered ‘‘high risk’’ compared to debt instruments that are rated investment grade. High yield securities areregarded as having predominantly speculative characteristics with respect to the issuer’s capacity to pay interestand repay principal in accordance with the terms of the obligations and involve major risk exposure to adverseconditions. In addition, high yield securities generally offer a higher current yield than that available fromhigher grade issues, but typically involve greater risk. These securities are especially sensitive to adversechanges in general economic conditions, to changes in the financial condition of their issuers and to pricefluctuation in response to changes in interest rates. During periods of economic downturn or rising interest rates,issuers of below investment grade instruments may experience financial stress that could adversely affect theirability to make payments of principal and interest and increase the possibility of default.Our investments may be in portfolio companies which may have limited operating histories and financialresources.We expect that our portfolio will continue to consist of investments that may have relatively limitedoperating histories. These companies may be particularly vulnerable to U.S. and foreign economic downturnssuch as the U.S. recession that began in mid-2007 and the European financial crisis, may have more limitedaccess to capital and higher funding costs, may have a weaker financial position and may need more capital toexpand or compete. These businesses also may experience substantial variations in operating results. They mayface 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 ingovernment regulation. Accordingly, these factors could impair their cash flow or result in other events, such asbankruptcy, which could limit their ability to repay their obligations to us, and may adversely affect the returnon, or the recovery of, our investment in these companies. We cannot assure you that any of our investments inour portfolio companies will be successful. Our portfolio companies compete with larger, more establishedcompanies with greater access to, and resources for, further development in these new technologies. We may loseour 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 significantlyaffected by numerous factors, some of which are beyond our control and may not be directly related to ouroperating performance. These factors include:58•operating performance of companies comparable to us; or•general economic conditions and trends and other external factors.TABLE OF CONTENTSOur business and operation could be negatively affected if we become subject to any securities litigation orstockholder activism, which could cause us to incur significant expense, hinder execution of investmentstrategy and impact our stock price.In the past, following periods of volatility in the market price of a company’s securities, securities classaction litigation has often been brought against that company. Stockholder activism, which could take manyforms or arise in a variety of situations, increased in the BDC space recently. Specifically, we are currentlysubject to class action litigation.On December 28, 2017, an alleged stockholder filed a putative class action lawsuit complaint, Paskowitz v.Capitala Finance Corp., et al., in the United States District Court for the Central District of California (casenumber 2:17-cv-09251-MWF-AS) (the ‘‘Paskowitz Action’’), against the Company and certain of its currentofficers on behalf of all persons who purchased or otherwise acquired the Company’s common stock betweenJanuary 4, 2016 and August 7, 2017. On January 3, 2018, another alleged stockholder filed a putative classaction 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 substantiallysimilar claims on behalf of the same putative class and against the same defendants. On February 2, 2018, theSandifer Action was transferred, on stipulation of the parties, to the United States District Court for the WesternDistrict of North Carolina. The Sandifer Action was voluntarily dismissed on February 28, 2018. On March 1,2018, the Paskowitz Action was transferred, on stipulation of the parties, to the United States District Court forthe Western District of North Carolina (case number 3:18-cv-00096-RJC-DSC). On June 19, 2018, the plaintiffsin the Paskowitz Action filed their amended complaint. The complaint, as currently amended, alleges certainviolations 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 betweenJanuary 4, 2016 and August 7, 2017. The plaintiffs in the Paskowitz Action seek compensatory damages andattorneys’ fees and costs, among other relief, but did not specify the amount of damages being sought.Defendants have moved to dismiss the amended complaint. 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 inherentlydifficult and requires an extensive degree of judgment, particularly where the matters involve indeterminateclaims for monetary damages, are in the early stages of the proceedings, and are subject to appeal. In addition,because most legal proceedings are resolved over extended periods of time, potential losses are subject tochange due to, among other things, new developments, changes in legal strategy, the outcome of intermediateprocedural and substantive rulings and other parties’ settlement posture and their evaluation of the strength orweakness of their case against us. For these reasons, we are currently unable to predict the ultimate timing oroutcome of, or reasonably estimate the possible losses or a range of possible losses resulting from, the mattersdescribed above. Based on information currently available, the Company does not believe that any reasonablypossible losses arising from the currently pending legal matters described above will be material to theCompany’s results of operations or financial condition. However, in light of the inherent uncertainties involvedin such matters, an adverse outcome in this litigation could materially adversely affect the Company’s financialcondition, 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 in substantial costs and divert management’s and our Board’s attention and resources from ourbusiness. Additionally, such securities litigation and stockholder activism could give rise to perceiveduncertainties as to our future, adversely affect our relationships with service providers and make it more difficultto attract and retain qualified personnel. Also, we may be required to incur significant legal fees and otherexpenses related to any securities litigation and activist stockholder matters. Further, our stock price could besubject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of anysecurities litigation and stockholder activism.59TABLE OF CONTENTSInvesting 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 thanalternative investment options. These investments in portfolio companies may be highly speculative andaggressive, and therefore, an investment in our common stock may not be suitable for investors with lower risktolerance.Our shares of common stock have a limited trading history and we cannot assure you that the market price ofshares of our common stock will not decline.Our shares of common stock have a limited trading history and we cannot assure you that a public tradingmarket will be sustained for such shares. We cannot predict the prices at which our common stock will trade. Wecannot assure you that the market price of shares of our common stock will not decline at any time. In addition,our common stock has from time to time traded below its net asset value since our inception and if our commonstock continues to trade below its net asset value, we will generally not be able to sell additional shares of ourcommon stock to the public at its market price without first obtaining the approval of our stockholders(including our unaffiliated stockholders) and our independent directors for such issuance.Our common stockholders will bear the expenses associated with our borrowings, and the holders of our debtsecurities will have certain rights senior to our common stockholders.All of the costs of offering and servicing our debt securities, including interest thereon, is borne by ourcommon stockholders. The interests of the holders of any debt we may issue will not necessarily be aligned withthe interests of our common stockholders. In particular, the rights of holders of our debt to receive interest orprincipal repayment will be senior to those of our common stockholders. In addition, we may grant a lender asecurity interest in a significant portion or all of our assets, even if the total amount we may borrow from suchlender 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 themarket price of our common stock.Sales of substantial amounts of our common stock, or the availability of such common stock for sale, couldadversely affect the prevailing market prices for our common stock. If this occurs and continues for a sustainedperiod of time, it could impair our ability to raise additional capital through the sale of securities should wedesire 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 netasset value that is attributable to those shares. In part as a result of adverse economic conditions and increasingpressure within the financial sector of which we are a part, our common stock has at times traded below its netasset value per share since our IPO on September 30, 2013. Our shares could continue trade at a discount to netasset value. The possibility that our shares of common stock may trade at a discount from net asset value overthe long term is separate and distinct from the risk that our net asset value will decrease. We cannot predictwhether 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 itsmarket price without first obtaining the approval for such issuance from our stockholders and our independentdirectors. If additional funds are not available to us, we could be forced to curtail or cease our new lending andinvestment activities, and our net asset value could decrease 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 willexperience dilution in 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 fordistribution. We cannot assure you that we will achieve investment results that will allow us to make a specifiedlevel of cash distributions or year-to-year increases in cash distributions. Our ability to pay distributions mightbe materially and adversely affected by the impact of one or more of the risks described60TABLE OF CONTENTSherein. Due to the asset coverage test applicable to us under the 1940 Act as a BDC, we may be limited in ourability to make distributions. All distributions will be made at the discretion of our Board and will depend onour earnings, financial condition, maintenance of RIC tax treatment, compliance with applicable BDC, SBAregulations and such other factors as our Board may deem relevant from time to time. We cannot assure you thatwe will make distributions to our stockholders in the future.All dividends declared in cash payable to stockholders that are participants in our dividend reinvestmentplan are automatically reinvested in shares of our common stock. As a result, our stockholders that opt out of ourdividend reinvestment plan will experience dilution in their ownership percentage of our common stock overtime.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. Wewill also pay operating expenses, and may pay other expenses such as due diligence expenses of potential newinvestments, from net proceeds. Our ability to achieve our investment objective may be limited to the extent thatthe net proceeds of any offering, pending full investment, are used to pay operating expenses. In addition, wecan provide you no assurance that the any offering will be successful, or that by increasing the size of ouravailable equity 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 oneor more offerings at prices below the then current net asset value per share of our common stock.At our 2019 Annual Stockholders Meeting, subject to certain determinations required to be made by ourBoard, we will ask our stockholders to approve our ability to sell or otherwise issue shares of our common stock,not exceeding 25% of our then outstanding common stock immediately prior to each such offering, at a pricebelow the then current net asset value per share during a period beginning on May 2, 2019 and expiring on theearlier of the one year anniversary of the date of the 2019 Annual Stockholders Meeting and the date of our2020 Annual Stockholders Meeting, which is expected to be held in April 2020.If we were to sell shares of our common stock below its then current net asset value per share would besubject to the determination by our Board that such issuance is in our and our stockholders’ best interests. If wewere to sell shares of our common stock below its then current net asset value per share, such sales would resultin an immediate dilution to the net asset value per share of our common stock. This dilution would occur as aresult of the sale of shares at a price below the then current net asset value per share of our common stock and aproportionately greater decrease in the stockholders’ interest in our earnings and assets and their voting interestin us than the increase in our assets resulting from such issuance. Because the number of shares of common stockthat 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 such offering is above or below the then current net asset value per share, their votingpower will be diluted. For example, if we sell an additional 10% of our common shares at a 10% discount fromnet asset value, a stockholder who does not participate in that offering for its proportionate interest will suffernet 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 anyrights offering.In the event we issue subscription rights to purchase shares of our common stock, stockholders who do notfully exercise their rights should expect that they will, at the completion of the offer, own a smaller proportionalinterest in Capitala Finance than would 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 atthis time what proportion of the shares would be purchased as a result of a rights offering.61TABLE OF CONTENTSIn addition, if the subscription price in a rights offering is less than our net asset value per share, then ourstockholders would experience an immediate dilution of the aggregate net asset value of their shares as a resultof the rights offering. The amount of any decrease in net asset value is not predictable because it is not known atthis time what the subscription price and net asset value per share will be on the expiration date of any rightsoffering or what proportion of the shares will be purchased as a result of such rights offering. Such dilution couldbe substantial.If we issue preferred stock, the net asset value and market value of our common stock will likely become morevolatile.We cannot assure you that the issuance of preferred stock would result in a higher yield or return to theholders of our common stock. The issuance of preferred stock would likely cause the net asset value and marketvalue of the common stock to become more volatile. If the dividend rate on the preferred stock were to approachthe net rate of return on our investment portfolio, the benefit of leverage to the holders of the common stockwould be reduced. If the dividend rate on the preferred stock were to exceed the net rate of return on ourportfolio, the leverage would result in a lower rate of return to the holders of common stock than if we had notissued preferred stock. Any decline in the net asset value of our investments would be borne entirely by theholders of common stock. Therefore, if the market value of our portfolio were to decline, the leverage wouldresult in a greater decrease in net asset value to the holders of common stock than if we were not leveragedthrough the issuance of preferred stock. This greater net asset value decrease would also tend to cause a greaterdecline in the market price for the common stock. We might be in danger of failing to maintain the required assetcoverage of the preferred stock or of losing our ratings, if any, on the preferred stock or, in an extreme case, ourcurrent investment income might not be sufficient to meet the dividend requirements on the preferred stock. Inorder to counteract such an event, we might need to liquidate investments in order to fund a redemption of someor all of the preferred stock. In addition, we would pay (and the holders of common stock would bear) all costsand expenses relating to the issuance and ongoing maintenance of the preferred stock, including higher advisoryfees if our total return exceeds the dividend rate on the preferred stock. Holders of preferred stock may havedifferent interests than holders of common stock and may at times have disproportionate influence over ouraffairs.Holders of any preferred stock we might issue would have the right to elect members of our Board and classvoting rights on certain matters.Holders of any preferred stock we might issue, voting separately as a single class, would have the right toelect two members of our Board at all times and in the event dividends become two full years in arrears wouldhave the right to elect a majority of the directors until such arrearage is completely eliminated. In addition,preferred stockholders have class voting rights on certain matters, including changes in fundamental investmentrestrictions and conversion to open-end status, and accordingly can veto any such changes. Restrictionsimposed on the declarations and payment of dividends or other distributions to the holders of our common stockand 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 tax purposes. While we would intend to redeem our preferred stock to the extent necessary toenable us to distribute our income as required to maintain our qualification as a RIC, there can be no assurancethat such actions could be effected in time to meet the tax requirements.62TABLE OF CONTENTSITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESOur executive offices are located at 4201 Congress Street, Suite 360, Charlotte, North Carolina 28209, andare provided by our Administrator in accordance with the terms of the Administration Agreement. We believethat our office facilities are suitable and adequate 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 legalproceedings, nor, to our knowledge, is any material legal proceeding threatened against us or our subsidiaries.From time to time, we, or our subsidiaries may be a party to certain legal proceedings in the ordinary course ofbusiness, including proceedings relating to the enforcement of our rights under contracts with our portfoliocompanies. While the outcome of these legal proceedings, if any, cannot be predicted with certainty, we do notexpect that these proceedings will have a material effect upon our financial condition or results of operations.On December 28, 2017, an alleged stockholder filed a putative class action lawsuit complaint, Paskowitz v.Capitala Finance Corp., et al., in the United States District Court for the Central District of California (casenumber 2:17-cv-09251-MWF-AS) (the “Paskowitz Action”), against the Company and certain of its currentofficers on behalf of all persons who purchased or otherwise acquired the Company’s common stock betweenJanuary 4, 2016 and August 7, 2017. On January 3, 2018, another alleged stockholder filed a putative classaction 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 substantiallysimilar claims on behalf of the same putative class and against the same defendants. On February 2, 2018, theSandifer Action was transferred, on stipulation of the parties, to the United States District Court for the WesternDistrict of North Carolina. The Sandifer Action was voluntarily dismissed on February 28, 2018. On March 1,2018, the Paskowitz Action was transferred, on stipulation of the parties, to the United States District Court forthe Western District of North Carolina (case number 3:18-cv-00096-RJC-DSC). On June 19, 2018, the plaintiffsin the Paskowitz Action filed their amended complaint. The complaint, as currently amended, alleges certainviolations 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 betweenJanuary 4, 2016 and August 7, 2017. The plaintiffs in the Paskowitz Action seek compensatory damages andattorneys’ fees and costs, among other relief, but did not specify the amount of damages being sought.Defendants have moved to dismiss the amended complaint. 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 inherentlydifficult and requires an extensive degree of judgment, particularly where the matters involve indeterminateclaims for monetary damages, are in the early stages of the proceedings, and are subject to appeal. In addition,because most legal proceedings are resolved over extended periods of time, potential losses are subject tochange due to, among other things, new developments, changes in legal strategy, the outcome of intermediateprocedural and substantive rulings and other parties’ settlement posture and their evaluation of the strength orweakness of their case against us. For these reasons, we are currently unable to predict the ultimate timing oroutcome of, or reasonably estimate the possible losses or a range of possible losses resulting from, the mattersdescribed above. Based on information currently available, the Company does not believe that any reasonablypossible losses arising from the currently pending legal matters described above will be material to theCompany’s results of operations or financial condition. However, in light of the inherent uncertainties involvedin such matters, an adverse outcome in this litigation could materially adversely affect the Company’s financialcondition, results of operations or cash flows in any particular reporting period.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.63TABLE OF CONTENTSPART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERSAND ISSUER PURCHASES OF EQUITY SECURITIESCOMMON STOCKOur common stock is traded on the NASDAQ Global Select Market under the symbol ‘‘CPTA.’’HOLDERSThe last reported price for our common stock on March 1, 2019 was $8.30 per share. As of March 1, 2019there were 42 holders 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 wedistribute to our stockholders, we are required to distribute at least 90% of our net ordinary income and our netshort-term capital gains in excess of net long-term capital losses, if any, to our stockholders on an annual basis.Additionally, we must distribute an amount at least equal to the sum of 98% of our net ordinary income (duringthe calendar year) plus 98.2% of our net capital gain income (during each 12-month period ending onOctober 31) plus any net ordinary income and capital gain net income for preceding years that were notdistributed during such years and on which we paid no U.S. federal income tax to avoid a U.S. federal excise tax.We made quarterly distributions to our stockholders for the first four full quarters subsequent to our IPO. To theextent we have income available, we have made and intend to make monthly distributions thereafter. Ourmonthly stockholder distributions, if any, will be determined by our Board on a quarterly basis. Any distributionto 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 levelor to increase the amount of our distributions from time to time, and from time to time we may decrease theamount of our distributions. In addition, we may be limited in our ability to make distributions due to the assetcoverage requirements applicable to us as a BDC under the 1940 Act. If we do not distribute a certain percentageof our income annually, we will suffer adverse tax consequences, including the possible loss of our qualificationas 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, aportion of those distributions may be deemed a return of capital to our stockholders for U.S. federal income taxpurposes. Thus, the source of a distribution to our stockholders may be the original capital invested by thestockholder rather than our income or gains. Stockholders should read any written disclosure accompanying anystockholder distribution carefully and should not assume that the source of any distribution is our ordinaryincome or capital gains.We have adopted an ‘‘opt out’’ dividend reinvestment plan (‘‘DRIP’’) for our common stockholders. As aresult, if we declare a distribution, then stockholders’ cash distributions will be automatically reinvested inadditional shares of our common stock unless a stockholder specifically ‘‘opts out’’ of our DRIP. If a stockholderopts out, that stockholder will receive cash distributions. Although distributions paid in the form of additionalshares of our common stock will generally be subject to U.S. federal, state and local taxes in the same manner ascash distributions, stockholders participating in our DRIP will not receive any corresponding cash distributionswith which to pay any such applicable taxes.PERFORMANCE GRAPHThe following graph compares the cumulative return on our common stock with that of the Standard &Poor’s 500 Stock Index and the NASDAQ Financial 100 index, as we do not believe there is an appropriateindex of companies with an investment strategy similar to our own with which to compare the return on ourcommon stock, for the period from December 31, 2013 through December 31, 2018. The graph assumes that onDecember 31, 2013, a person invested $100 in each of our common stock, the64TABLE OF CONTENTSStandard & Poor’s 500 Stock Index and the NASDAQ Financial 100 index. The graph measures total stockholderreturn, which takes into account both changes in stock price and dividends. The graph also assumes thatdividends paid are reinvested in the same class of equity securities at the frequency with which dividends arepaid on such 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-Kshall not be deemed to be ‘‘soliciting material’’ or to be ‘‘filed’’ with the SEC or subject to Regulation 14A or14C under, or to the liabilities of Section 18 of, the 1934 Act. The stock price performance included in the abovegraph is not necessarily indicative of future stock price performance.SALES OF UNREGISTERED SECURITIESDuring the year ended December 31, 2018, we issued 100,316 shares of common stock under our DRIP. Theissuances were not subject to the registration requirements under the Securities Act of 1933, as amended. Thecash paid for shares of common stock issued under our DRIP during the year ended December 31, 2018 wasapproximately $0.8 million. Other than the shares issued under our DRIP during the year ended December 31,2018, we did not sell any unregistered equity securities.ISSUER PURCHASES OF EQUITY SECURITIESNone.65(1)Total investment return is calculated assuming a purchase of common shares at the current market value onthe first day 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 underthe Company’s dividend reinvestment plan. Total investment return does not reflect brokeragecommissions.TABLE OF CONTENTSITEM 6. SELECTED CONSOLIDATED FINANCIAL DATAThe following selected consolidated financial data of the Company as of and for the years endedDecember 31, 2018, 2017, 2016, 2015 and 2014 are derived from our consolidated financial statements thathave been audited by Ernst & Young LLP, our independent registered public accounting firm. This consolidatedfinancial data should be read in conjunction with our consolidated financial statements and related notes theretoincluded elsewhere in this Form 10-K and with Management’s Discussion and Analysis of Financial Conditionand Results of Operations which follows (dollars in thousands except share and per share data):As of and for the year ended December 31,​​2018​​2017​​2016​​2015​​2014​Consolidated statements of operations data:Total investment income$47,293$51,089$68,312$63,976$49,528Total expenses, net of fee waivers31,27135,56539,27238,64929,562Net investment income16,02215,52429,04025,32719,966Net realized gain (loss) from investments(34,804(24,189(22,7665,436832Net unrealized appreciation (depreciation) oninvestments and written call option8402,9702,878(16,913(24,238Tax benefit (provision)1,916(1,289———Net increase (decrease) in net assets resultingfrom operations$(16,026$(6,984$9,152$13,850$(3,440Per share data:Net investment income$1.00$0.98$1.84$1.67$1.54Net increase (decrease) in net assets resultingfrom operations$(1.00$(0.44$0.58$0.91$(0.27Distributions declared$1.00$1.42$1.80$2.38$1.88Net asset value per share$11.88$13.91$15.79$17.04$18.56Consolidated statements of assets and liabilitiesdata:Total assets$493,165$534,595$584,415$632,818$539,864Total net assets$190,644$221,887$250,582$268,802$240,837Other data:Total return12.14(35.6824.07(20.43(0.85Number of portfolio company investments atyear end4447535752Total portfolio investments for the year$107,802$82,750$120,844$260,640$216,276Investment repayments for the year$123,517$115,810$163,564$142,713$80,19766))))))))))))(1)%)%%)%)%•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 whichwe 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.•an economic downturn could impair our portfolio companies’ ability to continue to operate or repaytheir borrowings, which could lead to the loss of some or all of our investments in such portfoliocompanies;•a contraction of available credit and/or an inability to access the equity markets could impair ourlending and investment activities;•interest rate volatility could adversely affect our results, particularly if we use leverage as part of ourinvestment strategy; and•the risks, uncertainties and other factors we identify in ‘‘Risk Factors’’ and elsewhere in this AnnualReport on Form 10-K.TABLE OF CONTENTSITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONSThe following discussion and analysis should be read in conjunction with our consolidated financialstatements and related notes and other financial information appearing elsewhere in this Annual Report on Form10-K.Except as otherwise specified, references to “we,” “us,” “our,” “Capitala,” or the “Company”, refer toCapitala Finance Corp.Forward-Looking StatementsThis Annual Report on Form 10-K, including Management’s Discussion and Analysis of FinancialCondition and Results of Operations, contains forward-looking statements that involve substantial risks anduncertainties. These forward-looking statements are not historical facts, but rather are based on currentexpectations, estimates and projections about the Company, our current 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, whichrelate to future events or our performance or financial condition. The forward-looking statements contained inour Annual Report on Form 10-K involve risks and uncertainties, including statements as to:These statements are not guarantees of future performance and are subject to risks, uncertainties, and otherfactors, some of which are beyond our control and difficult to predict and could cause actual results to differmaterially from those expressed or forecasted in the forward-looking statements, including without limitation:Although we believe that the assumptions on which these forward-looking statements are based arereasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-lookingstatements based on those assumptions also could be inaccurate. Important assumptions include our ability67TABLE OF CONTENTSto originate new loans and investments, certain margins and levels of profitability and the availability ofadditional capital. In light of these and other uncertainties, the inclusion of a projection or forward-lookingstatement in this Annual Report on Form 10-K should not be regarded as a representation by us that our plansand objectives will be achieved. These risks and uncertainties include those described or identified in ‘‘RiskFactors’’ and elsewhere in our Annual Report on Form 10-K. You should not place undue reliance on theseforward-looking statements, which apply only as of the date of this Annual Report on Form 10-K. We undertakeno obligation to revise or update any forward-looking statements, whether as a result of new information, futureevents or otherwise, unless required by law or U.S. Securities and Exchange Commission (‘‘SEC’’) rule orregulation.OverviewWe are a Maryland corporation that has elected to be regulated as a business development company(‘‘BDC’’) under the Investment Company Act of 1940 as amended (the ‘‘1940 Act’’). Our investment objectiveis 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 anon-exclusive emphasis on the Southeast, Southwest and Mid-Atlantic regions. We invest primarily incompanies with a history of earnings growth and positive cash flow, proven management teams, products orservices with competitive advantages and industry-appropriate margins. We primarily invest in companies withbetween $4.5 million and $30 million in trailing twelve-month earnings before interest, tax, depreciation, andamortization (‘‘EBITDA’’).We invest in first lien loans, second lien loans and subordinated loans, and, to a lesser extent, equitysecurities issued by lower middle-market companies and traditional middle-market companies.As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally mustinvest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly tradedpublic U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investmentsthat mature in one year or less. In addition, we are only allowed to borrow money such that our asset coverage, asdefined in the 1940 Act, equals at least 200% (or 150%, if certain requirements are met, after November 1, 2019)after such borrowing, with certain limited exceptions. On March 23, 2018, the Small Business CreditAvailability Act (the “SBCA”) was signed into law, which included various changes to regulations under thefederal securities laws that impact BDCs. The SBCA included changes to the 1940 Act to allow BDCs todecrease their asset coverage requirement from 200% to 150% (i.e. the amount of debt may not exceed 66.7% ofthe value of our total assets), if certain requirements are met. On November 1, 2018, the Board, including a‘‘required majority’’ (as such term is defined in Section 57(o) of the 1940 Act) approved the application of themodified asset coverage. As a result, our asset coverage requirements for senior securities will be changed from200% to 150%, effective November 1, 2019. To maintain our regulated investment company (“RIC”) status, wemust meet specified source-of-income and asset diversification requirements. To maintain our RIC tax treatmentunder subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) for U.S. federal income taxpurposes, we must distribute at least 90% of our net ordinary income and realized net short-term capital gains inexcess 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”) onSeptember 30, 2013. The Company was formed for the purpose of  (i) acquiring, through a series of transactions,an investment portfolio from the following entities: CapitalSouth Partners Fund I Limited Partnership (“FundI”); CapitalSouth Partners Fund II Limited Partnership (“Fund II”); CapitalSouth Partners Fund III, L.P. (“Fund IIIParent”); CapitalSouth Partners SBIC Fund III, L.P. (“Fund III”) and CapitalSouth Partners Florida Sidecar FundI, L.P. (“Florida Sidecar” and, collectively with Fund I, Fund II, Fund III and Fund III Parent, the “LegacyFunds”); (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-marketcompanies.68TABLE OF CONTENTSOn September 24, 2013, the Company acquired 100% of the limited partnership interests in Fund II, FundIII and Florida Sidecar and each of their respective general partners, as well as certain assets from Fund I andFund III Parent, in exchange for an aggregate of 8,974,420 shares of the Company’s common stock (the“Formation Transactions”). Fund II, Fund III and Florida Sidecar became the Company’s wholly ownedsubsidiaries. Fund II and Fund III retained their SBIC licenses, and continued to hold their existing investmentsat the time of IPO and have continued to make new investments after the IPO. 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 theCompany of  $74.25 million, after deducting underwriting fees and commissions totaling $4.0 million andoffering expenses totaling $1.75 million. The other costs of the IPO were borne by the limited partners of theLegacy Funds. During the fourth quarter of 2017, Florida Sidecar transferred all of its assets to the Company andwas legally dissolved as a standalone partnership.At the time of the Formation Transactions, our portfolio consisted of: (1) approximately $326.3 million ininvestments; (2) an aggregate of approximately $67.1 million in cash, interest receivable and other assets; and(3) liabilities of approximately $202.2 million of U.S. Small Business Administration (“SBA”) guaranteed debtpayable. We have two subsidiaries licensed under the Small Business Investment Company (“SBIC”) Act thathave elected to be regulated as BDCs under the 1940 Act.The Company has formed and expects to continue to form certain consolidated taxable subsidiaries (the‘‘Taxable Subsidiaries’’), which are taxed as corporations for income tax purposes. The Taxable Subsidiariesallow the Company to make equity investments in companies organized as pass-through entities whilecontinuing to satisfy the requirements of a RIC under the Code.Basis of PresentationThe Company is considered an investment company as defined in Accounting Standards Codification(‘‘ASC’’) Topic 946 — Financial Services — Investment Companies (‘‘ASC 946’’). The accompanyingconsolidated financial statements have been 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 Form10-K and Article 6 of Regulation S-X. The consolidated financial statements of the Company include theaccounts of the Company and its wholly owned subsidiaries.The Company’s financial statements as of December 31, 2018 and 2017, and for the years ended December31, 2018, 2017, and 2016 are presented on a consolidated basis. The effects of all intercompany transactionsbetween the Company and its subsidiaries (Fund II, Fund III, Florida Sidecar, and the Taxable Subsidiaries) havebeen 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 consolidatedfinancial statements reflect all adjustments that are necessary for the fair presentation of financial results as ofand for the periods presented.ConsolidationAs provided under Regulation S-X and ASC 946, the Company will generally not consolidate itsinvestment in a company other than an investment company subsidiary or a controlled operating companywhose business consists of providing services to the Company. Accordingly, the Company consolidated theresults of the Company’s wholly owned investment company subsidiaries (Fund II, Fund III, Florida Sidecar, andthe Taxable Subsidiaries) in its consolidated financial statements. The Company does not consolidate its interestin Capitala Senior Loan Fund II, LLC (‘‘CSLF II’’) because the investment is not considered a substantiallywholly owned investment company subsidiary. Further, CSLF II is a joint venture for which shared power existsrelating to the decisions that most significantly impact the economic performance of the entity. See Note 4 to theconsolidated financial statements for a description of the Company’s investment in CSLF II.RevenuesWe generate revenue primarily from the periodic cash interest we collect on our debt investments. Inaddition, most of our debt investments offer the opportunity to participate in a borrower’s equity performancethrough warrant participation, direct equity ownership or otherwise, which we expect to result69•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 travel expenses incurred in connection with making investments), including fees andexpenses associated with performing due diligence reviews of prospective investments and advisoryfees;•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 SecuritiesExchange Act of 1934, as amended (the ‘‘1934 Act’’) other applicable federal and state securities lawsand 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 andother insurance premiums;•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 ourbusiness, including payments under the Administration Agreement that will be based upon ourallocable portion of overhead and other expenses incurred by our Administrator in performing itsobligations under the Administration Agreement, including rent, the fees and expenses associated withperforming compliance functions, and our allocable portion of any costs of compensation and relatedexpenses of our chief compliance officer and our chief financial officer and their respectiveadministrative support staff.TABLE OF CONTENTSin revenue in the form of dividends and/or capital gains. Further, we may generate revenue in the form ofcommitment, origination, amendment, structuring or diligence fees, monitoring fees, fees for providingmanagerial assistance and possibly consulting fees and performance-based fees. These fees will be recognized asthey are earned.ExpensesOur primary operating expenses include the payment of investment advisory fees to our InvestmentAdvisor, our allocable portion of overhead and other expenses incurred by our Administrator in performing itsobligations under an administration agreement between us and the Administrator (the ‘‘AdministrationAgreement’’) and other operating expenses as detailed below. Our investment advisory fee will compensate ourInvestment Advisor for its work in identifying, evaluating, negotiating, closing, monitoring and servicing ourinvestments. We will bear all other expenses of our operations and transactions, including (without limitation):Critical Accounting Policies and Use of EstimatesIn the preparation of our consolidated financial statements and related disclosures, we have adopted variousaccounting policies that govern the application of U.S. GAAP. Our significant accounting policies are describedin Note 2 to the consolidated financial statements. While all of these policies are important to70TABLE OF CONTENTSunderstanding our financial statements, certain accounting policies and estimates are considered critical due totheir impact on the reported amounts of assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses for the periods covered by such financial statements. We haveidentified investment valuation, revenue recognition, and income taxes as our most critical accountingestimates. We continuously evaluate our estimates, including those related to the matters described below.Because of the nature of the judgments and assumptions we make, actual results could materially differ fromthose estimates under different assumptions or conditions. A discussion of our critical accounting policiesfollows.Valuation of InvestmentsThe Company applies fair value accounting to all of its financial instruments in accordance with the 1940Act and ASC Topic 820 — Fair Value Measurements and Disclosures (‘‘ASC 820’’). ASC 820 defines fair value,establishes a framework used to measure fair value and requires disclosures for fair value measurements. Inaccordance with ASC 820, the Company has categorized its financial instruments carried at fair value, based onthe priority of the valuation technique, into a three-level fair value hierarchy as discussed in Note 4 to ourconsolidated financial statements.In determining fair value, our board of directors (the ‘‘Board’’) uses various valuation approaches, andengages a third-party independent valuation firm, which provides positive assurance on the investments itreviews. In accordance with U.S. GAAP, a fair value hierarchy for inputs is used in measuring fair value thatmaximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the mostobservable inputs be used when available.Observable inputs are those that market participants would use in pricing the asset or liability based onmarket data obtained from sources independent of the Board. Unobservable inputs reflect the Board’sassumptions about the inputs market participants would use in pricing the asset or liability developed basedupon the best information available in the circumstances. The fair value hierarchy is categorized into threelevels based on the inputs as follows:Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilitiesthat the Company has the ability to access. Valuation adjustments and block discounts are not applied toLevel 1 securities. Since valuations are based on quoted prices that are readily and regularly available in anactive market, valuation of these securities does not entail a significant degree of judgment.Level 2 — Valuations based on quoted prices in markets that are not active or for which all significantinputs are observable, either directly or indirectly.Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair valuemeasurement.The availability of valuation techniques and observable inputs can vary from security to security and isaffected by a wide variety of factors including the type of security, whether the security is new and not yetestablished in the marketplace, and other characteristics particular to the transaction. To the extent thatvaluation is based on models or inputs that are less observable or unobservable in the market, the determinationof fair value requires more judgment. Those estimated values do not necessarily represent the amounts that maybe ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined.Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower thanthe values that would have been used had a market for the securities existed. Accordingly, the degree ofjudgment exercised by the Company in determining fair value is greatest for securities categorized in Level 3. Incertain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. Insuch cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurementin its entirety falls is determined based on the lowest level input that is significant to the fair value measurement.Fair value is a market-based measure considered from the perspective of a market participant rather than anentity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s ownassumptions are set to reflect those that market participants would use in pricing the asset71TABLE OF CONTENTSor liability at the measurement date. We use prices and inputs that are current as of the measurement date,including periods of market dislocation. In periods of market dislocation, the observability of prices and inputsmay be reduced for many securities. This condition could cause a security to be reclassified to a lower levelwithin the fair value hierarchy.In estimating the fair value of portfolio investments, the Company starts with the cost basis of theinvestment, which includes original issue discount and payment-in-kind (‘‘PIK income’’), if any. The transactionprice is typically the best estimate of fair value at inception. When evidence supports a subsequent change to thecarrying value from the original transaction price, adjustments are made to reflect the expected fair values.As a practical expedient, the Company uses net asset value (“NAV”) as the fair value for its equityinvestment in CSLF II. CSLF II records its underlying investments at fair value on a quarterly basis inaccordance with the 1940 Act and ASC 820.Valuation TechniquesEnterprise Value Waterfall ApproachThe enterprise value waterfall approach determines an enterprise value based on EBITDA multiples ofpublicly traded companies that are considered similar to the subject portfolio company. The Company considersa variety of items in determining a reasonable pricing multiple, including, but not limited to, operating results,budgeted projections, growth, size, risk, profitability, leverage, management depth, diversification, marketposition, 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 to reflect a normalized level ofearnings that is representative of future earnings. In certain instances, the Company may also utilize revenuemultiples to determine enterprise value. When available, the Company may assign a pricing multiple or value itsinvestments based on the value of recent investment transactions in the subject portfolio company or offers topurchase the portfolio company. The enterprise value is adjusted for financial instruments with seniority to theCompany’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 ofthe 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 certaindebt securities.Income ApproachThe income approach utilizes a discounted cash flow methodology in which the Company estimates fairvalue based on the present value of expected cash flows discounted at a market rate of interest. Thedetermination of a discount rate, or required rate of return, takes into account the portfolio company’sfundamentals and perceived credit risk. Because the majority of the Company’s portfolio companies do not havea public credit rating, determining a discount rate often involves assigning an implied credit rating based on theportfolio company’s operating metrics compared to average metrics of similar publicly rated debt. Operatingmetrics 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 availableyields on similarly rated debt securities. The Company may apply a premium to the discount rate utilized indetermining fair value when performance metrics and other qualitative information indicate that there is anadditional level of uncertainty about collectability of cash flows.Asset ApproachThe asset approach values an investment based on the value of the underlying collateral securing theinvestment. This approach is used when the Company has reason to believe that it will not collect all principaland interest in accordance with the contractual terms of the debt agreement.72TABLE OF CONTENTSRevenue 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 theextent that such amounts are expected to be collected. The Company has loans in the portfolio that contain apayment-in-kind interest (‘‘PIK interest’’) provision. The PIK interest, which represents contractually deferredinterest added to the loan balance that is generally due at maturity, is recorded on the accrual basis to the extentthat such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect theissuer 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 whenthere is reasonable doubt that principal or interest will be collected, for possible placement on non-accrualstatus. When the Company otherwise does not expect the borrower to be able to service its debt and otherobligations, the Company will place the loan on non-accrual status and will generally cease recognizing interestincome and PIK interest on that loan for financial reporting purposes. Interest payments received on non-accrualloans may be recognized as income or applied to principal depending upon management’s judgment. TheCompany writes off any previously accrued and uncollected cash interest when it is determined that interest isno longer considered collectible. The Company may elect to cease accruing PIK interest and continue accruinginterest income in cases where a loan is currently paying its interest income but, in management’s judgment,there is a reasonable likelihood of principal loss on the loan. Non-accrual loans are returned to accrual statuswhen the borrower’s financial condition improves such that management believes current interest and principalpayments are expected to be collected.Gains and losses on investment sales and paydowns: Realized gains and losses on investments arerecognized using the specific identification method.Dividend income and paid-in-kind dividends: Dividend income is recognized on the date dividends aredeclared. The Company holds preferred equity investments in the portfolio that contain a payment-in-kinddividend (‘‘PIK dividends’’) provision. PIK dividends, which represent contractually deferred dividends addedto the equity balance, are recorded on the accrual basis to the extent that such amounts are expected to becollected. The Company will typically cease accrual of PIK dividends when the fair value of the equityinvestment is less than the cost basis of the investment or when it is otherwise determined by management thatPIK dividends are unlikely to be collected. If management determines that a decline in fair value is temporary innature and the PIK dividends are more likely than not to be collected, management may elect to continueaccruing PIK dividends.Original issue discount: Discounts received to par on loans purchased are capitalized and accreted intoincome over the life of the 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, and other fees associated with investments in portfolio companies are recognized as income whenthe investment transaction closes. Prepayment penalties received by the Company for debt instruments repaidprior to the maturity date are recorded as income upon receipt.Income TaxesPrior to the Formation Transactions, the Legacy Funds were treated as partnerships for U.S. federal, state andlocal income tax purposes and, therefore, no provision has been made in the accompanying consolidatedfinancial statements for federal, state or local income taxes. In accordance with the partnership tax lawrequirements, each partner would include their respective components of the Legacy Funds’ taxable profits orlosses, as shown on their Schedule K-1 in their respective tax or information returns. The Legacy Funds aredisregarded 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 therequirement to qualify annually as a RIC under subchapter M of the Code and, among other things, intends tomake the requisite distributions to its stockholders which will relieve the Company from U.S. federal incometaxes.73TABLE OF CONTENTSIn order to qualify as a RIC, among other requirements, the Company is required to timely distribute to itsstockholders at least 90.0% of its investment company taxable income, as defined by the Code, for each fiscaltax year. The Company will be subject to a nondeductible U.S. federal excise tax of 4.0% on undistributedincome if it does not distribute at least 98.0% of its ordinary income in any calendar year and 98.2% of itscapital 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 carryforward taxable income in excess of current year dividend distributions into the next excise tax year and pay a4.0% U.S. excise tax on such income, as required. To the extent that the Company determines that its estimatedcurrent year annual taxable income will be in excess of estimated current year dividend distributions for excisetax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income isearned. Since the Company’s IPO, the Company has not accrued or paid excise tax.The Company elected to amend its tax year end from August 31 to December 31 and has filed a tax returnfor the four months ended December 31, 2017. The election to change tax year end is not expected to have amaterial impact on the Company’s consolidated statements of operations, the Company’s tax status as a RIC, orthe nature of distributions paid to our stockholders.The tax periods ended December 31, 2018, December 31, 2017, August 31, 2017, and August 31, 2016,remain subject to examination by U.S. federal, state, and local tax authorities. No interest expense or penaltieshave been assessed for the years ended December 31, 2018, 2017, and 2016. If the Company was required torecognize interest and penalties, if any, related to unrecognized tax benefits this would be recognized as incometax expense in the consolidated statements of operations.The Company’s Taxable Subsidiaries record deferred tax assets or liabilities related to temporary bookversus tax differences on the income or loss generated by the underlying equity investments held by the TaxableSubsidiaries. As of December 31, 2018 and December 31, 2017, the Company recorded a net deferred tax assetof  $0.6 million and a deferred tax liability of  $1.3 million, respectively. For the years ended December 31, 2018and December 31, 2017, the Company recorded a deferred tax benefit (provision) of  $1.9 million and $(1.3)million, respectively. For the year ended December 31, 2016, no tax provision was recorded.In accordance with certain applicable U.S. treasury regulations and private letter rulings issued by theInternal Revenue Service, a RIC may treat a distribution of its own stock as fulfilling its RIC distributionrequirements if each stockholder may elect to receive its entire distribution in either cash or stock of the RIC,subject to a limitation on the aggregate amount of cash to be distributed to all stockholders, which limitationmust be at least 20.0% of the aggregate declared distribution. If too many stockholders elect to receive cash,each stockholder electing to receive cash will receive a pro rata amount of cash (with the balance of thedistribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20.0% ofits entire distribution in cash. 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 beenreceived instead of stock.ASC Topic 740 — Income Taxes (‘‘ASC 740’’), provides guidance for how uncertain tax positions shouldbe recognized, measured, presented and disclosed in the consolidated financial statements. ASC 740 requires theevaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns todetermine whether the tax positions are ‘‘more-likely-than-not’’ of being sustained by the applicable taxauthority. Tax positions deemed to meet a ‘‘more-likely-than-not’’ threshold would be recorded as a tax benefitor expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognizedtax benefits as income tax expense in the consolidated statements of operations. As of December 31, 2018 andDecember 31, 2017, 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 besustained upon examination by the applicable taxing authority, including resolution of any related appeals orlitigation processes, based on the technical merits of the position. The tax benefit to be recognized is measuredas the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimatesettlement. De-recognition of a tax benefit previously recognized could result in the Company recording a taxliability that could negatively impact the Company’s net assets.74TABLE OF CONTENTSU.S. GAAP provides guidance on thresholds, measurement, de-recognition, classification, interest andpenalties, accounting in interim periods, disclosure, and transition that is intended to provide better financialstatement comparability among different entities.The Company has concluded that it was not necessary to record a liability for any such tax positions as ofDecember 31, 2018 and 2017. However, the Company’s conclusions regarding this policy may be subject toreview and adjustment at a later date based on factors including, but not limited to, ongoing analyses of, andchanges to, tax laws, regulations and interpretations thereof.On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act,which significantly changes the existing U.S. tax laws, including a reduction in the corporate tax rate from 35%to 21%, a move from a worldwide tax system to a territorial system, as well as other changes. The TaxableSubsidiaries’ provisional tax is based on the new lower blended federal and state corporate tax rate of 24.86%.The implementation of the Tax Act did not have a material impact on the Company’s financial position andresults of operations.Portfolio and Investment ActivityThe Company’s investment objective is to generate both current income and capital appreciation throughdebt and equity investments. Both directly and through the Company’s subsidiaries that are licensed by the SBAunder the SBIC Act, the Company offers customized financing to business owners, management teams andfinancial sponsors for change of ownership transactions, recapitalizations, strategic acquisitions, businessexpansion and other growth initiatives. The Company invests in first lien loans, second lien loans, andsubordinated loans and, to a lesser extent, equity securities issued by lower middle-market companies andtraditional middle-market companies. As of December 31, 2018, our portfolio consisted of investments in 44portfolio companies with a fair value of approximately $448.9 million.Most of the Company’s debt investments are structured as first lien loans. First lien loans may contain someminimum amount of principal amortization, excess cash flow sweep feature, prepayment penalties, or anycombination of the foregoing. First lien loans are secured by a first priority lien in existing and future assets ofthe borrower and may take the form of term loans or delayed draw facilities. Unitranche debt, a form of first lienloan, typically involves issuing one debt security that blends the risk and return profiles of both senior securedand subordinated debt in one debt security, bifurcating the loan into a first-out tranche and last-out tranche. Asof December 31, 2018, 13.7% of the fair value of our first lien loans consisted of last-out loans. As of December31, 2017, 13.7% of the fair value 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 creditfacility.The Company also invests in debt instruments structured as second lien loans. Second lien loans are loanswhich have a second priority security interest in all or substantially all of the borrower’s assets, and which arenot subject to the blockage of cash 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 typically have a second lien on all or substantially all of the borrower’s assets but unlikesecond lien loans, may be subject to the interruption of cash interest payments upon certain events of default, atthe discretion of the first lien lender.During the year ended December 31, 2018, we made approximately $107.8 million of investments and hadapproximately $123.5 million in repayments and sales of investments resulting in net repayments and sales ofapproximately $15.7 million for the year. 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 resulting in netrepayments and sales of approximately $33.0 million for the year. During the year ended December 31, 2016, wemade approximately $120.8 million of investments and had approximately $163.6 million in repayments andsales resulting in net investments of approximately $42.8 million for the year.75TABLE OF CONTENTSOn August 31, 2016, we sold a portion of 14 securities across 10 portfolio companies to CapitalSouthPartners Florida Sidecar Fund II, L.P. (‘‘FSC II’’), including granting an option to acquire a portion of our equityinvestment in Eastport Holdings, LLC (the ‘‘Written Call Option’’), in exchange for 100% of the partnershipinterests in FSC II. Concurrent with the sale of these assets to FSC II, we received cash consideration of  $47.6million from an affiliated third-party purchaser in exchange for 100% of the partnership interests of FSC II.These assets were sold to FSC II at their June 30, 2016 fair market values, resulting in a net realized gain of  $0.1million. Our Board pre-approved this transaction pursuant to Section 57(f) of the 1940 Act.The Company collected and will periodically collect principal and interest payments related to certain ofthe securities purchased by FSC II. Such principal and interest payments will be remitted timely to FSC II basedon its proportionate share of the security. FSC II does not have any recourse to the Company related to the non-payment of principal or interest by the underlying issuers of the securities.The Written Call Option granted FSC II the right to purchase up to 31.25% of our equity investment inEastport Holdings, LLC. The Written Call Option had a strike price of  $1.5 million and a termination date ofAugust 31, 2018. On August 27, 2018, FSC II exercised its option at a strike price of  $1.5 million. The fair valueof the Written Call Option, which had been treated as a derivative liability and recorded in the financialstatement line item Written Call Option at fair value in our consolidated statements of assets and liabilities, wasapproximately $0.0 million and $6.8 million as of December 31, 2018 and 2017, respectively. For purposes ofdetermining the fair value of the Written Call Option, we calculated the difference in the fair value of theunderlying equity investment in Eastport Holdings, LLC and the strike price of the Written Call Option, orintrinsic value. The Written Call Option was classified as a Level 3 financial instrument.As of December 31, 2018, our debt investment portfolio, which represented 76.4% of the fair value of ourtotal portfolio, had a weighted average annualized yield of approximately 11.9%. As of December 31, 2018,41.4% of the fair value of our debt investment portfolio was bearing a fixed rate of interest. As of December 31,2017, our debt investment portfolio, which represented 75.5% of the fair value of our total portfolio, had aweighted average annualized yield of approximately 11.9%. As of December 31, 2017, 51.7% of the fair value ofour debt investment portfolio was bearing a fixed rate of interest.The weighted annualized yield is calculated based on the effective interest rate as of period end, divided bythe fair value of our debt investments. The weighted average annualized yield of our debt investments is not thesame as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolioand is calculated before the payment of all of our fees and expenses. There can be no assurance that the weightedaverage yield will remain at its current level.The following table summarizes the amortized cost and the fair value of investments and cash and cashequivalents as of December 31, 2018 (dollars in thousands):​​Investments at Amortized Cost​​Percentage of Total​​Investments at Fair Value​​Percentage of Total​First Lien Debt$252,17454.9$237,57048.7Second Lien Debt33,0407.232,4956.7Subordinated Debt72,56215.873,11315.0Equity and Warrants48,59410.692,05418.9Capitala Senior Loan Fund II, LLC13,6003.013,6952.8Cash and Cash Equivalents39,2958.539,2957.9Total$459,265100.0$488,222100.076%%%%TABLE OF CONTENTSThe following table summarizes the amortized cost and the fair value of investments and cash and cashequivalents as of December 31, 2017 (dollars in thousands):​​Investments at Amortized Cost​​Percentage of Total​​Investments at Fair Value​​Percentage of Total​First Lien Debt$257,14751.8$243,48945.8Second Lien Debt32,4656.630,7945.8Subordinated Debt120,23524.2103,38519.5Equity and Warrants55,18011.1122,27123.0Cash and Cash Equivalents31,2216.331,2215.9Total$496,248100.0$531,160100.0The following table shows the portfolio composition by industry grouping at fair value (dollars inthousands):​​December 31, 2018​​December 31, 2017​​​Investments at Fair Value​​Percentage of Total Portfolio​​Investments at Fair Value​​Percentage of Total Portfolio​Business Services$57,94612.9$70,12214.0Consumer Products27,7466.229,6125.9Information Technology25,2325.624,7615.0Financial Services21,6664.826,9205.4Sales & Marketing Services19,4964.317,3883.5Telecommunications18,0004.0——Food Product Manufacturer17,3353.916,2223.2Healthcare16,9723.821,3684.3Industrial Equipment Rental16,3273.615,6033.1IT Consulting15,2333.412,2312.4Retail14,9793.315,0003.0Building Products14,8333.317,8793.6Automobile Part Manufacturer14,3843.29,2851.9Healthcare Management13,7923.19,0141.8Investment Funds13,6953.0——Multi-Platform Media and Consumer Products 13,0002.9——Textile Equipment Manufacturer12,8482.812,5052.5Government Services12,1092.710,3202.1Computer Supply Retail10,5972.412,5512.5Oil & Gas Services9,8612.227,7745.6Conglomerate9,0042.07,6451.5Advertising & Marketing Services8,7121.95,1571.0Testing Laboratories7,5031.7——Oil & Gas Engineering and Consulting Services 6,8541.58,5281.7Professional and Personal Digital Imaging6,6741.58,8101.8Electronic Machine Repair6,4321.4——Produce Distribution6,2101.46,1701.2Farming5,8801.35,5811.1Restaurant4,9031.14,8801.077%%%%%%TABLE OF CONTENTS​​December 31, 2018​​December 31, 2017​​​Investments atFair Value​​Percentage ofTotal Portfolio​​Investments atFair Value​​Percentage ofTotal Portfolio​Medical Device Distributor$4,7971.1$4,7130.9Online Merchandise Retailer3,4990.83,7550.8Footwear Retail3,1840.717,7483.6QSR Franchisor3,0180.77,6501.5Logistics2,9840.7——Home Repair Parts Manufacturer1,7220.42,7670.6Household Product Manufacturer7580.21,3160.3Data Processing & Digital Marketing7420.21,0350.2Specialty Retail——20,7134.1Fuel Transportation Services——11,5882.3Transportation——11,5602.3Refrigeration/HVAC Services——8,7361.7Bowling Products——7,1861.4Consumer Electronics——3,4980.7Replacement Window Manufacturer——1,8800.4In-Home Healthcare Services——1740.1Automotive Chemicals & Lubricants——1010.0Retail Display & Security Services——1000.0Dental Practice Management——930.0Total$448,927100.0$499,939100.0With the exception of the international investment holdings noted below, all investments made by theCompany as of December 31, 2018 and December 31, 2017 were made in portfolio companies located in the U.S.The geographic composition is determined by the location of the corporate headquarters of the portfoliocompany, which may not be indicative of the primary source of the portfolio company’s business. The followingtable shows the portfolio composition by geographic region at fair value as of December 31, 2018 and December31, 2017 (dollars in thousands):​​At December 31, 2018At December 31, 2017​​​Investments at Fair Value​​Percentage of Total PortfolioInvestments at Fair ValuePercentage of Total Portfolio​South$224,85650.1$254,82951.0Midwest77,53717.384,83217.0West77,35317.2107,83521.5Northeast66,30314.844,4288.9International2,8780.68,0151.6Total$448,927100.0$499,939100.0In addition to various risk management tools, our Investment Advisor 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 ratingsystem uses a scale of 1 to 5, with 1 being the lowest probability of default and principal loss. Our internal ratingis not an exact system, but it is used internally to estimate the probability of: (i) default on our debt securitiesand (ii) loss of our debt principal, in the event of a default. In general, our internal rating system may also assistour valuation team in its determination of the estimated fair value of equity securities or equity-like securities.Our internal risk rating system generally encompasses both qualitative and quantitative aspects of our portfoliocompanies.78%%%%%%%%TABLE OF CONTENTSOur internal investment rating system incorporates the following five categories:​Investment RatingDefinition​​1In general, the investment may be performing above our internal expectations. Fullreturn of principal and interest is expected. Capital gain is expected.​​2In 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.​​3In 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.​​4In 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.​​5In 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 eachinvestment in our portfolio. In connection with our valuation process, our Investment Advisor will review theseinvestment ratings on a quarterly basis. The investment rating of a particular investment should not, however, bedeemed to be a guarantee of the investment’s future performance.The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fairvalue as of December 31, 2018 and 2017 (dollars in thousands):​​As of December 31, 2018​​As of December 31, 2017​Investment Rating​​Investments at Fair Value​​Percentage of Total Investments​​Investments at Fair Value​​Percentage of Total Investments​1$171,82938.3$191,20438.22194,41143.3186,44537.3373,32516.397,30919.549,3622.124,9815.05————Total$448,927100.0$499,939100.0As of December 31, 2018, we had debt investments in two portfolio companies on non-accrual status withan amortized cost of  $20.7 million and a fair value of  $9.4 million, which represented 4.9% and 2.1% of theinvestment portfolio, respectively. As of December 31, 2017, we had debt investments in four portfoliocompanies on non-accrual status with amortized cost of  $50.1 million and a fair value of $25.0 million, whichrepresented 10.8% and 5.0% of the investment portfolio, respectively.Capitala Senior Loan Fund II, LLCOn December 20, 2018, Capitala and Trinity Universal Insurance Company (“Trinity”), a subsidiary ofKemper Corporation, entered into a limited liability company agreement (the “LLC Agreement”) to co-manageCapitala Senior Loan Fund II, LLC (“CSLF II”). The purpose and design of the joint venture is to investprimarily in senior secured first-out loans. Capitala and Trinity have committed to provide $25.0 million ofequity to CSLF II, with Capitala providing $20.0 million and Trinity providing $5.0 million.79%%%%(1)Based on principal amount outstanding at year end.(2)Only two investments outstanding at year end.TABLE OF CONTENTSCapitala and Trinity each appointed two members to CSLF II’s four-person board of directors andinvestment committee. All material decisions with respect to CSLF II, including those involving its investmentportfolio, require approval of a member on the board of directors and investment committee of at least onemember representing Capitala and Trinity, respectively.As of December 31, 2018, $13.6 million and $3.4 million in equity capital had been contributed byCapitala and Trinity, respectively. As of December 31, 2018, the Company and Trinity had $6.4 million and$1.6 million of unfunded equity capital commitments outstanding. The Company’s equity investment in CSLFII is not redeemable.Below is a summary of CSLF II’s portfolio at fair value as of December 31, 2018 (dollars in thousands):December 31, 2018First lien loans$10,000Weighted average current interest rate on first lien loans7.6Number of borrowers in CSLF II2Largest portfolio company investment$5,550Total of five largest portfolio company investments$10,000Below is CSLF II’s schedule of investments as of December 31, 2018:Capitala Senior Loan Fund II, LLC Schedule of Investments December 31, 2018 (in thousands)Portfolio Company​​Industry​​Type of Investment​​Principal Amount​​Cost​​Fair Value​Investments in Non-Controlled, Non-Affiliated Portfolio CompaniesU.S. BioTek Laboratories, LLCTesting LaboratoriesFirst Lien Debt (7.8% Cash (3 month LIBOR + 5.0%, 2.0% Floor), Due 12/14/23)$4,500$4,500$4,500Freedom Electronics, LLCElectronicsFirst Lien Debt (7.5% Cash (1 month LIBOR + 5.0%, 2.0% Floor), Due 12/20/23)5,5005,5005,500TOTAL INVESTMENTS IN NON-CONTROLLED, NON-AFFILIATED PORTFOLIO COMPANIES$10,000$10,000$10,00080(1)%(1)(1)(2)TABLE OF CONTENTSBelow is the financial information for CSLF II:Capitala Senior Loan Fund II, LLC Statement of Assets and Liabilities (in thousands)As ofDecember 31, 2018ASSETSInvestments at fair valueNon-control/non-affiliate investments (amortized cost of  $10,000)$10,000Cash and cash equivalents7,100Interest receivable31Total assets$17,131LIABILITIESAccounts payable$12Total liabilities$12NET ASSETSPartners’ capital$17,119Total net assets$17,119Capitala Senior Loan Fund II, LLC Statement of Operations (in thousands)For the period from December 20, 2018 (commencement of operations) to December 31, 2018INVESTMENT INCOMEFrom non-controlled, non-affiliated investments:Interest income$31Fee income100Total investment income$131EXPENSESGeneral and administrative expenses$12Total expenses$12NET INVESTMENT INCOME$119NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS$11981TABLE OF CONTENTSResults of OperationsOur operating results for the years ended December 31, 2018, 2017 and 2016 are as follows (dollars inthousands):For the Year Ended December 31,​​201820172016​Total investment income$47,293$51,089$68,312Total expenses, net of incentive fee waivers31,27135,56539,272Net investment income16,02215,52429,040Total realized loss on investments(34,804(24,189(22,766Net unrealized appreciation (depreciation) on investments(5,9557,0495,594Net unrealized appreciation (depreciation) on Written CallOption6,795(4,079(2,716Tax benefit (provision)1,916(1,289—Net increase (decrease) in net assets resulting from operations$(16,026$(6,984$9,152Investment incomeThe composition of our investment income for the years ended December 31, 2018, 2017 and 2016 was asfollows (dollars in thousands):For the Year Ended December 31,201820172016​Interest income$40,357$40,462$54,990Fee income2,0442,0274,118Payment-in-kind interest and dividend income4,3487,1436,300Dividend income3971,2212,792Other Income—12585Interest from cash and cash equivalents14711127Total investment income$47,293$51,089$68,312The income reported as interest income and PIK interest and PIK dividend income is generally based on thestated rates as disclosed in our consolidated schedule of investments. Accretion of discounts received forpurchased loans are included in interest income as an adjustment to yield. As a general rule, our interest incomeand PIK interest and PIK dividend income are recurring in nature.We also generate fee income primarily through origination fees charged for new investments, andsecondarily via amendment fees, consent fees, prepayment penalties, and other fees. While fee income istypically non-recurring for each investment, most of our new investments include an origination fee; as such, feeincome is dependent upon our volume of directly originated investments and the fee structure associated withthose investments.We earn dividends on certain equity investments within our investment portfolio. As noted in ourconsolidated schedule of investments, some investments are scheduled to pay a periodic dividend, though theserecurring dividends do not make up a significant portion of our total investment income. We may, and havereceived, more substantial one-time dividends from our equity investments.For the year ended December 31, 2018, total investment income decreased by $3.8 million, or 7.4%,compared to the year ended December 31, 2017. The decrease from the prior year was driven primarily by a $2.8million decline in PIK income, from $7.1 million for the year ended December 31, 2017, to $4.3 million for theyear ended December 31, 2018. The decrease in PIK income was due to a decline in investments with acontractual PIK rate. Interest income declined $0.1 for the year ended December 31, 2018 compared to the yearended December 31, 2017, as a decline in average outstanding debt investments was partially offset82)))))))))TABLE OF CONTENTSby an increase in the weighted average cash interest yield of the portfolio and a decline in average non-accrualdebt investments. For the year ended December 31, 2018, we generated $1.7 million in origination fees from newdeployments and $0.3 million in other fees. Comparatively, for the year ended December 31, 2017, we generated$1.2 million in origination fees from new deployments and $0.8 million in other fees. Dividend incomedecreased from $1.2 million for the year ended December 31, 2017 to $0.4 million for the year ended December31, 2018, mostly driven by a decrease in one-time dividends from portfolio companies.For the year ended December 31, 2017, total investment income decreased by $17.2 million, or 25.2%,compared to the year ended 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 in interest income was caused by a decline inaverage outstanding debt investments and an increase in average non-accrual debt investments. Fee incomedeclined 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 $1.2million in origination fees from new deployments and $0.8 million in other fees. Comparatively, for the yearended December 31, 2016, we generated $2.1 million in origination fees from new deployments and $2.0million in other fees. Dividend income decreased from $2.8 million for the year ended December 31, 2016 to$1.2 million for the year ended December 31, 2017, mostly driven by a $1.8 million decrease in dividends paidby Capitala Senior Liquid Loan Fund I, LLC. PIK income increased $0.8 million compared to the prior year,from $6.3 million for the year ended December 31, 2016 to $7.1 million for the year ended December 31, 2017.The increase in PIK income was primarily due to investments restructured during the year ended December 31,2017 that provided for an increase in the PIK rate being charged.Operating expensesThe composition of our expenses for the years ended December 31, 2018, 2017 and 2016 was as follows(dollars in thousands):For the Year Ended December 31,201820172016​Interest and financing expenses$17,283$18,825$19,711Loss on extinguishment of debt—2,732—Base management fee9,0499,78010,588Incentive fees, net of incentive fee waiver2443505,169General and administrative expenses4,6953,8783,804Total expenses, net of fee waivers$31,271$35,565$39,272For the year ended December 31, 2018, operating expenses decreased by $4.3 million, or 12.1%, comparedto the year ended December 31, 2017. For the year ended December 31, 2017, we recognized a $2.7 million losson extinguishment of debt related to repayment of our 7.125% Notes due 2021 (the “2021 Notes”). Interest andfinancing expenses declined from $18.8 million for the year ended December 31, 2017 to $17.3 million for theyear ended December 31, 2018 due to lower weighted average interest rates on our outstanding debt and loweraverage debt outstanding. Our base management fee declined from $9.8 million for the year ended December 31,2017 to $9.0 million for the year ended December 31, 2018 due to lower average assets under management.Incentive fees, net of incentive fee waiver, decreased from $0.4 million to $0.2 million due to lower pre-incentive fee net investment income. General and administrative expenses increased from $3.9 million for theyear ended December 31, 2017 to $4.7 million for the year ended December 31, 2018 due primarily to anincrease in legal expenses relating to a shareholder lawsuit, an increase in payments made to the Administrator,and an increase in professional fees related to internal control audit services.For the year ended December 31, 2017, operating expenses decreased by $3.7 million, or 9.4%, compared tothe year ended December 31, 2016. For the year ended December 31, 2017 we recognized a $2.7 million loss onextinguishment of debt related to the repayment of our 2021 Notes. The increase in83TABLE OF CONTENTSexpenses related to the loss on extinguishment of debt was offset by (i) a decline in base management fees, from$10.6 million for the year ended December 31, 2016, to $9.8 million for the year ended December 31, 2017 dueto lower average assets under management, (ii) a decline in incentive fees, net of incentive fee waiver, from $5.2million 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 $19.7million for the year ended December 31, 2016 to $18.8 million for the year ended December 31, 2017, primarilydue to a lower average debt balance outstanding during the period.Net realized gains (losses) on sales of investmentsDuring the years ended December 31, 2018, 2017, and 2016, we recognized $(34.8) million, $(24.2) millionand $(22.8) million of net realized losses on our portfolio investments, respectively.Net unrealized appreciation (depreciation) on investmentsNet change in unrealized appreciation (depreciation) on investments reflects the net change in the fair valueof our investment portfolio. For the years ended December 31, 2018, 2017, and 2016, we had $(6.0) million, $7.0million and $5.6 million of unrealized appreciation (depreciation) on investments, respectively.Net unrealized depreciation on Written Call optionFor the years ended December 31, 2018, 2017 and 2016 we had net unrealized appreciation (depreciation)on the Written Call Option of  $6.8 million, $(4.1) million, and $(2.7) million, respectively.Tax benefit (provision)For the years ended December 31, 2018 and December 31, 2017, we recorded a tax benefit (provision) of $1.9 million and $(1.3) million, respectively. For the year ended December 31, 2016, no tax provision wasrecorded.Changes in net assets resulting from operationsFor the years ended December 31, 2018, 2017, and 2016 we recorded a net increase (decrease) in net assetsresulting from operations of  $(16.0) million, $(7.0) million, and $9.2 million, respectively. Based on theweighted average shares of common stock outstanding for the years ended December 31, 2018, 2017, and 2016our per share net increase (decrease) in net assets resulting from operations was $(1.00), $(0.44), and $0.58,respectively.Summarized Financial Information of Our Unconsolidated SubsidiariesThe Company holds a control interest, as defined by the 1940 Act, in five portfolio companies that areconsidered significant subsidiaries under the guidance in Regulation S-X, but are not consolidated in theCompany’s consolidated financial statements. Below is a brief description of each such portfolio company,along with summarized financial information as of December 31, 2018 and 2017, and for the years endedDecember 31, 2018, 2017, and 2016.During the year ended December 31, 2018, the Company sold its investment in Kelle’s Transport Service,LLC and realized a loss of  $3.7 million. During the year ended December 31, 2018, the Company wrote-off itsinvestment in On-Site Fuel Service, Inc. and realized a loss of  $16.7 million.AAE Acquisition, LLCAAE Acquisition, LLC, formed on May 21, 2004 as a Delaware limited liability company, is an aerialequipment rental and services business primarily serving the Gulf Coast region. The income (loss) the Companygenerated from AAE Acquisition, LLC, which includes all interest, dividends, PIK interest and PIK dividends,fees, and unrealized appreciation (depreciation), was $1.7 million, $1.7 million, and $(1.1) million for the yearsended December 31, 2018, December 31, 2017, and December 31, 2016 respectively.84TABLE OF CONTENTSCableOrganizer Acquisition, LLCCableOrganizer Acquisition, LLC, a Delaware limited liability company that began operations on April 23,2013, is a leading online provider of cable and wire management products. The income (loss) the Companygenerated from CableOrganizer Acquisition, LLC, which includes all interest, dividends, PIK interest and PIKdividends, fees, and unrealized appreciation (depreciation), was $(2.4) million, $1.8 million and $1.9 million forthe years ended December 31, 2018, December 31, 2017, and December 31, 2016, respectively.Eastport Holdings, LLCEastport Holdings, LLC, an Ohio limited liability company organized on November 1, 2011, is a holdingcompany consisting of marketing and advertising companies located across the U.S. The income the Companygenerated from Eastport Holdings, LLC, which includes all interest, dividends, PIK interest and dividends, fees,and unrealized appreciation (depreciation), was $11.4 million and $14.3 million for the years ended December31, 2017 and December 31, 2016, respectively. On August 27, 2018, the Written Call Option associated with theCompany’s investment in Eastport Holdings, LLC was exercised and, as a result of the reduced ownershippercentage, is no longer considered a control investment. The income the Company generated from EastportHoldings, LLC while it was considered a control investment from January 1, 2018 to August 27, 2018 was $2.1million. The summarized financial information disclosed below is as of August 31, 2018 and for the eightmonths ended August 31, 2018 as this is the period that Eastport Holdings, LLC was considered a controlinvestment.Micro Precision, LLCMicro Precision, LLC, formed on August 5, 2011 as a Delaware limited liability company, is a primecontractor supplying critical parts and mechanical assemblies to the U.S. Department of Defense as well asdesigner and manufacturer of locomotive air horns. The income the Company generated from Micro Precision,LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation(depreciation), was $2.1 million, $0.0 million, and $1.8 million for the years ended December 31, 2018,December 31, 2017, and December 31, 2016, respectively.Navis Holdings, Inc.Navis Holdings, Inc., incorporated in Delaware on December 21, 2010, designs and manufactures leadingmachinery for the global knit and woven finishing textile industries. The income the Company generated fromNavis Holdings, Inc., which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealizedappreciation (depreciation) was $0.6 million, $0.7 million, and $1.9 million for the years ended December 31,2018, December 31, 2017, and December 31, 2016, respectively.The summarized unaudited financial information of our unconsolidated subsidiaries was as follows (dollarsin thousands):As ofBalance Sheets – AAE Acquisition, LLCDecember 31, 2018December 31, 2017​Current assets$7,277$6,712Noncurrent assets22,99427,668Total assets$30,271$34,380Current liabilities$53,939$2,897Noncurrent liabilities2,12251,428Total liabilities$56,061$54,325Total deficit$(25,790$(19,94585))TABLE OF CONTENTSFor the year endedStatements of Operations – AAE Acquisition, LLC​​December 31, 2018​​December 31, 2017​​December 31, 2016​Net sales$27,162$26,677$28,352Cost of goods sold20,09820,26522,402Gross profit$7,064$6,412$5,950Other expenses$12,768$11,916$11,812Net loss before income taxes(5,704(5,504(5,862Income tax provision———Net loss$(5,704$(5,504$(5,862As ofBalance Sheets – CableOrganizer Acquisition, LLCDecember 31, 2018December 31, 2017​Current assets$2,987$5,182Noncurrent assets8,4598,354Total assets$11,446$13,536Current liabilities$13,094$5,205Noncurrent liabilities—12,346Total liabilities$13,094$17,551Total deficit$(1,648$(4,015For the year endedStatements of Operations – CableOrganizer Acquisition, LLC.​​December 31, 2018​December 31, 2017December 31, 2016​Net sales$18,115$27,133$23,277Cost of goods sold12,18319,81915,715Gross profit$5,932$7,314$7,562Other expenses$7,960$10,690$10,344Net loss before income taxes(2,028(3,376(2,782Income tax provision———Net loss$(2,028$(3,376$(2,782As ofBalance Sheets – Eastport Holdings, LLCAugust 31, 2018December 31, 2017​Current assets$99,483$94,396Noncurrent assets185,292180,266Total assets$284,775$274,662Current liabilities$163,085$153,182Noncurrent liabilities60,93956,272Total liabilities$224,024$209,454Total equity$60,751$65,20886))))))))))))))TABLE OF CONTENTS​​For the eight months ended August 31, 2018​​For the year ended​Statements of Operations – Eastport Holdings, LLC​​December 31, 2017​​December 31, 2016​Net sales$373,943$510,400$499,986Cost of goods sold267,395364,605377,036Gross profit$106,548$145,795$122,950Other expenses$103,811$135,597$111,677Net income before income taxes2,73710,19811,273Income tax provision335278—Net income$2,402$9,920$11,273As ofBalance Sheets – Micro Precision, LLCDecember 31, 2018December 31, 2017​Current assets$5,880$6,187Noncurrent assets19,43615,864Total assets$25,316$22,051Current liabilities$7,712$6,511Noncurrent liabilities13,96115,790Total liabilities$21,673$22,301Total equity (deficit)$3,643$(250For the year endedStatements of Operations – Micro Precision, LLC​​December 31, 2018​​December 31, 2017​​December 31, 2016​Net sales$12,083$14,053$17,788Cost of goods sold6,5958,67712,183Gross profit$5,488$5,376$5,605Other expenses$5,562$6,590$6,836Net loss before income taxes(74(1,214(1,231Income tax provision———Net loss$(74$(1,214$(1,231As ofBalance Sheets – Navis Holdings, Inc.December 31, 2018December 31, 2017​Current assets$5,868$4,723Noncurrent assets5,1452,162Total assets$11,013$6,885Current liabilities$5,542$2,463Noncurrent liabilities8,0606,738Total liabilities$13,602$9,201Total deficit$(2,589$(2,31687)))))))))TABLE OF CONTENTSFor the year endedStatements of Operations – Navis Holdings, Inc.​​December 31, 2018​​December 31, 2017​​December 31, 2016​Net sales$14,305$13,947$17,803Cost of goods sold8,4568,72910,933Gross profit$5,849$5,218$6,870Other expenses$5,977$4,684$5,070Net income (loss) before income taxes(1285341,800Income tax provision201,185701Net income (loss)$(148$(651$1,099Financial Condition, Liquidity and Capital ResourcesWe use and intend to use existing cash primarily to originate investments in new and existing portfoliocompanies, pay distributions to our stockholders, and repay indebtedness.On September 30, 2013, we issued 4,000,000 shares at $20.00 per share in our IPO, generating net proceedsof  $74.25 million.On October 17, 2014, the Company entered into a senior secured revolving credit agreement (the “CreditFacility”) with ING Capital, LLC, as administrative agent, arranger, and bookrunner, and the lenders partythereto. The Credit Facility was amended on May 22, 2015, June 16, 2017, and July 19, 2018 (the“Amendments”). The Amendments were affected, among other things, in order to increase the total borrowingsallowed under the Credit Facility, allow for stock repurchases, extend the maturity date, and to reduce theminimum required interest coverage ratio. The Credit Facility currently provides for borrowings up to $114.5million and may be increased up to $200.0 million pursuant to its “accordion” feature. The Credit Facilitymatures on June 16, 2021. As of December 31, 2018, we had $10.0 million outstanding and $104.5 millionavailable under the Credit Facility.On April 13, 2015, we completed an underwritten offering of 3,500,000 shares of our common stock at apublic offering price of  $18.32 per share. The total proceeds received in the offering net of underwritingdiscounts and offering costs were approximately $61.7 million.On May 16, 2017, we issued $70.0 million in aggregate principal amount of 6.0% fixed-rate notes due May31, 2022 (the ‘‘2022 Notes’’). On May 25, 2017, we issued an additional $5.0 million in aggregate principalamount of the 2022 Notes pursuant to a partial exercise of the underwriters’ overallotment option. The 2022Notes will mature on May 31, 2022 and may be redeemed in whole or in part at any time or from time to time atour option on or after May 31, 2019 at a redemption price equal to 100% of the outstanding principal, plusaccrued and unpaid interest. Interest is payable quarterly beginning August 31, 2017. The 2022 Notes are listedon the 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 convertiblenotes due on May 31, 2022 (the ‘‘2022 Convertible Notes’’). On June 26, 2017, we issued an additional $2.1million in aggregate principal amount of the 2022 Convertible Notes pursuant to a partial exercise of theunderwriters’ overallotment option. Interest is payable quarterly beginning August 31, 2017. The 2022Convertible Notes are listed on the NASDAQ Capital Market under the trading symbol ‘‘CPTAG’’ with a parvalue $25.00 per share.As of December 31, 2018, Fund II had $26.2 million in regulatory capital and $15.7 million in SBA-guaranteed debentures outstanding and Fund III had $75.0 million in regulatory capital and $150.0 million inSBA-guaranteed debentures outstanding. In addition to our existing SBA-guaranteed debentures, we may, ifpermitted by regulation, seek to issue additional SBA-guaranteed debentures as well as other forms of leverageand borrow funds to make investments. On June 10, 2014, we received an exemptive order from the SECexempting us, Fund II and Fund III from certain provisions of the 1940 Act88)))TABLE OF CONTENTS(including an exemptive order granting relief from the asset coverage requirements for certain indebtednessissued by Fund II and Fund III as SBICs) and from certain reporting requirements mandated by the 1934 Act,with respect to Fund II and Fund III. We intend to comply with the conditions of the order.As of December 31, 2018, we had $39.3 million in cash and cash equivalents, and our net assets totaled$190.6 million.Contractual ObligationsWe have entered into two contracts under which we have material future commitments: the InvestmentAdvisory Agreement, pursuant to which the Investment Advisor serves as our investment adviser, and theAdministration Agreement, pursuant to which our Administrator agrees to furnish us with certain administrativeservices necessary to conduct our day-to-day operations. Payments under the Investment Advisory Agreement infuture periods will be equal to: (1) a percentage of the value of our gross assets; and (2) an incentive fee based onour performance. Payments under the Administration Agreement will occur on an ongoing basis as expenses areincurred on our behalf by our Administrator.The Investment Advisory Agreement and the Administration Agreement are each terminable by either partywithout penalty upon 60 days’ written notice to the other. If either of these agreements is terminated, the costswe incur under new agreements may increase. In addition, we will likely incur significant time and expense inlocating alternative parties to provide the services we expect to receive under both our Investment AdvisoryAgreement and our Administration Agreement. Any new investment advisory agreement would also be subjectto approval by our stockholders.A summary of our significant contractual payment obligations as of December 31, 2018 are as follows(dollars in thousands):Contractual Obligations Payments Due by Period​​Less Than 1 Year​​1 – 3 Years3 – 5 YearsMore Than 5 YearsTotal​SBA Debentures$—$80,700$85,000$—$165,7002022 Notes——75,000—75,0002022 Convertible Notes——52,088—52,088Credit Facility—$10,000——$10,000Total Contractual Obligations$    —$90,700$212,088$    —$302,788DistributionsIn order to qualify as a RIC and to avoid corporate-level U.S. federal income tax on the income wedistribute to our stockholders, we are required to distribute at least 90% of our net ordinary income and our netshort-term capital gains in excess of net long-term capital losses, if any, to our stockholders on an annual basis.Additionally, we must distribute an amount at least equal to the sum of 98% of our net ordinary income (duringthe calendar year) plus 98.2% of our net capital gain income (during each 12-month period ending on October31) plus any net ordinary income and capital gain net income for preceding years that were not distributedduring such years and on which we paid no U.S. federal income tax to avoid a U.S. federal excise tax. We madequarterly distributions to our stockholders for the first four full quarters subsequent to our IPO. To the extent wehave income available, we have made and intend to make monthly distributions thereafter. Our monthlystockholder distributions, if any, will be determined by our Board on a quarterly basis. Any distribution to ourstockholders 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 levelor to increase the amount of our distributions from time to time, and from time to time we may decrease theamount of our distributions. In addition, we may be limited in our ability to make distributions due to the assetcoverage requirements applicable to us as a BDC under the 1940 Act. If we do not distribute a certain percentageof our income annually, we will suffer adverse tax consequences, including the possible loss of our qualificationas a RIC. We cannot assure stockholders that they will receive any distributions.89TABLE OF CONTENTSTo the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, aportion of those distributions may be deemed a return of capital to our stockholders for U.S. federal income taxpurposes. Thus, the source of a distribution to our stockholders may be the original capital invested by thestockholder rather than our income or gains. Stockholders should read any written disclosure accompanying anystockholder distribution carefully and should not assume that the source of any distribution is our ordinaryincome or capital gains.We have adopted an ‘‘opt out’’ dividend reinvestment plan (‘‘DRIP’’) for our common stockholders. As aresult, if we declare a distribution, then stockholders’ cash distributions will be automatically reinvested inadditional shares of our common stock unless a stockholder specifically ‘‘opts out’’ of our DRIP. If a stockholderopts out, that stockholder will receive cash distributions. Although distributions paid in the form of additionalshares of our common stock will generally be subject to U.S. federal, state and local taxes in the same manner ascash distributions, stockholders participating in our DRIP will not receive any corresponding cash distributionswith which to pay any such applicable taxes.The following tables summarize our distributions declared from January 1, 2016 through December 31,2018:Date DeclaredRecord DatePayment DateAmount Per Share​January 2, 2018January 22, 2018January 30, 2018$0.0833​January 2, 2018February 20, 2018February 27, 20180.0833​January 2, 2018March 23, 2018March 29, 20180.0833​April 2, 2018April 19, 2018April 27, 20180.0833​April 2, 2018May 22, 2018May 30, 20180.0833​April 2, 2018June 20, 2018June 28, 20180.0833​July 2, 2018July 23, 2018July 30, 20180.0833​July 2, 2018August 23, 2018August 30, 20180.0833​July 2, 2018September 20, 2018September 27, 20180.0833​October 1, 2018October 23, 2018October 30, 20180.0833​October 1, 2018November 21, 2018November 29, 20180.0833​October 1, 2018December 20, 2018December 28, 20180.0833​Total Distributions Declared andDistributed for 2018$1.00​Date DeclaredRecord DatePayment DateAmount Per Share​January 3, 2017January 20, 2017January 30, 2017$0.1300​January 3, 2017February 20, 2017February 27, 20170.1300​January 3, 2017March 23, 2017March 30, 20170.1300​April 3, 2017April 19, 2017April 27, 20170.1300​April 3, 2017May 23, 2017May 29, 20170.1300​April 3, 2017June 21, 2017June 29, 20170.1300​July 3, 2017July 21, 2017July 28, 20170.1300​July 3, 2017August 23, 2017August 30, 20170.1300​July 3, 2017September 20, 2017September 28, 20170.1300​October 2, 2017October 23, 2017October 30, 20170.0833​October 2, 2017November 21, 2017November 29, 20170.0833​October 2, 2017December 20, 2017December 28, 20170.0833​Total Distributions Declared andDistributed for 2017$1.42​90TABLE OF CONTENTSDate DeclaredRecord DatePayment DateAmount Per Share​January 4, 2016January 22, 2016January 28, 2016$0.1567​January 4, 2016February 19, 2016February 26, 20160.1567​January 4, 2016March 22, 2016March 30, 20160.1567​April 1, 2016April 22, 2016April 28, 20160.1567​April 1, 2016May 23, 2016May 30, 20160.1567​April 1, 2016June 21, 2016June 29, 20160.1567​July 1, 2016July 22, 2016July 29, 20160.1567​July 1, 2016August 22, 2016August 30, 20160.1567​July 1, 2016September 22, 2016September 29, 20160.1567​September 22, 2016October 21, 2016October 28, 20160.1300​September 22, 2016November 21, 2016November 29, 20160.1300​September 22, 2016December 21, 2016December 29, 20160.1300​Total Distributions Declared andDistributed for 2016$1.80​Related PartiesWe have entered into the Investment Advisory Agreement with the Investment Advisor. Joseph B. Alala,our chief executive officer and chairman of our Board, is the managing partner and chief investment officer ofthe Investment Advisor, and M. Hunt Broyhill, a member of our Board, has an indirect controlling interest in theInvestment Advisor.In addition, an affiliate of the Investment Advisor also manages CapitalSouth Partners SBIC Fund IV, L.P.(‘‘Fund IV’’), a private investment limited partnership which provides financing solutions to smaller and lowermiddle-market companies that had its first closing in March 2013 and obtained SBA approval for its SBIClicense in April 2013. In addition to Fund IV, affiliates of the Investment Advisor may manage several affiliatedfunds 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’’), a private investment limited partnership, and a private investment vehicle (referred to herein as“Capitala Specialty Lending Corp” or “CSLC”), both of which provide financing solutions to lower middle-market and traditional middle-market companies. The Investment Advisor and its affiliates may also manageother funds in the future that may have investment mandates that are similar, in whole and in part, with ours. Tothe extent permitted by the 1940 Act and interpretation of the SEC staff, the Investment Advisor and its affiliatesmay determine that an investment is appropriate for us and for one or more of those other funds. In such event,depending on the availability of such investment and other appropriate factors, the Investment Advisor or itsaffiliates may determine that we should invest side-by-side with one or more other funds. Any such investmentswill be made only to the extent permitted by applicable law and interpretive positions of the SEC and its staff,and consistent with the Investment Advisor’s allocation procedures. We expect to make, and have made, co-investments with Fund V and/or CSLC given their similar investment strategies.On September 10, 2015, we, Fund II, Fund III, Fund V, and the Investment Advisor filed an application forexemptive relief with the SEC to permit an investment fund and one or more other affiliated investment 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 (the ‘‘Order’’) permitting this relief. Pursuant to the Order, we arepermitted to co-invest in such investment opportunities with our affiliates if a ‘‘required majority’’ (as defined inSection 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection 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, are91TABLE OF CONTENTSreasonable and fair to us and our stockholders and do not involve overreaching in respect of us or ourstockholders on the part of any person concerned, and (2) the potential co-investment transaction is consistentwith the interests of our stockholders and is consistent with our then-current investment objective and strategies.On August 31, 2016, the Company sold assets to FSC II in exchange for 100% of the partnership interests inFSC II. Concurrent with the sale of these assets to FSC II, the Company received cash consideration of  $47.6million from an affiliated third-party purchaser in exchange for 100% of the partnership interests of FSC II. TheCompany’s Board pre-approved this transaction pursuant to Section 57(f) of the 1940 Act. Capitala AdvisorsCorp., the Company’s Administrator, also serves as the administrator to FSC II.The Company may invest in the same unitranche facility as CSLF II whereby CSLF II provides the first-outportion of the unitranche facility and the Company and other lenders provide the last-out portion of theunitranche facility. Under a guarantee agreement, the Company may be required to purchase its pro-rata portionof first-out loans from CSLF II upon certain triggering events, including acceleration upon payment default ofthe underlying borrower. As of December 31, 2018, the Company has evaluated the fair value of the guaranteeunder the guidance of ASC Topic 460 — Guarantees and determined that the fair value of the guarantee isimmaterial as the risk of payment default for first-out loans in CSLF II is considered remote. The maximumexposure to credit risk as of December 31, 2018 is $4.3 million and extends to the stated maturity of theunderlying loans in CSLF II.We have entered into a license agreement with the Investment Advisor, pursuant to which the InvestmentAdvisor has agreed to 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 theAdministration Agreement, our Administrator provides us with the office facilities and administrative servicesnecessary to conduct our day-to-day operations. Mr. Alala, our chief executive officer, and chairman of ourBoard, is the chief executive officer, president and a director of our Administrator.Off-Balance Sheet ArrangementsAs of December 31, 2018, the Company had outstanding unfunded commitments related to debt and equityinvestments in existing portfolio companies of  $6.4 million (Capitala Senior Loan Fund II, LLC), $5.0 million(Portrait Studio, LLC), $1.1 million (MC Sign Lessor, Corp), $1.0 million (U.S. BioTek Laboratories, LLC), $0.8million (Freedom Electronics, LLC), and $0.3 million (CableOrganizer Acquisition, LLC). As of December 31,2017, the Company had outstanding unfunded commitments related to debt investments in existing portfoliocompanies of  $3.1 million (Portrait Studio, LLC), $2.0 million (CIS Secure Computing, Inc.), $1.0 million(Kelle’s Transport Service, LLC), and $0.7 million (U.S. Well Services, LLC).The Company may invest in the same unitranche facility as CSLF II whereby CSLF II provides the first-outportion of the unitranche facility and the Company and other lenders provide the last-out portion of theunitranche facility. Under a guarantee agreement, the Company may be required to purchase its pro-rata portionof first-out loans from CSLF II upon certain triggering events, including acceleration upon payment default ofthe underlying borrower. As of December 31, 2018, the Company has evaluated the fair value of the guaranteeunder the guidance of ASC Topic 460 — Guarantees and determined that the fair value of the guarantee isimmaterial as the risk of payment default for first-out loans in CSLF II is considered remote. The maximumexposure to credit risk as of December 31, 2018 is $4.3 million and extends to the stated maturity of theunderlying loans in CSLF II.We have no other off-balance sheet arrangements that have or are reasonably likely to have a current orfuture effect on our financial condition, changes in financial condition, revenues or expenses, results ofoperations, liquidity, capital expenditures or capital resources.92TABLE OF CONTENTSRecent DevelopmentsDistributionsOn January 2, 2019 our Board declared the following distributions:Date DeclaredRecord DatePayment DateDistributions per Share​January 2, 2019January 24, 2019January 30, 2019$0.0833​January 2, 2019February 20, 2019February 27, 2019$0.0833​January 2, 2019March 21, 2019March 28, 2019$0.0833​Portfolio ActivityOn January 4, 2019, the Company invested $9.2 million in first lien debt and $0.9 million in membershipunits of Reliant Account Management, LLC.On February 1, 2019, the Company invested $3.8 million in second lien debt of AAE Acquisition, LLC.On February 27, 2019, the Company sold its warrants in B&W Quality Growers, LLC for $5.9 million.BorrowingsOn February 22, 2019, the Company completed an amendment to its Credit Facility that reducedits minimum net asset value to $150.0 million and reduced the minimum required asset coverage ratio to2:1 debt-to-equity.On March 1, 2019, the Company prepaid $15.7 million in outstanding SBA debentures for Fund II andrelinquished the related SBIC license.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 mayaffect both our cost of funding and our interest income from portfolio investments and cash and cashequivalents. We may hedge against interest rate fluctuations by using standard hedging instruments such asfutures, options and forward contracts subject to the requirements of the 1940 Act. For the year ended December31, 2018, we did not engage in hedging activities.As of December 31, 2018, we held 25 securities bearing a variable rate of interest. Our variable rateinvestments represent approximately 58.6% of the fair value of total debt investments. As of December 31, 2018,4.3% of variable rate securities were yielding interest at a rate equal to the established interest rate floor orinterest rate ceiling and 95.7% of variable rate securities were yielding interest at a rate above its interest ratefloor or were not subject to an interest rate floor. As of December 31, 2018, we had $10.0 million outstanding onour Credit Facility, which has a variable rate of interest at one-month LIBOR + 3.0%. As of December 31, 2018,all of our other interest paying liabilities, consisting of  $165.7 million in SBA-guaranteed debentures, $75.0million in 2022 Notes, and $52.1 million in 2022 Convertible Notes, were bearing interest at a fixed rate.Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interestrates. Because we fund a portion of our investments with borrowings, our net investment income is affected bythe difference between the rate at which we invest and the rate at which we borrow. As a result, there can be noassurance that a significant change in market interest rates will not have a material adverse effect on our netinvestment income.Based on our December 31, 2018 consolidated statements of assets and liabilities, the following tableshows the annual impact on net income (excluding the potential related incentive fee impact) of base ratechanges in interest rates (considering interest rate floors for variable rate securities) assuming no changes in ourinvestment and borrowing structure (dollars in thousands):Basis Point ChangeIncrease (decrease) in interest income(Increase) decrease in interest expenseIncrease (decrease) in net income​Up 300 basis points$6,043$(300$5,743Up 200 basis points$4,044$(200$3,844Up 100 basis points$2,022$(100$1,922Down 100 basis points$(1,915$100$(1,815Down 200 basis points$(2,857$200$(2,657Down 300 basis points$(2,909$250$(2,65994)))))))))TABLE OF CONTENTSITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAINDEX TO CONSOLIDATED FINANCIAL STATEMENTSPageReport of Independent Registered Public Accounting FirmF-1Report of Independent Registered Public Accounting Firm on Internal Control Over FinancialReportingF-2Audited Financial Statements:Consolidated Statements of Assets and Liabilities as of December 31, 2018 and December 31, 2017F-3Consolidated Statements of Operations for the years ended December 31, 2018, December 31, 2017 and December 31, 2016F-4Consolidated Statements of Changes in Net Assets for the years ended December 31, 2018,December 31, 2017 and December 31, 2016F-5Consolidated Statements of Cash Flows for the years ended December 31, 2018, December 31, 2017 and December 31, 2016F-6Consolidated Schedules of Investments as of December 31, 2018 and December 31, 2017F-7Notes to Consolidated Financial StatementsF-2095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 FinanceCorp. (the “Company”), including the consolidated schedules of investments, as of December 31, 2018 and2017, the related consolidated statements of operations, changes in net assets, and cash flows for each of thethree years in the period ended December 31, 2018, and the related notes (collectively referred to as the“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in allmaterial respects, the financial position of the Company at December 31, 2018 and 2017, and the results of itsoperations, changes in its net assets, and its cash flows for each of the three years in the period endedDecember 31, 2018, in conformity with U.S. generally accepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting OversightBoard (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31,2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission 2013 framework and our report dated March 4, 2019expressed an unqualified opinion thereon.Basis for OpinionThese financial statements are the responsibility of the Company’s management. Our responsibility is toexpress an opinion on the Company’s financial statements based on our audits. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance withthe U.S. federal securities laws and the applicable rules and regulations of the Securities and ExchangeCommission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement, whether due to error or fraud. Our audits included performing procedures to assess therisks of material misstatement of the financial statements, whether due to error or fraud, and performingprocedures that respond to those risks. Such procedures included examining, on a test basis, evidence regardingthe amounts and disclosures in the financial statements. Our procedures included confirmation of investmentsowned as of December 31, 2018 and 2017, by correspondence with the custodians, agents and/or directly withmanagement or designees of the portfolio companies, as applicable. Our audits also included evaluating theaccounting principles used and significant estimates made by management, as well as evaluating the overallpresentation of the financial statements. 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 CarolinaMarch 4, 2019F-1TABLE OF CONTENTSReport of Independent Registered Public Accounting FirmTo the Shareholders and the Board of Directors of Capitala Finance Corp.Opinion on Internal Control over Financial ReportingWe have audited Capitala Finance Corp.’s internal control over financial reporting as of December 31,2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion,Capitala Finance Corp. (the “Company”) maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2018, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting OversightBoard (United States) (PCAOB), the consolidated balance sheets of the Company, including the consolidatedschedules of investments, as of December 31, 2018 and 2017, and the related consolidated statements ofoperations, changes in net assets, and cash flows for each of the three years in the period ended December 31,2018, and the related notes and our report dated March 4, 2019, expressed an unqualified opinion thereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financialreporting and for its assessment of the effectiveness of internal control over financial reporting included in theaccompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is toexpress an opinion on the Company’s internal control over financial reporting based on our audit. We are apublic accounting firm registered with the PCAOB and are required to be independent with respect to theCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that weplan and perform the audit to obtain reasonable assurance about whether effective internal control over financialreporting was maintained in all material respects.Our audit included obtaining an understanding of internal control over financial reporting, assessing therisk that a material weakness exists, testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk, and performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposesin accordance with generally accepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have a material effect on the financialstatements.Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate./s/ Ernst & Young LLPCharlotte, North CarolinaMarch 4, 2019F-2TABLE OF CONTENTSCapitala Finance Corp.Consolidated Statements of Assets and Liabilities (in thousands, except share and per share data)As ofDecember 31, 2018December 31, 2017​ASSETSInvestments at fair valueNon-control/non-affiliate investments (amortized cost of  $280,114 and$298,132, respectively)$286,843$288,374Affiliate investment (amortized cost of  $72,300 and $77,336, respectively)92,939103,957Control investments (amortized cost of  $67,556 and $89,559, respectively)69,145107,608Total investments at fair value (amortized cost of  $419,970 and $465,027,respectively)448,927499,939Cash and cash equivalents39,29531,221Interest and dividend receivable3,7782,976Due from related parties—95Prepaid expenses454309Deferred tax asset, net628—Other assets8355Total assets$493,165$534,595LIABILITIESSBA debentures (net of deferred financing cost of  $1,688 and $2,300,respectively)$164,012$168,4002022 Notes (net of deferred financing cost of  $1,987 and $2,496, respectively)73,01372,5042022 Convertible Notes (net of deferred financing cost of  $1,259 and $1,583,respectively)50,82950,505Credit Facility (net of deferred financing cost of  $983 and $1,293, respectively)9,0177,707Management and incentive fees payable2,4872,172Interest and financing fees payable3,0633,141Trade settlement payable—175Deferred tax liability, net—1,289Written call option at fair value (proceeds of  $0 and $20, respectively)—6,815Accounts payable and accrued expenses100—Total liabilities$302,521$312,708Commitments and contingencies (Note 2)NET ASSETSCommon stock, par value $.01, 100,000,000 common shares authorized,16,051,547 and $15,951,231 common shares issued and outstanding,respectively$161$160Additional paid in capital241,757241,027Total distributable loss(51,274(19,300Total net assets$190,644$221,887Total liabilities and net assets$493,165$534,595Net asset value per share$11.88$13.91See accompanying notes to consolidated financial statements.F-3))TABLE OF CONTENTSCapitala Finance Corp.Consolidated Statements of Operations (in thousands, except share and per share data)For the Year Ended December 31,​201820172016​INVESTMENT INCOMEInterest and fee income:Non-control/non-affiliate investments$27,754$31,084$42,667Affiliate investments7,9454,5095,723Control investments6,7026,89610,718Total interest and fee income42,40142,48959,108Payment-in-kind interest and dividend income:Non-control/non-affiliate investments2,2484,5034,965Affiliate investments1,2511,898383Control investments849742952Total payment-in-kind interest and dividend income4,3487,1436,300Dividend income:Non-control/non-affiliate investments59225263Affiliate investments238641115Control investments1003552,414Total dividend income3971,2212,792Other income—12585Interest income from cash and cash equivalents14711127Total investment income47,29351,08968,312EXPENSESInterest and financing expenses17,28318,82519,711Loss on extinguishment of debt—2,732—Base management fee9,0499,78010,588Incentive fees2441,3086,842General and administrative expenses4,6953,8783,804Expenses before incentive fee waiver31,27136,52340,945Incentive fee waiver (See Note 6)—(958(1,673Total expenses, net of fee waivers31,27135,56539,272NET INVESTMENT INCOME16,02215,52429,040REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND WRITTEN CALL OPTION:Net realized gain (loss) on investments:Non-control/non-affiliate investments(15,714(6,6821,261Affiliate investments2,9204,926(24,172Control investments(22,010(22,433145Net realized loss on investments(34,804(24,189(22,766Net unrealized appreciation (depreciation) on investments:Non-control/non-affiliate investments16,487(11,577(11,661Affiliate investments(5,9824,4364,124Control investments(16,46014,19013,131Net unrealized appreciation (depreciation) on investments(5,9557,0495,594Net unrealized appreciation (depreciation) on written call option6,795(4,079(2,716Net realized and unrealized loss on investments and written call option(33,964(21,219(19,888Tax benefit (provision)1,916(1,289—Total net realized and unrealized loss on investments and written call option,net of taxes(32,048(22,508(19,888NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROMOPERATIONS$(16,026$(6,984$9,152NET INCREASE (DECREASE) IN NET ASSETS PER SHARERESULTING FROM OPERATIONS – BASIC AND DILUTED$(1.00$(0.44$0.58WEIGHTED AVERAGE COMMON STOCK OUTSTANDING – BASICAND DILUTED15,993,43615,903,16715,819,175DISTRIBUTIONS PAID PER SHARE$1.00$1.42$1.80See accompanying notes to consolidated financial statements.F-4))))))))))))))))))))))))))))TABLE OF CONTENTSCapitala Finance Corp.Consolidated Statements of Changes in Net Assets (in thousands, except share data)​Common StockAdditional Paid in CapitalTotal Distributable Earnings (Loss)Total​​Number of SharesPar ValueBALANCE, December 31, 201515,777,345$158$239,104$29,540$268,802Net investment income———29,04029,040Net realized loss on investments———(22,766(22,766Net unrealized appreciation on investments———5,5945,594Net unrealized depreciation on written call option———(2,716(2,716Distributions to Shareholders:Stock issued under dividend reinvestment plan90,70011,102—1,103Distributions declared———(28,475(28,475Tax reclassification of stockholders’ equity inaccordance with generally accepted accountingprinciples——(2222—BALANCE, December 31, 201615,868,045$159$240,184$10,239$250,582Net investment income———15,52415,524Net realized loss on investments———(24,189(24,189Net unrealized appreciation on investments———7,0497,049Net unrealized depreciation on written call option———(4,079(4,079Tax provision———(1,289(1,289Distributions to Shareholders:Stock issued under dividend reinvestment plan83,1861864—865Distributions declared———(22,576(22,576Tax reclassification of stockholders’ equity inaccordance with generally accepted accountingprinciples——(2121—BALANCE, December 31, 201715,951,231$160$241,027$(19,300$221,887Net investment income———16,02216,022Net realized loss on investments———(34,804(34,804Net unrealized depreciation on investments———(5,955(5,955Net unrealized appreciation on written call option———6,7956,795Tax benefit———1,9161,916Distributions to Shareholders:Stock issued under dividend reinvestment plan100,3161768—769Distributions declared———(15,986(15,986Tax reclassification of stockholders’ equity in accordance with generally accepted accounting principles——(3838—BALANCE, December 31, 201816,051,547$161$241,757$(51,274$190,644See accompanying notes to consolidated financial statements.F-5)))))))))))))))))))))))))TABLE OF CONTENTSCapitala Finance Corp.Consolidated Statements of Cash Flows (in thousands)For the Year Ended December 31,20182017​​2016​CASH FLOWS FROM OPERATING ACTIVITIESNet increase (decrease) in net assets resulting from operations$(16,026$(6,984$9,152Adjustments to reconcile net increase (decrease) in net assets resultingfrom operations to net cash provided by operating activities:Purchase of investments(107,802(82,750(120,844Repayments and sales of investments123,517115,810163,564Net realized loss on investments34,80424,18922,766Net unrealized (appreciation) depreciation on investments5,955(7,049(5,594Payment-in-kind interest and dividends(4,348(7,143(6,300Accretion of original issue discount on investments(1,114(1,357(2,775Proceeds (payments) from written call option(20—20Net unrealized (appreciation) depreciation on written call option(6,7954,0792,716Amortization of deferred financing fees1,8852,1002,149Loss on extinguishment of debt—2,732—Tax provision (benefit)(1,9161,289—Changes in assets and liabilities:Interest and dividend receivable(8022,759(345Due from related parties958774Prepaid expenses(145197(3Other assets(281736Due to related parties—(3529Management and incentive fees payable315(4,2544,739Interest and financing fees payable(78484(330Accounts payable and accrued expenses100(53669Trade settlement payable(175175—NET CASH PROVIDED BY OPERATING ACTIVITIES27,42243,81069,123CASH FLOWS FROM FINANCING ACTIVITIESPaydowns on SBA debentures(5,000—(13,500Proceeds from Credit Facility31,0009,00029,000Payments to Credit Facility(30,000(44,000(55,000Issuance of 2022 Notes—75,000—Issuance of 2022 Convertible Notes—52,088—Repayment of 2021 Notes—(113,438—Distributions paid to shareholders(15,217(21,711(27,372Deferred financing fees paid(131(5,809(75NET CASH USED IN FINANCING ACTIVITIES(19,348(48,870(66,947NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS8,074(5,0602,176CASH AND CASH EQUIVALENTS, beginning of year31,22136,28134,105CASH AND CASH EQUIVALENTS, end of year$39,295$31,221$36,281SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid for interest$14,139$15,503$17,591SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING TRANSACTIONSDistributions paid through dividend reinvestment plan share issuances$769$865$1,103See accompanying notes to consolidated financial statements.F-6)))))))))))))))))))))))))))))))))))))))))))TABLE OF CONTENTSCapitala Finance Corp.  Consolidated Schedule of Investments (in thousands, except for units/shares) December 31, 2018Portfolio Company, Country​​Industry​​Type of Investment​​Principal Amount​​CostFair Value% of Net Assets​Non-control/non-affiliated investments – 150.4%Non-control/non-affiliated investments – United States3 Bridge Solutions, LLCIT ConsultingFirst Lien Debt (11.3% Cash (1 month LIBOR + 9.0%, 1.0% Floor), Due 12/4/22)$13,954$13,954$13,9547.33 Bridge Solutions, LLCIT ConsultingPreferred Units (965 units, 8.0% PIK)1,0491,0490.63 Bridge Solutions, LLCIT ConsultingMembership Units (39,000 units)102300.115,01315,2338.0Alternative Biomedical Solutions, LLCHealthcareFirst Lien Debt (9.5% Cash (1 month LIBOR + 7.0%, 1.0% Floor), Due 12/18/22)1181181180.1Alternative Biomedical Solutions, LLCHealthcareFirst Lien Debt (12.4% Cash, Due 12/18/22)13,00013,00010,3705.4Alternative Biomedical Solutions, LLCHealthcareMembership Units (20,092 units)800—0.013,91810,4885.5American Clinical Solutions, LLCHealthcareFirst Lien Debt (10.5% Cash, 2.0% PIK, Due 6/11/20)9,2938,9186,4843.48,9186,4843.4AmeriMark Direct, LLCConsumer ProductsFirst Lien Debt (12.8% Cash, Due 9/8/21)18,30018,02918,3009.618,02918,3009.6B&W Quality Growers, LLCFarmingMembership Unit Warrants (91,739 Units)—5,8803.1—5,8803.1BigMouth, Inc.Consumer ProductsFirst Lien Debt (14.3% Cash, Due 11/14/21)9,0949,0949,0944.8BigMouth, Inc.Consumer ProductsSeries A Preferred Stock (350,000 shares, 8.0% PIK)4113520.29,5059,4465.0Bluestem Brands, Inc.Online Merchandise RetailerFirst Lien Debt (10.0% Cash (1 month LIBOR + 7.5%, 1.0% Floor), Due 11/7/20)3,7793,7623,4991.83,7623,4991.8Burke America Parts Group, LLCHome Repair Parts ManufacturerMembership Units (14 units)51,7220.951,7220.9California Pizza Kitchen, Inc.RestaurantSecond Lien Debt (12.5% Cash (1 month LIBOR + 10.0%, 1.0% Floor), Due 8/23/23)5,0004,9034,9032.64,9034,9032.6Cedar Ultimate Parent, LLCConsumer ElectronicsSeries C Preferred Stock (4,759,250 units)958—0.0Cedar Ultimate Parent, LLCConsumer ElectronicsSeries D Preferred Stock (16,562,190 units)——0.0Cedar Ultimate Parent, LLCConsumer ElectronicsSeries E Common Units (190,370 units)——0.0958—0.0Chicken Soup for the Soul, LLCMulti-platform Media and Consumer ProductsFirst Lien Debt (10.9% Cash (1 month LIBOR + 8.5%, 1.5% Floor), Due 12/13/20)13,00013,00013,0006.813,00013,0006.8See accompanying notes to consolidated financial statements.F-7(1),(2),(3),(4),(19)%(5)%%%%(6)%%%(7)%%%%%%(6)%(5)%%%%%%%%%%%%%%TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2018 Portfolio Company, Country​​Industry​​Type of Investment​​PrincipalAmountCostFair Value% ofNet Assets​CIS Secure Computing, Inc.Government ServicesFirst Lien Debt (10.8% Cash (1 month LIBOR + 8.5%, 1.0% Floor), 1.0% PIK, Due 9/14/22)$10,428$10,428$10,4285.5CIS Secure Computing, Inc.Government ServicesCommon Stock (46,163 shares)1,0001,6810.911,42812,1096.4Corporate Visions, Inc.Sales & Marketing ServicesSubordinated Debt (9.0% Cash, 2.0% PIK, Due 11/29/21)18,94018,94018,6799.8Corporate Visions, Inc.Sales & Marketing ServicesCommon Stock (15,750 shares)1,5758170.420,51519,49610.2Currency Capital, LLCFinancial ServicesFirst Lien Debt (13.4% Cash (1 month LIBOR + 11.0%, 0.5% Floor), Due 1/2/20)16,78816,78816,7888.8Currency Capital, LLCFinancial ServicesClass A Preferred Units (2,000,000 units)2,0002,0001.018,78818,7889.8Flavors Holdings, Inc.Food Product ManufacturerFirst Lien Debt (8.6% Cash (3 month LIBOR + 5.8%, 1.0% Floor), Due 4/3/20)6,3006,2416,0703.2Flavors Holdings, Inc.Food Product ManufacturerSecond Lien Debt (12.8% Cash (3 month LIBOR + 10.0%, 1.0% Floor), Due 10/3/21)12,00011,80911,2655.918,05017,3359.1Freedom Electronics, LLCElectronic Machine RepairFirst Lien Debt (8.7% Cash (1 month LIBOR + 6.25%, 2.0% Floor), Due 12/20/23)2502502500.1Freedom Electronics, LLCElectronic Machine RepairFirst Lien Debt (9.1% Cash, Due 12/20/23)6,0006,0006,0003.1Freedom Electronics, LLCElectronic Machine RepairMembership Units (181,818 units)1821820.16,4326,4323.3Installs, LLCLogisticsFirst Lien Debt (9.3% Cash (1 month LIBOR + 7.0%, 1.8% Floor), Due 6/20/23)2,9842,9842,9841.62,9842,9841.6MC Sign Lessor Corp.Advertising & Marketing ServicesFirst Lien Debt (9.3% Cash (1 month LIBOR + 7.0%, 1.0% Floor), Due 12/22/22)———0.0MC Sign Lessor Corp.Advertising & Marketing ServicesFirst Lien Debt (9.3% Cash (1 month LIBOR + 7.0%, 1.0% Floor), Due 12/22/22)3,9053,9053,9052.03,9053,9052.0Nth Degree, Inc.Business ServicesFirst Lien Debt (13.9% Cash (1 month LIBOR + 11.5%, 1.0% Floor), 2.0% PIK, Due 3/29/23)7,3467,3467,3463.9Nth Degree, Inc.Business ServicesPreferred Stock (2,400 Units, 10.0% PIK dividend)3,24416,4908.610,59023,83612.5Sequoia Healthcare Management, LLCHealthcare ManagementFirst Lien Debt (10.8% Cash (1 month LIBOR + 8.5%, 1.8% Floor), Due 8/21/23)13,79213,79213,7927.213,79213,7927.2See accompanying notes to consolidated financial statements.F-8(1),(2),(3),(4),(19)%%%%%%(8)%(8)%%%%%(9)%(6)%%%%%(10)%(11)%%(12)%(5)%%%%TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2018 Portfolio Company, Country​​Industry​​Type of Investment​​PrincipalAmount​​CostFair Value% ofNet Assets​Sunset Digital Holdings, LLCTelecommunicationsFirst Lien Debt (9.6% Cash (1 month LIBOR + 7.3%, 1.5% Floor), Due 8/2/19)$18,000$18,000$18,0009.418,00018,0009.4Sur La Table, Inc.RetailFirst Lien Debt (12.0% Cash, Due 7/28/20)15,00015,00014,9797.915,00014,9797.9Taylor Precision Products, Inc.Household Product ManufacturerSeries C Preferred Stock (379 shares)7587580.47587580.4U.S. BioTek Laboratories, LLCTesting laboratoriesFirst Lien Debt (10.1% Cash, Due 12/14/23)7,0007,0007,0003.7U.S. BioTek Laboratories, LLCTesting laboratoriesClass A Preferred Units (500 Units, 10.0% PIK)5025020.3U.S. BioTek Laboratories, LLCTesting laboratoriesClass C Units (500 Units)110.07,5037,5034.0U.S. Well Services, Inc.Oil & Gas ServicesClass A Common Stock (77,073 shares)7716320.3U.S. Well Services, Inc.Oil & Gas ServicesClass B Common Stock (1,125,426 shares)6,7019,2294.97,4729,8615.2Vology, Inc.Information TechnologySubordinated Debt (15.0% Cash (1 month LIBOR + 14.0%, 1.0% Ceiling), 4.0% PIK Due 6/30/20)8,7208,7208,6454.58,7208,6454.5Xirgo Technologies, LLCInformation TechnologySubordinated Debt (11.5% Cash, Due 3/1/22)15,75015,75015,7508.3Xirgo Technologies, LLCInformation TechnologyMembership Units (600,000 units)6008370.416,35016,5878.7Sub Total Non-control/non-affiliated investments – United States268,298283,965148.9Non-control/non-affiliated investments – BrazilVelum Global Credit Management, LLCFinancial ServicesFirst Lien Debt (15.0% PIK, Due 12/31/17)14,27711,8162,8781.511,8162,8781.5Sub Total Non-control/non-affiliated investments – Brazil11,8162,8781.5Sub Total Non-control/non-affiliated investments$280,114$286,843150.4Affiliate Investments – 48.8%Affiliate investments – United StatesBurgaflex Holdings, LLCAutomobile Part ManufacturerFirst Lien Debt (12.0% Cash, 1.0% PIK, Due 3/23/21)$14,801$14,801$14,3847.5Burgaflex Holdings, LLCAutomobile Part ManufacturerCommon Stock Class A (1,253,198 shares)1,504—0.0Burgaflex Holdings, LLCAutomobile Part ManufacturerCommon Stock Class B (900,000 shares)300—0.016,60514,3847.5City Gear, LLCFootwear RetailMembership Unit Warrants (11.4% fully diluted)—3,1841.7—3,1841.7Eastport Holdings, LLCBusiness ServicesSubordinated Debt (15.8% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 4/29/20)16,50015,49616,5008.7See accompanying notes to consolidated financial statements.F-9(1),(2),(3),(4),(19)%%%%%%(6)(13)%(5)%%%(8)%(8)%%%%%%%%(7)(8)(12)%%%%%%%%(14)%%%TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2018 Portfolio Company, Country​​Industry​​Type of Investment​​PrincipalAmount​CostFair Value% ofNet Assets​Eastport Holdings, LLCBusiness ServicesMembership Units (22.9% ownership)$3,263$17,6109.218,75934,11017.9GA Communications, Inc.Advertising & Marketing ServicesSeries A-1 Preferred Stock (1,998 shares, 8.0% PIK Dividend)3,1793,4821.8GA Communications, Inc.Advertising & Marketing ServicesSeries B-1 Common Stock (200,000 shares)21,3250.73,1814,8072.5J&J Produce Holdings, Inc.Produce DistributionSubordinated Debt (13.0% Cash, Due 6/16/19)$6,4066,4066,2103.3J&J Produce Holdings, Inc.Produce DistributionCommon Stock (8,182 shares)818—0.0J&J Produce Holdings, Inc.Produce DistributionCommon Stock Warrants (6,369 shares)——0.07,2246,2103.3LJS Partners, LLCQSR FranchisorCommon Stock (1,587,848 shares)1,1883,0181.61,1883,0181.6MMI Holdings, LLCMedical Device DistributorFirst Lien Debt (12.0% Cash, Due 1/31/20)2,6002,6002,6001.4MMI Holdings, LLCMedical Device DistributorSubordinated Debt (6.0% Cash, Due 1/31/20)4003884000.2MMI Holdings, LLCMedical Device DistributorPreferred Units (1,000 units, 6.0% PIK Dividend)1,4741,6120.8MMI Holdings, LLCMedical Device DistributorCommon Membership Units (45 units)—1850.14,4624,7972.5Sierra Hamilton Holdings CorporationOil & Gas Engineering and Consulting ServicesCommon Stock (15,068,000 shares)6,9586,8543.66,9586,8543.6US Bath Group, LLCBuilding ProductsFirst Lien Debt (11.4% Cash (1 month LIBOR + 9.0%, 1.0% Floor), Due 1/2/23)12,75012,75012,7506.7US Bath Group, LLCBuilding ProductsMembership Units (500,000 units)5002,0831.113,25014,8337.8V12 Holdings, Inc.Data Processing & Digital MarketingSubordinated Debt—6737420.46737420.4Sub Total Affiliate investments – United States$72,300$92,93948.8Control Investments – 36.3%Control investments – United StatesAAE Acquisition, LLCIndustrial Equipment RentalSecond Lien Debt (6.0% Cash, Due 8/24/19)$16,327$16,327$16,3278.6AAE Acquisition, LLCIndustrial Equipment RentalMembership Units (2.2% fully diluted)17—0.0AAE Acquisition, LLCIndustrial Equipment RentalWarrants (37.8% fully diluted)——0.016,34416,3278.6CableOrganizer Acquisition, LLCComputer Supply RetailFirst Lien Debt (10.0% Cash, Due 5/24/19)1,7081,7081,7080.9CableOrganizer Acquisition, LLCComputer Supply RetailFirst Lien Debt (12.0% Cash, 4.0% PIK, Due 6/30/19)8,8898,8898,8894.6CableOrganizer Acquisition, LLCComputer Supply RetailPreferred Units (4,000,000 units)2,354—0.0See accompanying notes to consolidated financial statements.F-10(1),(2),(3),(4),(19)%%(5)%%%(12)%%%%%%(12)%(12)%(5)%%%%%%%%(15)%%%(12)%%%%(16)%(12)%%(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 arenon-income producing, unless otherwise noted.(4)Percentages are based on net assets of  $190,644 as of December 31, 2018.(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)Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of theInvestment Company Act of 1940, as amended. Qualifying assets must represent at least 70% of theCompany’s total assets at the time of acquisition of any additional non-qualifying assets. As ofDecember 31, 2018, 9.2% of the Company’s total assets were non-qualifying assets.TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2018 Portfolio Company, Country​​Industry​​Type of Investment​​PrincipalAmount​​Cost​Fair Value% ofNet Assets​CableOrganizer Acquisition, LLCComputer Supply RetailCommon Stock (21.3% fully diluted)$1,394$—0.0CableOrganizer Acquisition, LLCComputer Supply RetailCommon Stock Warrants (10.0% fully diluted)——0.014,34510,5975.5Capitala Senior Loan Fund II, LLCInvestment FundsMembership Units (80% ownership)13,60013,6957.213,60013,6957.2Micro Precision, LLCConglomerateSubordinated Debt (10.0% Cash, Due 1/1/19)$1,8621,8621,8621.0Micro Precision, LLCConglomerateSubordinated Debt (14.0% Cash, 4.0% PIK, Due 1/1/19)4,3254,3254,3252.3Micro Precision, LLCConglomerateSeries A Preferred Units (47 units)1,6292,8171.57,8169,0044.8Navis Holdings, Inc.Textile Equipment ManufacturerFirst Lien Debt (15.0% Cash, Due 10/30/20)7,5007,5007,5003.9Navis Holdings, Inc.Textile Equipment ManufacturerClass A Preferred Stock (1,000 shares, 10.0% Cash Dividend)1,0001,0000.5Navis Holdings, Inc.Textile Equipment ManufacturerCommon Stock (300,000 shares)14,3482.38,50112,8486.7Portrait Studio, LLCProfessional and Personal Digital ImagingFirst Lien Debt (9.0% Cash (1 month LIBOR + 7.0%, 1.0% Floor, 2.0% Ceiling), Due 12/31/22)———0.0Portrait Studio, LLCProfessional and Personal Digital ImagingFirst Lien Debt (9.4% Cash (1 month LIBOR + 7.0%, 1.0% Floor, 5.0% Ceiling), Due 12/31/22)4,5004,5004,5002.4Portrait Studio, LLCProfessional and Personal Digital ImagingPreferred Units (4,350,000 Units)2,4502,1741.1Portrait Studio, LLCProfessional and Personal Digital ImagingMembership Units (150,000 Units)——0.06,9506,6743.5Sub Total Control investments – United States$67,556$69,14536.3TOTAL INVESTMENTS – 235.5%$419,970$448,927235.5See accompanying notes to consolidated financial statements.F-11(1),(2),(3),(4),(19)%%%(8)(17)%%(12)%(12)%%%(12)%(5)%%%(18)%%%%%%%(9)The investment has a $0.8 million unfunded commitment.(10)The investment has a $0.5 million unfunded commitment.(11)The investment has a $0.6 million unfunded commitment.(12)The maturity date of the original investment has been extended.(13)The investment has a $1.0 million unfunded commitment.(14)The investment has been exited. The residual value reflects estimated earnout to be settled post-closing.(15)The investment has been exited. The residual value reflects estimated escrow and earnout to be settled post-closing.(16)The investment has a $0.3 million unfunded commitment.(17)The investment has a $6.4 million unfunded commitment.(18)The investment has a $5.0 million unfunded commitment.(19)Capitala Finance Corp. generally acquires its investments in private transactions exempt from registrationunder the Securities Act of 1933, as amended (the “Securities Act”). These investments are generallysubject to certain limitations on resale, and may be deemed to be “restricted securities” under the SecuritiesAct.TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2018 See accompanying notes to consolidated financial statements.F-12TABLE OF CONTENTSCapitala Finance Corp.  Consolidated Schedule of Investments (in thousands, except for units/shares) December 31, 2017Portfolio Company, CountryIndustryType of InvestmentPrincipal Amount​​Cost​​Fair Value​​% of Net Assets​Non-control/non-affiliated investments – 130.0%Non-control/non-affiliated investments – United States3 Bridge Solutions, LLCIT ConsultingFirst Lien Debt (10.4% Cash (1 month LIBOR + 9.0%, 1.0% Floor), Due 12/4/22)$11,250$11,250$11,2505.13 Bridge Solutions, LLCIT ConsultingPreferred Units (965 units, 8.0% PIK)9719710.43 Bridge Solutions, LLCIT ConsultingMembership Units (39,000 units)10100.012,23112,2315.5Alternative Biomedical Solutions, LLCHealthcareFirst Lien Debt (11.7% Cash, Due 12/18/22)13,00013,00013,0005.9Alternative Biomedical Solutions, LLCHealthcareMembership Units (20,092 units)8008000.413,80013,8006.3American Clinical Solutions, LLCHealthcareFirst Lien Debt (10.5% Cash, 1.0% PIK, Due 6/11/20)9,0689,0687,5683.49,0687,5683.4American Exteriors, LLCReplacement Window ManufacturerFirst Lien Debt (10.0% PIK, Due 1/1/19)8,2875,6791,8800.8American Exteriors, LLCReplacement Window ManufacturerCommon Stock Warrants (10.0% fully diluted)——0.05,6791,8800.8AmeriMark Direct, LLCConsumer ProductsFirst Lien Debt (12.8% Cash, Due 9/8/21)19,10018,71319,1008.618,71319,1008.6B&W Quality Growers, LLCFarmingMembership Unit Warrants (91,739 Units)—5,5812.5—5,5812.5BigMouth, Inc.Consumer ProductsFirst Lien Debt (13.3% Cash, Due 11/14/21)9,7909,7909,7904.4BigMouth, Inc.Consumer ProductsSeries A Preferred Stock (350,000 shares, 8.0% PIK)3827220.310,17210,5124.7Bluestem Brands, Inc.Online Merchandise RetailerFirst Lien Debt (9.1% Cash (1 month LIBOR + 7.5%, 1.0% Floor), Due 11/7/20)4,0293,9653,7551.73,9653,7551.7Brunswick Bowling Products, Inc.Bowling ProductsFirst Lien Debt (8.0% Cash (1 month LIBOR + 6.0%, 2.0% Floor), Due 5/22/20)1,6001,6001,6000.7Brunswick Bowling Products, Inc.Bowling ProductsFirst Lien Debt (16.3% Cash (1 month LIBOR + 14.3%, 2.0% Floor), Due 5/22/20)5,5865,5865,5862.57,1867,1863.2Burke America Parts Group, LLCHome Repair Parts ManufacturerMembership Units (14 units)52,7671.252,7671.2California Pizza Kitchen, Inc.RestaurantSecond Lien Debt (11.6% Cash (1 month LIBOR + 10.0%, 1.0% Floor), Due 8/23/23)5,0004,8804,8802.24,8804,8802.2See accompanying notes to consolidated financial statements.F-13(1),(2),(3),(4),(20)%(5)%%%(6)%%%%%(7)(8)%%%%%%%(6)%(5)%%%%%%%%%%%TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2017 Portfolio Company, Country​IndustryType of Investment​​PrincipalAmount​​Cost​​Fair Value​​% ofNet Assets​Caregiver Services, Inc.In-Home Healthcare ServicesCommon Stock (293,186 shares)$258$540.0Caregiver Services, Inc.In-Home Healthcare ServicesCommon Stock Warrants (655,908 units)2641200.15221740.1Cedar Electronics Holding Corp.Consumer ElectronicsSubordinated Debt (12.0% Cash, Due 12/26/20)$21,55021,5503,4981.621,5503,4981.6CIS Secure Computing, Inc.Government ServicesFirst Lien Debt (9.9% Cash (1 month LIBOR + 8.5%, 1.0% Floor), 1.0% PIK, Due 9/14/22)9,1169,1169,1164.1CIS Secure Computing, Inc.Government ServicesCommon Stock (46,163 shares)1,0001,2040.510,11610,3204.6Corporate Visions, Inc.Sales & Marketing ServicesSubordinated Debt (9.0% Cash, 2.0% PIK, Due 11/29/21)18,15918,15916,9957.7Corporate Visions, Inc.Sales & Marketing ServicesCommon Stock (15,750 shares)1,5753930.219,73417,3887.9Currency Capital, LLCFinancial ServicesFirst Lien Debt (12.4% Cash (1 month LIBOR + 11.0%, 0.5% Floor) Due 1/20/22)17,00017,00017,0007.7Currency Capital, LLCFinancial ServicesClass A Preferred Units (2,000,000 units)2,0001,9050.919,00018,9058.6Flavors Holdings, Inc.Food Product ManufacturerFirst Lien Debt (7.4% Cash (3 month LIBOR + 5.8%, 1.0% Floor), Due 4/3/20)6,7006,5895,9112.7Flavors Holdings, Inc.Food Product ManufacturerSecond Lien Debt (11.7% Cash (3 month LIBOR + 10.0%, 1.0% Floor), Due 10/3/21)12,00011,74010,3114.618,32916,2227.3Nth Degree, Inc.Business ServicesFirst Lien Debt (8.4% Cash (1 month LIBOR + 7.0%, 1.0% Floor), 1.0% PIK, Due 12/14/20)8,8338,8338,8334.0Nth Degree, Inc.Business ServicesFirst Lien Debt (12.9% Cash (1 month LIBOR + 11.5%, 1.0% Floor), 2.0% PIK, Due 12/14/20)7,2007,2007,2003.2Nth Degree, Inc.Business ServicesPreferred Stock (2,400 Units, 10.0% PIK Dividend)2,93811,1405.018,97127,17312.2Sequoia Healthcare Management, LLCHealthcare ManagementFirst Lien Debt (12.0% Cash, 4.0% PIK, Due 7/17/19)9,0148,9649,0144.18,9649,0144.1Spectra Services Holdings, LLCRefrigeration/​HVAC servicesFirst Lien Debt (10.0% Cash, 4.0% PIK, Due 12/27/22)7,4507,4507,4503.4Spectra Services Holdings, LLCRefrigeration/​HVAC servicesClass A Units (1,283,824 units, 4.0% Cash Dividend, 11.0% PIK Dividend)1,2861,2860.6Spectra Services Holdings, LLCRefrigeration/​HVAC servicesClass B Units (257 units)——0.08,7368,7364.0See accompanying notes to consolidated financial statements.F-14(1),(2),(3),(4),(20)%(9)%%(7)%%(10)%%%%%%(11)%(11)%%%%%%%(5)%%%%%(5)%%%TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2017 Portfolio Company, Country​IndustryType of InvestmentPrincipalAmountCost​Fair Value​​% ofNet Assets​Sur La Table, Inc.RetailFirst Lien Debt (12.0% Cash, Due 7/28/20)$15,000$15,000$15,0006.815,00015,0006.8Taylor Precision Products, Inc.Household Product ManufacturerSeries C Preferred Stock (379 shares)7581,3160.67581,3160.6Vintage Stock, Inc.Specialty RetailFirst Lien Debt (13.9% Cash (1 month LIBOR + 12.5%, 0.5% Floor), 3.0% PIK, Due 11/3/21)20,71320,71320,7139.320,71320,7139.3Vology, Inc.Information TechnologySubordinated Debt (15.0% Cash (3 month LIBOR + 14.0%, 1.0% Ceiling), 4.0% PIK Due 6/30/20)8,3748,3748,3743.88,3748,3743.8Western Windows Systems, LLCBuilding ProductsFirst Lien Debt (11.9% Cash, Due 7/31/20)10,50010,50010,5004.7Western Windows Systems, LLCBuilding ProductsMembership Units (39,860 units)3,0007,3793.313,50017,8798.0Xirgo Technologies, LLCInformation TechnologySubordinated Debt (11.5% Cash, Due 3/1/22)15,75015,75015,7507.1Xirgo Technologies, LLCInformation TechnologyMembership Units (600,000 units)6006370.316,35016,3877.4Sub Total Non-control/non-affiliated investments – United States286,316280,359126.4Non-control/non-affiliated investments – BrazilVelum Global Credit Management, LLCFinancial ServicesFirst Lien Debt (15.0% PIK, Due 12/31/17)12,27511,8168,0153.611,8168,0153.6Sub Total Non-control/non-affiliated investments – Brazil11,8168,0153.6Sub Total Non-control/non-affiliated investments$298,132$288,374130.0Affiliate investments – 46.8%Affiliate investments – United StatesAAE Acquisition, LLCIndustrial Equipment RentalSecond Lien Debt (8.0% Cash, 4.0% PIK, Due 8/24/19)$15,846$15,846$15,6037.0AAE Acquisition, LLCIndustrial Equipment RentalMembership Units (2.2% fully diluted)17—0.0AAE Acquisition, LLCIndustrial Equipment RentalWarrants (37.8% fully diluted)——0.015,86315,6037.0Burgaflex Holdings, LLCAutomobile Part ManufacturerSubordinated Debt (14.0% Cash, Due 8/9/19)3,0003,0003,0001.4Burgaflex Holdings, LLCAutomobile Part ManufacturerSubordinated Debt (12.0% Cash, Due 8/9/19)5,8285,8285,8282.6Burgaflex Holdings, LLCAutomobile Part ManufacturerCommon Stock (1,253,198 shares)1,5044570.210,3329,2854.2City Gear, LLCFootwear RetailSubordinated Debt (13.0% Cash, Due 10/20/19)8,2318,2318,2313.7City Gear, LLCFootwear RetailPreferred Membership Units (2.8% fully diluted, 9.0% Cash Dividend)1,2691,2690.6See accompanying notes to consolidated financial statements.F-15(1),(2),(3),(4),(20)%%%%%%%%(6)%%%%%%%(7)(8)(11)(12)%%%%(8)%%%%(13)%(13)%%%(8)%(5)%TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2017 Portfolio Company, Country​IndustryType of Investment​PrincipalAmount​​Cost​​Fair Value​​% ofNet Assets​City Gear, LLCFootwear RetailMembership Unit Warrants (11.4% fully diluted)$—$8,2483.79,50017,7488.0GA Communications, Inc.Advertising & Marketing ServicesSeries A-1 Preferred Stock (1,998 shares, 8.0% PIK Dividend)2,9023,2251.5GA Communications, Inc.Advertising & Marketing ServicesSeries B-1 Common Stock (200,000 shares)21,9320.92,9045,1572.4J&J Produce Holdings, Inc.Produce DistributionSubordinated Debt (6.0% Cash, 7.0% PIK, Due 6/16/19)$6,3686,3686,1702.8J&J Produce Holdings, Inc.Produce DistributionCommon Stock (8,182 shares)818—0.0J&J Produce Holdings, Inc.Produce DistributionCommon Stock Warrants (6,369 shares)——0.07,1866,1702.8LJS Partners, LLCQSR FranchisorCommon Stock (1,500,000 shares)8967,6503.48967,6503.4MMI Holdings, LLCMedical Device DistributorFirst Lien Debt (12.0% Cash, Due 1/31/19)2,6002,6002,6001.2MMI Holdings, LLCMedical Device DistributorSubordinated Debt (6.0% Cash, Due 1/31/19)4003884000.2MMI Holdings, LLCMedical Device DistributorPreferred Units (1,000 units, 6.0% PIK Dividend)1,3811,5200.7MMI Holdings, LLCMedical Device DistributorCommon Membership Units (45 units)—1930.14,3694,7132.2MTI Holdings, LLCRetail Display & Security ServicesMembership Units (2,000,000 units)—1000.0—1000.0Sierra Hamilton Holdings CorporationOil & Gas Engineering and Consulting ServicesCommon Stock (15,068,000 shares)6,9588,5283.86,9588,5283.8Source Capital Penray, LLCAutomotive Chemicals & LubricantsMembership Units (11.3% ownership)—1010.0—1010.0STX Healthcare Management Services, Inc.Dental Practice ManagementCommon Stock (1,200,000 shares)—930.0—930.0U.S. Well Services, LLCOil & Gas ServicesFirst Lien Debt (7.4% Cash (1 month LIBOR + 6.0%, 1.0% Floor), Due 2/2/22)2,2992,2992,2991.0U.S. Well Services, LLCOil & Gas ServicesFirst Lien Debt (12.4% PIK (1 month LIBOR + 11.0%, 1.0% Floor), Due 2/2/22)9,5169,5169,5164.3U.S. Well Services, LLCOil & Gas ServicesClass A Units (5,680,688 Units)6,25915,0046.8U.S. Well Services, LLCOil & Gas ServicesClass B Units (2,076,298 Units)4419550.418,51527,77412.5See accompanying notes to consolidated financial statements.F-16(1),(2),(3),(4),(20)%%(5)%%%(8)%%%%%%(8)%(8)%(5)%%%(14)%%%%(14)%%(14)%%(15)%%%%%TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2017 Portfolio Company, CountryIndustryType of Investment​PrincipalAmount​​Cost​​Fair Value​​% ofNet Assets​V12 Holdings, Inc.Data Processing & Digital MarketingSubordinated Debt$—$813$1,0350.58131,0350.5Sub Total Affiliate investments – United States$77,336$103,95746.8Control investments – 48.5%Control investments – United StatesCableOrganizer Acquisition, LLCComputer Supply RetailFirst Lien Debt (12.0% Cash, 4.0% PIK, Due 5/24/18)$12,373$12,373$12,3735.6CableOrganizer Acquisition, LLCComputer Supply RetailCommon Stock (21.3% fully diluted)1,3941180.1CableOrganizer Acquisition, LLCComputer Supply RetailCommon Stock Warrants (10.0% fully diluted)—600.013,76712,5515.7Eastport Holdings, LLCBusiness ServicesSubordinated Debt (14.5% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 4/29/20)16,50014,73816,5007.4Eastport Holdings, LLCBusiness ServicesMembership Units (33.3% ownership)4,73326,44911.919,47142,94919.3Kelle’s Transport Service, LLCTransportationFirst Lien Debt (4.0% Cash, Due 2/15/20)2,0002,0002,0000.9Kelle’s Transport Service, LLCTransportationFirst Lien Debt (1.5% Cash, Due 2/15/20)13,67413,6699,5604.3Kelle’s Transport Service, LLCTransportationMembership Units (27.5% fully diluted)——0.015,66911,5605.2Micro Precision, LLCConglomerateSubordinated Debt (10.0% Cash, Due 9/15/18)1,8621,8621,8620.8Micro Precision, LLCConglomerateSubordinated Debt (14.0% Cash, 4.0% PIK, Due 9/15/18)4,1544,1544,1541.9Micro Precision, LLCConglomerateSeries A Preferred Units (47 units)1,6291,6290.77,6457,6453.4Navis Holdings, Inc.Textile Equipment ManufacturerFirst Lien Debt (15.0% Cash, Due 10/30/20)6,5006,5006,5002.9Navis Holdings, Inc.Textile Equipment ManufacturerClass A Preferred Stock (1,000 shares, 10.0% Cash Dividend)1,0001,0000.5Navis Holdings, Inc.Textile Equipment ManufacturerCommon Stock (300,000 shares)15,0052.37,50112,5055.7On-Site Fuel Service, Inc.Fuel Transportation ServicesSubordinated Debt (18.0% Cash, Due 12/19/18)14,07211,02011,5885.2On-Site Fuel Service, Inc.Fuel Transportation ServicesSeries A Preferred Stock (32,782 shares)3,278—0.0On-Site Fuel Service, Inc.Fuel Transportation ServicesSeries B Preferred Stock (23,648 shares)2,365—0.0On-Site Fuel Service, Inc.Fuel Transportation ServicesCommon Stock (33,058 shares)33—0.016,69611,5885.2See accompanying notes to consolidated financial statements.F-17(1),(2),(3),(4),(20)(19)%%%%%%%%(16)%%(17)%(8)%%%(8)%(8)%%%(8)%(5)%%%(7)(8)%%%%%(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 arenon-income producing, 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 theInvestment Company Act of 1940, as amended. Qualifying assets must represent at least 70% of theCompany’s total assets at the time of acquisition of any additional non-qualifying assets. As ofDecember 31, 2017, 5.0% of the Company’s total assets were non-qualifying assets.(12)The company is headquartered in Brazil.(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.TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2017 Portfolio Company, CountryIndustryType of InvestmentPrincipalAmount​Cost​​Fair Value​​% ofNet Assets​Portrait Studio, LLCProfessional and Personal Digital ImagingFirst Lien Debt (8.6% Cash (1 month LIBOR + 7.0%, 1.0% Floor, 2.0% Ceiling), Due 12/31/22)$1,860$1,860$1,8600.9Portrait Studio, LLCProfessional and Personal Digital ImagingFirst Lien Debt (8.6% Cash (1 month LIBOR + 7.0%, 1.0% Floor, 5.0% Ceiling), Due 12/31/22)4,5004,5004,5002.0Portrait Studio, LLCProfessional and Personal Digital ImagingPreferred Units (4,350,000 Units)2,4502,4501.1Portrait Studio, LLCProfessional and Personal Digital ImagingMembership Units (150,000 Units)——0.08,8108,8104.0Sub Total Control investments – United States$89,559$107,60848.5TOTAL INVESTMENTS – 225.3%$465,027$499,939225.3Derivatives – (3.1)%Derivatives – United StatesEastport Holdings, LLCBusiness ServicesWritten Call Option$(20$(6,815(3.1Sub Total Derivatives – United States$(20$(6,815(3.1TOTAL DERIVATIVES – (3.1)%$(20$(6,815(3.1See accompanying notes to consolidated financial statements.F-18(1),(2),(3),(4),(20)(18)%%%%%%%(16))))%)))%)))%(16)The Company has written a call option that enables CapitalSouth Partners Florida Sidecar Fund II, L.P. topurchase up to 31.25% of the Company’s interest at a strike price of  $1.5 million. As of December 31,2017, the fair value of the written call option is approximately $6.8 million. See Note 4 to the consolidatedfinancial statements for further detail on the written call option 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.(20)Capitala Finance Corp. generally acquires its investments in private transactions exempt from registrationunder the Securities Act of 1933, as amended (the “Securities Act”). These investments are generallysubject to certain limitations on resale, and may be deemed to be “restricted securities” under the SecuritiesAct.TABLE OF CONTENTSCapitala Finance Corp. Consolidated Schedule of Investments – (continued)(in thousands, except for units/shares)December 31, 2017 See accompanying notes to consolidated financial statements.F-19TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018Note 1. OrganizationCapitala Finance Corp. (the “Company”, “we”, “us”, and “our”) is an externally managed non-diversifiedclosed-end management investment company incorporated in Maryland that has elected to be regulated as abusiness development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940Act”). The Company commenced operations on May 24, 2013 and completed its initial public 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 of1940, as amended, and Capitala Advisors Corp. (the “Administrator”) provides the administrative servicesnecessary for the Company to operate. For United States (“U.S.”) federal income tax purposes, the Company haselected to be treated, and intends to comply with the requirements to continue to qualify annually, as a regulatedinvestment company (“RIC”) under subchapter M of the Internal Revenue Code of 1986, as amended (the“Code”).The Company’s investment objective is to generate both current income and capital appreciation throughdebt and equity investments. Both directly and through our subsidiaries that are licensed by the U.S. SmallBusiness Administration (“SBA”) under the Small Business Investment Company (“SBIC”) Act, the Companyoffers customized financing to business owners, management teams and financial sponsors for change ofownership transactions, recapitalizations, strategic acquisitions, business expansion and other growth initiatives.The Company invests in first lien loans, second lien loans, subordinated loans, and, to a lesser extent, equitysecurities 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 investmentportfolio from the following entities: CapitalSouth Partners Fund I Limited Partnership (“Fund I”); CapitalSouthPartners Fund II Limited Partnership (“Fund II”); CapitalSouth Partners Fund III, L.P. (“Fund III Parent”);CapitalSouth Partners SBIC Fund III, L.P. (“Fund III”) and CapitalSouth Partners Florida Sidecar Fund I, L.P.(“Florida Sidecar” and, collectively with Fund I, Fund II, Fund III and Fund III Parent, the “Legacy Funds”); (ii)raising capital in the IPO and (iii) continuing and expanding the business of the Legacy Funds by makingadditional 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, FundIII and Florida Sidecar and each of their respective general partners, as well as certain assets from Fund I andFund III Parent, in exchange for an aggregate of 8,974,420 shares of the Company’s common stock (the“Formation Transactions”). Fund II, Fund III and Florida Sidecar became the Company’s wholly ownedsubsidiaries. Fund II and Fund III retained their SBIC licenses, continued to hold their existing investments atthe time of the IPO and have continued to make new investments. The IPO consisted of the sale of 4,000,000shares of the Company’s common stock at a price of  $20.00 per share, resulting in net proceeds to the Companyof  $74.25 million, after deducting underwriting fees and commissions totaling $4.0 million and offeringexpenses totaling $1.75 million. The other costs of the IPO were borne by the limited partners of the LegacyFunds. During the fourth quarter of 2017, Florida Sidecar transferred all of its assets to the Company and waslegally dissolved as a standalone partnership.The Company has formed and expects to continue to form certain consolidated taxable subsidiaries (the“Taxable Subsidiaries”), which are taxed as corporations for income tax purposes. The Taxable Subsidiariesallow the Company to make equity investments in companies organized as pass-through entities whilecontinuing to satisfy the requirements of a RIC under the Code.Note 2. Summary of Significant Accounting PoliciesBasis of PresentationThe Company is considered an investment company as defined in Accounting Standards Codification(“ASC”) Topic 946 — Financial Services — Investment Companies (“ASC 946”). The accompanyingF-20TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 2. Summary of Significant Accounting Policies – (continued) consolidated financial statements have been 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 Form10-K and Article 6 of Regulation S-X. The consolidated financial statements of the Company include theaccounts of the Company and its wholly owned subsidiaries, including Fund II, Fund III, Florida Sidecar, and theTaxable Subsidiaries.The Company’s financial statements as of December 31, 2018 and December 31, 2017 and for the yearsended December 31, 2018, 2017 and 2016 are presented on a consolidated basis. The effects of all intercompanytransactions 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 theseconsolidated financial statements have been presented on the basis described above. In the opinion ofmanagement, the consolidated financial statements reflect all adjustments that are necessary for the fairpresentation 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 requiresmanagement to make estimates and assumptions that affect the amounts reported in the consolidated financialstatements and accompanying notes. Actual results could differ from those estimates under different assumptionsand conditions. The most significant estimates in the preparation of the consolidated financial statements areinvestment valuation, revenue recognition, and income taxes.ConsolidationAs provided under ASC 946, the Company will generally not consolidate its investment in a company otherthan a substantially wholly owned investment company subsidiary or a controlled operating company whosebusiness consists of providing services to the Company. Accordingly, the Company consolidated the results ofthe Company’s wholly owned investment company subsidiaries (Fund II, Fund III, Florida Sidecar, and theTaxable Subsidiaries) in its consolidated financial statements. The Company does not consolidate its interest inCapitala Senior Loan Fund II, LLC (“CSLF II”) because the investment is not considered a substantially whollyowned investment company subsidiary. Further, CSLF II is a joint venture for which shared power exists relatingto the decisions that most significantly impact the economic performance of the entity. See Note 4 to theconsolidated financial statements for a description of the Company’s investment in CSLF II.SegmentsIn accordance with ASC Topic 280 — Segment Reporting (“ASC 280”), the Company has determined thatit has a single reporting segment and operating unit structure. While the Company invests in several industriesand geographic locations, all investments share similar business and economic risks. As such, all investmentactivities have been aggregated into a single segment.Cash and Cash EquivalentsThe Company considers cash equivalents to be highly liquid investments with original maturities of threemonths or less at the date of purchase. The Company deposits its cash in financial institutions and, at times, suchbalances may be in excess of the Federal Deposit Insurance Corporation insurance limits.Investment ClassificationIn accordance with the provisions of the 1940 Act, the Company classifies its investments by level ofcontrol. As defined in the 1940 Act, “Control Investments” are investments in those companies that theCompany is deemed to “Control.” “Affiliate Investments” are investments in those companies that areF-21TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 2. Summary of Significant Accounting Policies – (continued) “Affiliated Companies” of the Company, as defined in the 1940 Act, other than Control Investments. “Non-Control/Non-Affiliate Investments” are those investments that are neither Control Investments nor AffiliateInvestments. Generally under the 1940 Act, the Company is deemed to control a company in which it hasinvested if the Company owns more than 25% of the voting securities of such company and/or has greater than50% 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 investedif it owns between 5% and 25% of the voting securities of such company.Valuation of InvestmentsThe Company applies fair value accounting to all of its financial instruments in accordance with the 1940Act and ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value,establishes a framework used to measure fair value and requires disclosures for fair value measurements. Inaccordance with ASC 820, the Company has categorized its financial instruments carried at fair value, based onthe priority of the valuation technique, into a three-level fair value hierarchy, as discussed in Note 4.In determining fair value, the Company’s board of directors (the “Board”) uses various valuationapproaches, and engages a third-party valuation firm, which provides an independent valuation of certaininvestments it reviews. In accordance with U.S. GAAP, a fair value hierarchy for inputs is used in measuring fairvalue that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiringthat the most observable inputs be used when available.Observable inputs are those that market participants would use in pricing the asset or liability based onmarket data obtained from sources independent of the Board. Unobservable inputs reflect the Board’sassumptions about the inputs market participants would use in pricing the asset or liability developed basedupon the best information available in the circumstances.The availability of valuation techniques and observable inputs can vary from security to security and isaffected by a wide variety of factors including the type of security, whether the security is new and not yetestablished in the marketplace, and other characteristics particular to the transaction. To the extent thatvaluation is based on models or inputs that are less observable or unobservable in the market, the determinationof fair value requires more judgment. Those estimated values do not necessarily represent the amounts that maybe ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined.Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower thanthe values that would have been used had a market for the securities existed. Accordingly, the degree ofjudgment exercised by the Board in determining fair value is greatest for securities categorized in Level 3. Incertain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. Insuch cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurementin its entirety falls is determined based on the lowest level input that is significant to the fair value measurement.Fair value is a market-based measure considered from the perspective of a market participant rather than anentity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s ownassumptions are set to reflect those that market participants would use in pricing the asset or liability at themeasurement date. The Company uses prices and inputs that are current as of the measurement date, includingperiods of market dislocation. In periods of market dislocation, the observability of prices and inputs may bereduced for many securities. This condition could cause a security to be reclassified to a lower level within thefair value hierarchy.F-22TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 2. Summary of Significant Accounting Policies – (continued) In estimating the fair value of portfolio investments, the Company starts with the cost basis of theinvestment, which includes original issue discount and payment-in-kind (“PIK”) income, if any. The transactionprice is typically the best estimate of fair value at inception. When evidence supports a subsequent change to thecarrying value from the original transaction price, adjustments are made to reflect the expected fair values.As a practical expedient, the Company uses net asset value (“NAV”) as the fair value for its equityinvestment in CSLF II. CSLF II records its underlying investments at fair value on a quarterly basis inaccordance with the 1940 Act and ASC 820.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 and amortization (“EBITDA”) multiples of publicly traded companies that are consideredsimilar to the subject portfolio company. The Company considers a variety of items in determining a reasonablepricing 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 adjustedfor non-recurring items in order to reflect a normalized level of earnings that is representative of future earnings.In certain instances, the Company may also utilize revenue multiples to determine enterprise value. Whenavailable, the Company may assign a pricing multiple or value its investments based on the value of recentinvestment transactions in the subject portfolio company or offers to purchase the portfolio company. Theenterprise value is adjusted for financial instruments with seniority to the Company’s ownership and for theeffect of any instrument which may dilute the Company’s investment in the portfolio company. The adjustedenterprise value is then apportioned based on the seniority and privileges of the Company’s investments withinthe 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 certaindebt securities.Income ApproachThe income approach utilizes a discounted cash flow methodology in which the Company estimates fairvalue based on the present value of expected cash flows discounted at a market rate of interest. Thedetermination of a discount rate, or required rate of return, takes into account the portfolio company’sfundamentals and perceived credit risk. Because the majority of the Company’s portfolio companies do not havea public credit rating, determining a discount rate often involves assigning an implied credit rating based on theportfolio company’s operating metrics compared to average metrics of similar publicly rated debt. Operatingmetrics 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 availableyields on similarly rated debt securities. The Company may apply a premium to the discount rate utilized indetermining fair value when performance metrics and other qualitative information indicate that there is anadditional level of uncertainty about collectability of cash flows.Asset ApproachThe asset approach values an investment based on the value of the underlying collateral securing theinvestment. This approach is used when the Company has reason to believe that it will not collect all principaland interest in accordance with the contractual terms of the debt agreement.F-23TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 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 theextent that such amounts are expected to be collected. The Company has loans in the portfolio that contain apayment-in-kind interest (“PIK interest”) provision. The PIK interest, which represents contractually deferredinterest added to the loan balance that is generally due at maturity, is recorded on an accrual basis to the extentthat such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect theissuer 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 whenthere is reasonable doubt that principal or interest will be collected, for possible placement on non-accrualstatus. When the Company otherwise does not expect the borrower to be able to service its debt and otherobligations, the Company will place the loan on non-accrual status and will generally cease recognizing interestincome and PIK interest on that loan for financial reporting purposes. Interest payments received on non-accrualloans may be recognized as income or applied to principal depending upon management’s judgment. TheCompany writes off any previously accrued and uncollected interest when it is determined that interest is nolonger considered collectible. The Company may elect to cease accruing PIK interest and continue accruinginterest income in cases where a loan is currently paying its interest income but, in management’s judgment,there is a reasonable likelihood of principal loss on the loan. Non-accrual loans are returned to accrual statuswhen the borrower’s financial condition improves such that management believes current interest and principalpayments are expected to be collected.Gains and losses on investment sales and paydowns: Realized gains and losses on investments arerecognized using the specific identification method.Dividend income and paid-in-kind dividends: Dividend income is recognized on the date dividends aredeclared. The Company holds preferred equity investments in the portfolio that contain a payment-in-kinddividend (“PIK dividends”) provision. PIK dividends, which represent contractually deferred dividends added tothe equity balance, are recorded on the accrual basis to the extent that such amounts are expected to becollected. The Company will typically cease accrual of PIK dividends when the fair value of the equityinvestment is less than the cost basis of the investment or when it is otherwise determined by management thatPIK dividends are unlikely to be collected. If management determines that a decline in fair value is temporary innature and the PIK dividends are more likely than not to be collected, management may elect to continueaccruing PIK dividends.Original issue discount: Discounts received to par on loans purchased are capitalized and accreted intoincome over the life of the 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, and other fees associated with investments in portfolio companies are recognized as income whenthe investment transaction closes. Prepayment penalties received by the Company for debt instruments repaidprior to maturity date are recorded as income upon receipt.Loan SalesThe Company follows the guidance in ASC Topic 860 — Transfers and Servicing (“ASC 860”) whenaccounting for loan participations and partial loan sales as it relates to concluding on sales accounting treatmentfor such transactions. Based on the Company’s analysis of all loan participations and partial sales completed, theCompany believes that all such transactions meet the criterion required by ASC 860 to qualify for salesaccounting treatment.F-24TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 2. Summary of Significant Accounting Policies – (continued) General and Administrative ExpensesGeneral and administrative expenses are paid as incurred. The Company’s administrative expenses includepersonnel and overhead expenses allocable to the Company paid by and reimbursed to the Administrator underan administration agreement between the Company and the Administrator (the “Administration Agreement”).Other operating expenses such as legal and audit fees, director fees, and director and officer insurance aregenerally paid directly by the Company.Deferred Financing FeesCosts incurred to issue the Company’s debt obligations are capitalized and are amortized over the term ofthe debt agreements under the effective interest method.Earnings per shareThe Company’s earnings per share (“EPS”) amounts have been computed based on the weighted-averagenumber of shares of common stock outstanding for the period. Basic EPS is computed by dividing net increase(decrease) in net assets resulting from operations by the weighted average number of shares of common stockoutstanding during the period of computation. Diluted EPS is computed by dividing net increase (decrease) innet assets resulting from operations, adjusted for the change in net assets resulting from the exercise of thedilutive shares, by the weighted average number of shares of common stock assuming all potentially dilutiveshares had been issued. Diluted EPS reflects the potential dilution using the as-if-converted method forconvertible debt, which could occur if all potentially dilutive securities were exercised.Commitments and ContingenciesAs of December 31, 2018, the Company had outstanding unfunded commitments related to debt and equityinvestments in existing portfolio companies of  $6.4 million (Capitala Senior Loan Fund II, LLC), $5.0 million(Portrait Studio, LLC), $1.1 million (MC Sign Lessor, Corp), $1.0 million (U.S. BioTek Laboratories, LLC), $0.8million (Freedom Electronics, LLC), and $0.3 million (CableOrganizer Acquisition, LLC). As of December 31,2017, the Company had outstanding unfunded commitments related to debt investments in existing portfoliocompanies of  $3.1 million (Portrait Studio, LLC), $2.0 million (CIS Secure Computing, Inc.), $1.0 million(Kelle’s Transport Service, LLC), and $0.7 million (U.S. Well Services, LLC).The Company may invest in the same unitranche facility as CSLF II whereby CSLF II provides the first-outportion of the unitranche facility and the Company and other lenders provide the last-out portion of theunitranche facility. Under a guarantee agreement, the Company may be required to purchase its pro-rata portionof first-out loans from CSLF II upon certain triggering events, including acceleration upon payment default ofthe underlying borrower. As of December 31, 2018, the Company has evaluated the fair value of the guaranteeunder the guidance of ASC Topic 460 — Guarantees and determined that the fair value of the guarantee isimmaterial as the risk of payment default for first-out loans in CSLF II is considered remote. The maximumexposure to credit risk as of December 31, 2018 is $4.3 million and extends to the stated maturity of theunderlying loans in CSLF II.In the ordinary course of business, the Company may enter into contracts or agreements that containindemnifications or warranties. Future events could occur that could lead to the execution of these provisionsagainst the Company. Based on its history and experience, management believes that the likelihood of such anevent is remote.On December 28, 2017, an alleged stockholder filed a putative class action lawsuit complaint, Paskowitz v.Capitala Finance Corp., et al., in the United States District Court for the Central District of California (casenumber 2:17-cv-09251-MWF-AS) (the “Paskowitz Action”), against the Company andF-25TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 2. Summary of Significant Accounting Policies – (continued) certain of its current officers on behalf of all persons who purchased or otherwise acquired the Company’scommon stock between January 4, 2016 and August 7, 2017. On January 3, 2018, another alleged stockholderfiled a putative class action complaint, Sandifer v. Capitala Finance Corp., et al., in the United States DistrictCourt for the Central District of California (case number 2:18-cv-00052-MWF-AS) (the “Sandifer Action”),asserting substantially similar claims on behalf of the same putative class and against the same defendants. OnFebruary 2, 2018, the Sandifer Action was transferred, on stipulation of the parties, to the United States DistrictCourt for the Western District of North Carolina. The Sandifer Action was voluntarily dismissed on February 28,2018. On March 1, 2018, the Paskowitz Action was transferred, on stipulation of the parties, to the United StatesDistrict Court for the Western District of North Carolina (case number 3:18-cv-00096-RJC-DSC). On June 19,2018, the plaintiffs in the Paskowitz Action filed their amended complaint. The complaint, as currentlyamended, alleges 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, andprospects between January 4, 2016 and August 7, 2017. The plaintiffs in the Paskowitz Action seekcompensatory damages and attorneys’ fees and costs, among other relief, but did not specify the amount ofdamages being sought. Defendants have moved to dismiss the amended complaint. While the Company intendsto vigorously defend itself in this litigation, the outcome of these legal proceedings cannot be predicted withcertainty.Estimating an amount or range of possible losses resulting from litigation proceedings is inherentlydifficult and requires an extensive degree of judgment, particularly where the matters involve indeterminateclaims for monetary damages, are in the early stages of the proceedings, and are subject to appeal. In addition,because most legal proceedings are resolved over extended periods of time, potential losses are subject tochange due to, among other things, new developments, changes in legal strategy, the outcome of intermediateprocedural and substantive rulings and other parties’ settlement posture and their evaluation of the strength orweakness of their case against us. For these reasons, we are currently unable to predict the ultimate timing oroutcome of, or reasonably estimate the possible losses or a range of possible losses resulting from, the mattersdescribed above. Based on information currently available, the Company does not believe that any reasonablypossible losses arising from the currently pending legal matters described above will be material to theCompany’s results of operations or financial condition. However, in light of the inherent uncertainties involvedin such matters, an adverse outcome in this litigation could materially and adversely affect the Company’sfinancial 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 inlegal actions with respect to bankruptcy, insolvency or other types of proceedings. Such lawsuits may involveclaims that could adversely affect the value of certain financial instruments owned by the Company or result indirect losses to the Company. In management’s opinion, no direct losses with respect to litigation contingencieswere probable as of December 31, 2018 and December 31, 2017. Management is of the opinion that the ultimateresolution of such claims, if any, will not materially affect the Company’s business, financial position, results ofoperations or liquidity. Furthermore, in management’s opinion, it is not possible to estimate a range ofreasonably 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 therequirements to qualify annually as a RIC under subchapter M of the Code and, among other things, intends tomake the requisite distributions to its stockholders which will relieve the Company from U.S. federal incometaxes.In order to qualify as a RIC, among other requirements, the Company is required to timely distribute to itsstockholders at least 90.0% of its investment company taxable income, as defined by the Code, for each fiscaltax year. The Company will be subject to a nondeductible U.S. federal excise tax of 4.0% onF-26TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 2. Summary of Significant Accounting Policies – (continued) undistributed income if it does not distribute at least 98.0% of its ordinary income in any calendar year and98.2% 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 carryforward taxable income in excess of current year dividend distributions into the next excise tax year and pay a4.0% excise tax on such income, as required. To the extent that the Company determines that its estimatedcurrent year annual taxable income will be in excess of estimated current year dividend distributions for excisetax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income isearned. Since the Company’s IPO, the Company has not accrued or paid excise tax.The Company elected to amend its tax year end from August 31 to December 31 and has filed a tax returnfor the four months ended December 31, 2017. The election to change the tax year end is not expected to have amaterial impact on the Company’s consolidated statements of operations, the Company’s tax status as a RIC, orthe nature of distributions paid to our stockholders. The tax periods ended December 31, 2018, December 31,2017, August 31, 2017 and August 31, 2016 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, 2018, 2017and 2016. If the Company was required to recognize interest and penalties, if any, related to unrecognized taxbenefits this would be recognized as income tax expense in the consolidated statements of operations.The Company’s Taxable Subsidiaries record deferred tax assets or liabilities related to temporary bookversus tax differences on the income or loss generated by the underlying equity investments held by the TaxableSubsidiaries. As of December 31, 2018 and December 31, 2017, the Company recorded a net deferred tax assetof  $0.6 million and a deferred tax liability of  $1.3 million, respectively. For the years ended December 31, 2018and December 31, 2017, the Company recorded a deferred tax benefit (provision) of  $1.9 million and $(1.3)million, respectively. For the year ended December 31, 2016, no tax provision was recorded.In accordance with certain applicable U.S. Treasury regulations and guidance issued by the InternalRevenue Service, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements ifeach stockholder may elect to receive its entire distribution in either cash or stock of the RIC, subject to alimitation on the aggregate amount of cash to be distributed to all stockholders, which limitation must be atleast 20.0% of the aggregate declared distribution. If too many stockholders elect to receive cash, the cashavailable for distribution must be allocated among the stockholders electing to receive cash (with the balance ofthe distribution paid in stock). In no event will any stockholder, electing to receive cash, receive the lesser of  (a)the portion of the distribution such stockholder has elected to receive in cash or (b) an amount equal to his or herentire distribution times the percentage limitation on cash available for distribution. If these and certain otherrequirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will beequal to the amount of cash that could have been received instead of stock. For income tax purposes, theCompany has paid distributions on its common stock from ordinary income in the amount of  $16.0 million,$6.1 million, $25.2 million, and $24.5 million during the tax periods ended December 31, 2018, December 31,2017, August 31, 2017, and August 31, 2016, respectively.ASC Topic 740 — Income Taxes (“ASC 740”), provides guidance for how uncertain tax positions should berecognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation oftax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determinewhether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Taxpositions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense inthe current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefitsas income tax expense in the consolidated statements of operations. As of December 31, 2018 and December 31,2017, there were no uncertain tax positions.F-27TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 2. Summary of Significant Accounting Policies – (continued) The Company is required to determine whether a tax position of the Company is more likely-than-not to besustained upon examination by the applicable taxing authority, including resolution of any related appeals orlitigation processes, based on the technical merits of the position. The tax benefit to be recognized is measuredas the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimatesettlement. De-recognition of a tax benefit previously recognized could result in the Company recording a taxliability that could negatively impact the Company’s net assets.U.S. GAAP provides guidance on thresholds, measurement, de-recognition, classification, interest andpenalties, accounting in interim periods, disclosure, and transition that is intended to provide better financialstatement comparability among different entities.On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act,which significantly changes the existing U.S. tax laws, including a reduction in the corporate tax rate from 35%to 21%, a move from a worldwide tax system to a territorial system, as well as other changes. The TaxableSubsidiaries’ provisional tax is based on the new lower blended federal and state corporate tax rate of 24.86%.The implementation of the Tax Act did not have a material impact on the Company’s financial position andresults of operations.DistributionsDistributions to common stockholders are recorded as payable on the declaration date. The amount to bepaid out as a dividend is determined by the Board. Net capital gains, if any, are generally distributed at leastannually, although we may decide to retain such capital gains for reinvestment.The Company has adopted an “opt out” dividend reinvestment plan (“DRIP”) for the Company’s commonstockholders. As a result, if the Company declares a distribution, then stockholders’ cash distributions will beautomatically reinvested in additional shares of the Company’s common stock unless a stockholder specifically“opts out” of our DRIP. If a stockholder opts out, that stockholder will receive cash distributions. Althoughdistributions paid in the form of additional shares of our common stock will generally be subject to U.S. federal,state and local taxes in the same manner as cash distributions, stockholders participating in the Company’s DRIPwill 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 willgenerally consist of debt and equity instruments that may be affected by business, financial market or legaluncertainties. Prices of investments may be volatile, and a variety of factors that are inherently difficult topredict, such as domestic or international economic and political developments, may significantly affect theresults of the Company’s activities and the value of its investments. In addition, the value of the Company’sportfolio may fluctuate as the general level of interest rates fluctuate.The value of the Company’s investments may be detrimentally affected to the extent, among other things,that a borrower defaults on its obligations, there is insufficient collateral and/or there are extensive legal andother costs incurred in collecting on a defaulted loan, observable secondary or primary market yields for similarinstruments issued by comparable companies increase materially or risk premiums required in the marketbetween smaller companies, such as our borrowers, and those for which market yields are observable increasematerially.The Investment Advisor may attempt to minimize this risk by maintaining low debt-to-liquidation valueswith each debt investment and the collateral underlying the debt investment.F-28TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 2. Summary of Significant Accounting Policies – (continued) The Company’s assets may, at any time, include securities and other financial instruments or obligationsthat are illiquid or thinly traded, making purchase or sale of such securities and financial instruments at desiredprices or in desired quantities difficult. Furthermore, the sale of any such investments may be possible only atsubstantial discounts, and it may be extremely difficult to value any such investments accurately.Note 3. Recent Accounting PronouncementsIn August 2018, the FASB issued Accounting Standards Update 2018-13, Disclosure Framework — Changes to the Disclosure Requirement for Fair Value Measurement. The FASB issued the amendments as partof the disclosure framework project which is intended to improve the effectiveness of fair value disclosures inthe notes to the financial statements by facilitating clear communication of the information required by U.S.GAAP that is most important to users of the financial statements. The standard is effective for interim and annualreporting periods in fiscal years that begin after December 15, 2019. Management is currently evaluating theimpact these changes will have on the Company’s consolidated financial statements and disclosures.In October 2018, the SEC adopted amendments (the “Amendments”) to certain disclosure requirements thathave become redundant, duplicative, overlapping, outdated, or superseded, in light of other SEC disclosurerequirements, U.S. GAAP requirements, or changes in the information environment. In part, the Amendmentsrequire an investment company to present distributable earnings in total, rather than showing the threecomponents of distributable earnings. The compliance date for the Amendments is for all filings on or afterNovember 5, 2018. Management has adopted the Amendments and included the required disclosures in theCompany’s consolidated financial statements.In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts withCustomers (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. Thecore principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goodsor services to customers in an amount that reflects the consideration to which an entity expects to be entitled inexchange for those goods or services. The new guidance significantly enhances comparability of revenuerecognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidancerequires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized.The new guidance became effective for the annual reporting period beginning January 1, 2018, includinginterim periods within that reporting period. The Company completed its assessment in evaluating the potentialimpact on its consolidated financial statements and based on its assessment, determined that its financialcontracts are excluded from the scope of ASU 2014-09. As a result of the scope exception for financial contracts,the Company’s management has determined that there will be no material changes to the recognition, timing,and classification of revenues and expenses; additionally, the Company’s management determined that theadoption of ASU 2014-09 does not have a significant impact on its consolidated financial statement disclosures.Note 4. Investments and Fair Value MeasurementsThe Company’s investment objective is to generate both current income and capital appreciation throughdebt and equity investments. Both directly and through the Company’s subsidiaries that are licensed by the SBAunder the SBIC Act, the Company offers customized financing to business owners, management teams andfinancial sponsors for change of ownership transactions, recapitalizations, strategic acquisitions, businessexpansion and other growth initiatives. The Company invests in first lien loans,F-29TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 4. Investments and Fair Value Measurements – (continued) second lien loans, and subordinated loans and, to a lesser extent, equity securities issued by lower middle-market companies and traditional middle-market companies. As of December 31, 2018, our portfolio consistedof investments in 44 portfolio companies with a fair value of approximately $448.9 million.Most of the Company’s debt investments are structured as first lien loans. First lien loans may contain someminimum amount of principal amortization, excess cash flow sweep feature, prepayment penalties, or anycombination of the foregoing. First lien loans are secured by a first priority lien in existing and future assets ofthe borrower and may take the form of term loans or delayed draw facilities. Unitranche debt, a form of first lienloan, typically involves issuing one debt security that blends the risk and return profiles of both senior securedand subordinated debt in one debt security, bifurcating the loan into a first-out tranche and last-out tranche. Asof December 31, 2018, 13.7% of the fair value of our first lien loans consisted of last-out loans. As of December31, 2017, 13.7% of the fair value 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 creditfacility.The Company also invests in debt instruments structured as second lien loans. Second lien loans are loanswhich have a second priority security interest in all or substantially all of the borrower’s assets, and which arenot subject to the blockage of cash 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 typically have a second lien on all or substantially all of the borrower’s assets, but unlikesecond lien loans, may be subject to the interruption of cash interest payments upon certain events of default, atthe discretion of the first lien lender.During the year ended December 31, 2018, the Company made approximately $107.8 million ofinvestments and had approximately $123.5 million in repayments and sales, resulting in net repayments andsales of approximately $15.7 million for the year. During the year ended December 31, 2017, the Company madeapproximately $82.8 million of investments and had approximately $115.8 million in repayments and salesresulting in net repayments and sales of approximately $33.0 million for the year. During the year endedDecember 31, 2016, the Company made approximately $120.8 million of investments and had approximately$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, 2018, the Company funded $6.5 million of previously committedcapital to existing portfolio companies. During the year ended December 31, 2018, the Company funded $101.3million of investments in portfolio companies for which it was not previously committed to fund. During theyear 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 ofinvestments in portfolio companies for which it was not previously committed to fund. During the year endedDecember 31, 2016, the Company funded $2.8 million of previously committed capital to existing portfoliocompanies. During the year ended December 31, 2016, the Company funded $118.0 million of investments inportfolio companies for which it was not previously committed to fund. During the years ended December 31,2018 and 2016, the Company did not assist any portfolio companies in obtaining indirect financing. During theyear ended December 31, 2017, the Company assisted one portfolio company in obtaining indirect financing byproviding a limited guarantee. During the years ended December 31, 2018, 2017, and 2016, the Company didnot lead any syndicates.On August 31, 2016, the Company sold a portion of 14 securities across 10 portfolio companies toCapitalSouth Partners Florida Sidecar Fund II, L.P. (“FSC II”), including granting an option to acquire a portionof the Company’s equity investment in Eastport Holdings, LLC (the “Written Call Option”), inF-30TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 4. Investments and Fair Value Measurements – (continued) exchange for 100% of the partnership interests in FSC II. Concurrent with the sale of these assets to FSC II, theCompany received cash consideration of  $47.6 million from an affiliated third-party purchaser in exchange for100% of the partnership interests of FSC II. These assets were sold to FSC II at their June 30, 2016 fair marketvalues, resulting in a net realized gain of  $0.1 million. The Company’s Board pre-approved this transactionpursuant to Section 57(f) of the 1940 Act.The Company collected and will periodically collect principal and interest payments related to certain ofthe securities purchased by FSC II. Such principal and interest payments will be remitted timely to FSC II basedon its proportionate share of the security. FSC II does not have any recourse to the Company related to the non-payment of principal or interest by the underlying issuers of the securities.The Written Call Option granted FSC II the right to purchase up to 31.25% of the Company’s equityinvestment in Eastport Holdings, LLC. The Written Call Option had a strike price of  $1.5 million and atermination date of August 31, 2018. On August 27, 2018, FSC II exercised its option at a strike price of $1.5million. The fair value of the Written Call Option, which has been treated as a derivative liability and recordedin the financial statement line item Written Call Option at fair value in the Company’s consolidated statementsof assets and liabilities, was approximately $0.0 million and $6.8 million as of December 31, 2018 andDecember 31, 2017, respectively. For purposes of determining the fair value of the Written Call Option, theCompany calculated the difference in the fair value of the underlying equity investment in Eastport Holdings,LLC and the strike price of the Written Call Option, or intrinsic value. The Written Call Option was classified asa Level 3 financial instrument.The composition of our investments as of December 31, 2018, at amortized cost and fair value was asfollows (dollars in thousands):​​Investmentsat Amortized Cost​​Percentage ofTotal​​Investmentsat Fair Value​​Percentage ofTotal​First Lien Debt$252,17460.0$237,57052.9Second Lien Debt33,0407.932,4957.2Subordinated Debt72,56217.373,11316.3Equity and Warrants48,59411.692,05420.5Capitala Senior Loan Fund II, LLC13,6003.213,6953.1Total$419,970100.0$448,927100.0The composition of our investments as of December 31, 2017, at amortized cost and fair value was asfollows (dollars in thousands):​​Investmentsat Amortized Cost​​Percentage ofTotalInvestmentsat Fair ValuePercentage ofTotal​First Lien Debt$257,14755.3$243,48948.7Second Lien Debt32,4657.030,7946.1Subordinated Debt120,23525.8103,38520.7Equity and Warrants55,18011.9122,27124.5Total$465,027100.0$499,939100.0As noted above, the Company values all investments in accordance with ASC 820. ASC 820 requiresenhanced disclosures about assets and liabilities that are measured and reported at fair value. As defined in ASC820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date.F-31%%%%%%%%•Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities thatthe Company has the ability to access.•Level 2 — Valuations based on inputs other than quoted prices in active markets, which are eitherdirectly or indirectly observable.•Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair valuemeasurement.(1)Excludes our $13.7 million investment in CSLF II, measured at NAV.TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 4. Investments and Fair Value Measurements – (continued) ASC 820 establishes a hierarchal disclosure framework which prioritizes and ranks the level of market priceobservability of inputs used in measuring investments at fair value. Market price observability is affected by anumber of factors, including the type of investment and the characteristics specific to the investment.Investments with readily available active quoted prices or for which fair value can be measured from activelyquoted prices generally will have a higher degree of market price observability and a lesser degree of judgmentused in measuring fair value.Based on the observability of the inputs used in the valuation techniques, the Company is required toprovide disclosures on fair value measurements according to the fair value hierarchy. The fair value hierarchyranks the observability of the inputs used to determine fair values. Investments carried at fair value are classifiedand disclosed in one of the following three categories:In addition to using the above inputs in investment valuations, the Company continues to employ thevaluation policy approved by the Board that is consistent with ASC 820 (see Note 2). Consistent with theCompany’s valuation policy, the Company evaluates the source of inputs, including any markets in which itsinvestments are trading, in determining fair value.In estimating fair value of portfolio investments, the Company starts with the cost basis of the investment,which includes amortized original issue discount and PIK income, if any. The transaction price is typically thebest estimate of fair value at inception. When evidence supports a subsequent change to the carrying value fromthe original transaction price, adjustments are made to reflect the expected fair values.The following table presents the fair value measurements of investments, by major class, as of December 31,2018 (dollars in thousands), according to the fair value hierarchy:Fair Value MeasurementsLevel 1Level 2Level 3TotalFirst Lien Debt$ —$ —$237,570$237,570Second Lien Debt——32,49532,495Subordinated Debt——73,11373,113Equity and Warrants——92,05492,054Total$—$—$435,232$435,232F-32(1)(1)Excludes our $13.7 million investment in CSLF II, measured at NAV.TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 4. Investments and Fair Value Measurements – (continued) The following table presents fair value measurements of investments, by major class, as of December 31,2017 (dollars in thousands), according to the fair value hierarchy:Fair Value MeasurementsLevel 1Level 2Level 3TotalFirst Lien Debt$ —$ —$243,489$243,489Second Lien Debt——30,79430,794Subordinated Debt——103,385103,385Equity and Warrants——122,271122,271Total$—$—$499,939$499,939The following table presents fair value measurements of the Written Call Option as of December 31, 2017(dollars in thousands), according to the fair value hierarchy:Fair Value MeasurementsLevel 1Level 2Level 3TotalWritten Call Option$ —$ —$(6,815$(6,815Total$—$—$(6,815$(6,815The following table provides a reconciliation of the beginning and ending balances for investments thatuse Level 3 inputs for the year ended December 31, 2018 (dollars in thousands):​First LienDebt​​Second LienDebt​​SubordinatedDebt​​Equityand Warrants​​Total​Balance as of January 1, 2018$243,489$30,794$103,385$122,271$499,939Reclassifications16,723—(20,8064,083—Repayments/sales(95,294—(8,463(19,760(123,517Purchases92,421——1,78194,202Payment in-kind interest and dividendsaccrued1,7124821,3378174,348Accretion of original issue discount26493757—1,114Realized gain (loss) from investments(20,799—(20,4996,494(34,804Net unrealized appreciation (depreciation)on investments(9461,12617,402(23,632(6,050Balance as of December 31, 2018$237,570$32,495$73,113$92,054$435,232The following table provides a reconciliation of the beginning and ending balances for the Written CallOption that use Level 3 inputs for the year ended December 31, 2018 (dollars in thousands):Written Call OptionBalance as of January 1, 2018$(6,815Payment from Written Call Option20Net unrealized appreciation on Written Call Option6,795Balance as of December 31, 2018$—F-33))))(1)))))))))))))TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 4. Investments and Fair Value Measurements – (continued) The following table provides a reconciliation of the beginning and ending balances for investments thatuse Level 3 inputs for the year ended December 31, 2017 (dollars in thousands):​First LienDebt​​Second LienDebt​​SubordinatedDebt​​Equityand Warrants​​Total​Balance as of January 1, 2017$226,578$71,483$150,232$93,346$541,639Reclassifications(7,109—(9,00016,109—Repayments/sales(26,409(45,804(22,092(21,505(115,810Purchases69,7224,0002,7306,29882,750Payment in-kind interest and dividendsaccrued4,3788469879327,143Accretion of original issue discount274322761—1,357Realized gain (loss) from investments(28,356(1,456(2,0007,623(24,189Net unrealized appreciation (depreciation)on investments4,4111,403(18,23319,4687,049Balance as of December 31, 2017$243,489$30,794$103,385$122,271$499,939The following table provides a reconciliation of the beginning and ending balances for the Written CallOption that use Level 3 inputs for the year ended December 31, 2017 (dollars in thousands):Written Call OptionBalance as of January 1, 2017$(2,736Net unrealized depreciation on Written Call Option(4,079Balance as of December 31, 2017$(6,815The net change in unrealized depreciation on investments held as of December 31, 2018 and December 31,2017, was $(32.7) million and $(1.6) million, respectively, and is included in net unrealized depreciation oninvestments in the consolidated statements of operations.F-34)))))))))))))))(1)$0.7 million in subordinated debt and $2.9 million in first lien debt were valued using the asset approach.(2)Excludes our $13.7 million investment in CSLF II, measured at NAV.TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 4. Investments and Fair Value Measurements – (continued) The valuation techniques and significant unobservable inputs used in recurring Level 3 fair valuemeasurements of assets as of December 31, 2018 were as follows:Fair Value(in millions)ValuationApproachUnobservable InputRange (Weighted Average)​First lien debt$195.1IncomeRequired Rate of ReturnLeverage RatioAdjusted EBITDA9.2% – 16.0% (12.1%)1.0x – 13.5x (4.3x)$1.7 million –  $118.7 million ($17.6 million)First lien debt$42.5Enterprise Value Waterfall and AssetEBITDA MultipleAdjusted EBITDA Revenue MultipleRevenue4.0x – 6.0x (5.3x)$0.6 million – $3.7 million ($2.3 million) 0.9x – 0.9x (0.9x)$13.0 million –  $13.0 million ($13.0 million)Second lien debt$16.2IncomeRequired Rate of ReturnLeverage RatioAdjusted EBITDA12.5% – 15.5% (14.6%)4.6x – 5.0x (4.8x)$67.0 million –  $79.2 million ($75.5 million)Second lien debt$16.3Enterprise Value Waterfall and AssetEBITDA MultipleAdjusted EBITDA5.6x – 5.6x (5.6x)$9.2 million – $9.2 million ($9.2 million)Subordinated debt$49.3IncomeRequired Rate of ReturnLeverage RatioAdjusted EBITDA11.5% – 20.0% (14.1%)3.1x – 9.1x (5.7x)$1.7 million – $15.8 million ($10.5 million)Subordinated debt$23.8Enterprise Value Waterfall and AssetEBITDA MultipleAdjusted EBITDA Revenue MultipleRevenue6.0x – 8.0x (7.9x)$1.7 million – $3.1 million ($3.0 million)  0.4x – 0.4x (0.4x) $568.2 million –  $568.2 million ($568.2 million)Equity and warrants$92.1Enterprise Value WaterfallEBITDA MultipleAdjusted EBITDA Revenue MultipleRevenue3.3x – 14.0x (6.5x)$1.7 million –  $112.3 million ($27.8 million) 0.4x – 0.4x (0.4x)$164.6 million –  $568.2 million ($455.1 million)F-35(2)(1)(1)(1)$1.0 million in subordinated debt and $1.9 million in first lien debt were valued using the asset approach.TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 4. Investments and Fair Value Measurements – (continued) The valuation techniques and significant unobservable inputs used in recurring Level 3 fair valuemeasurements of assets and (liabilities) as of December 31, 2017 were as follows:Fair Value(in millions)ValuationApproachUnobservable InputRange (Weighted Average)First lien debt$211.2IncomeRequired Rate of ReturnLeverage RatioAdjusted EBITDA8.6% – 21.2% (13.5%)1.7x – 7.0x (3.6x)$1.8 million –  $131.2 million ($21.1 million)First lien debt$32.3Enterprise Value Waterfall and AssetEBITDA MultipleAdjusted EBITDA4.0x – 7.0x (5.5x)$2.1 million –  $3.1 million ($2.6 million)Second lien debt$30.8IncomeRequired Rate of ReturnLeverage RatioAdjusted EBITDA11.6% – 17.6% (14.4%)4.9x – 7.0x (6.0x)$7.3 million –  $78.5 million ($41.1 million)Subordinated debt$64.4IncomeRequired Rate of ReturnLeverage RatioAdjusted EBITDA11.5% – 19.0% (14.2%)3.2x – 8.1x (5.6x)$3.2 million – $15.1 million ($9.7 million)Subordinated debt$39.0Enterprise Value Waterfall and AssetEBITDA MultipleAdjusted EBITDA Revenue MultipleRevenue6.0x – 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 ($150.7 million)Equity and warrants$122.3Enterprise Value WaterfallEBITDA MultipleAdjusted EBITDA3.5x – 14.5x (7.9x)$1.8 million – $77.6 million ($24.3 million)Written Call Option$(6.8Enterprise Value WaterfallEBITDA MultipleAdjusted EBITDA7.25x – 7.25x (7.25x)$30.1 million –  $30.1 million ($30.1 million)The significant unobservable inputs used in the valuation of the Company’s investments are required rateof return, adjusted EBITDA, EBITDA multiples, revenue, revenue multiples, and leverage ratios. Changes in anyof these unobservable inputs could have a significant impact on the Company’s estimate of fair value. Anincrease (decrease) in the required rate of return or leverage will result in a lower (higher) estimate of fair valuewhile an increase (decrease) in adjusted EBITDA, EBITDA multiples, revenue, or revenue multiples will result ina higher (lower) estimate of fair value.Capitala Senior Loan Fund II, LLCOn December 20, 2018, Capitala and Trinity Universal Insurance Company (“Trinity”), a subsidiary ofKemper Corporation, entered into a limited liability company agreement (the “LLC Agreement”) to co-manageCapitala Senior Loan Fund II, LLC (“CSLF II”). The purpose and design of the joint venture is to investprimarily in senior secured first-out loans. Capitala and Trinity have committed to provide $25.0 million ofequity to CSLF II, with Capitala providing $20.0 million and Trinity providing $5.0 million.Capitala and Trinity each appointed two members to CSLF II’s four-person board of directors andinvestment committee. All material decisions with respect to CSLF II, including those involving itsF-36(1)(1))(1)Based on principal amount outstanding at year end.(2)Only two investments outstanding at year end.TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 4. Investments and Fair Value Measurements – (continued) investment portfolio, require approval of a member on the board of directors and investment committee of atleast one member representing Capitala and Trinity, respectively.As of December 31, 2018, $13.6 million and $3.4 million in equity capital had been contributed byCapitala and Trinity, respectively. As of December 31, 2018, the Company and Trinity had $6.4 million and$1.6 million of unfunded equity capital commitments outstanding. The Company’s equity investment in CSLFII is not redeemable.Below is a summary of CSLF II’s portfolio at fair value as of December 31, 2018 (dollars in thousands):December 31, 2018First lien loans$10,000Weighted average current interest rate on first lien loans7.6Number of borrowers in CSLF II2Largest portfolio company investment$5,550Total of five largest portfolio company investments$10,000Below is CSLF II’s schedule of investments as of December 31, 2018:Capitala Senior Loan Fund II, LLC Schedule of Investments December 31, 2018 (in thousands)Portfolio Company​​Industry​​Type of Investment​​Principal Amount​​Cost​​Fair Value​Investments in Non-Controlled, Non-Affiliated Portfolio CompaniesU.S. BioTek Laboratories, LLCTesting LaboratoriesFirst Lien Debt (7.8% Cash (3 month LIBOR + 5.0%, 2.0% Floor), Due 12/14/23)$4,500$4,500$4,500Freedom Electronics, LLCElectronicsFirst Lien Debt (7.5% Cash (1 month LIBOR + 5.0%, 2.0% Floor), Due 12/20/23)5,5005,5005,500TOTAL INVESTMENTS IN NON-CONTROLLED, NON-AFFILIATED PORTFOLIO COMPANIES$10,000$10,000$10,000F-37(1)%(1)(1)(2)TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 4. Investments and Fair Value Measurements – (continued) Below is the financial information for CSLF II:Capitala Senior Loan Fund II, LLC Statement of Assets and Liabilities (in thousands)As ofDecember 31, 2018ASSETSInvestments at fair valueNon-control/non-affiliate investments (amortized cost of  $10,000)$10,000Cash and cash equivalents7,100Interest receivable31Total assets$17,131LIABILITIESAccounts payable$12Total liabilities$12NET ASSETSPartners’ capital$17,119Total net assets$17,119Capitala Senior Loan Fund II, LLC Statement of Operations (in thousands)For the period from December 20, 2018 (commencement of operations) to December 31, 2018INVESTMENT INCOMEFrom non-controlled, non-affiliated investments:Interest income$31Fee income100Total investment income$131EXPENSESGeneral and administrative expenses$12Total expenses$12NET INVESTMENT INCOME$119NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS$119F-38TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 5. Transactions With Affiliated CompaniesDuring the year ended December 31, 2018, the Company had investments in portfolio companiesdesignated as affiliates under the 1940 Act. Transactions with affiliates were as follows (dollars in thousands):Company​​Type of Investment​​Principal Amount​​Amount of Interest, Fees or Dividends Credited to Income​​December 31, 2017 Fair Value​​Gross AdditionsGross ReductionsRealized Gain/(Loss)Unrealized Gain/(Loss)December 31, 2018 Fair Value​Affiliate investmentsAAE Acquisition, LLCSecond Lien Debt (6.0% Cash, Due 8/24/19)$—$479$15,603$320$(16,165$—$242$—AAE Acquisition, LLCMembership Units (2.2% fully diluted)———(17—17—AAE Acquisition, LLCWarrants (37.8% fully diluted)———————47915,603320(16,182—259—Burgaflex Holdings, LLCFirst Lien Debt (12.0% Cash, 1.0% PIK, Due 3/23/21)14,8011,390—14,801——(41714,384Burgaflex Holdings, LLCSubordinated Debt (14% Cash, Due 8/9/19)—1163,000—(3,000———Burgaflex Holdings, LLCSubordinated Debt (12% Cash, Due 8/9/19)—1995,828—(5,828———Burgaflex Holdings, LLCCommon Stock Class A (1,253,198 shares)—457———(457—Burgaflex Holdings, LLCCommon Stock Class B (900,000 shares)——300——(300—1,7059,28515,101(8,828—(1,17414,384Chef’n CorporationSeries A Preferred Stock (1,000,000 shares)———(644644—————(644644——City Gear, LLCSubordinated Debt (13.0% Cash, Due 10/20/19)—9188,231—(8,231———City Gear, LLCPreferred Membership Units (2.8% fully diluted, 9.0% Cash Dividend)1171,269—(1,269———City Gear, LLCMembership Unit Warrants (11.4% fully diluted)—8,248—(1,9081,908(5,0643,1841,03517,748—(11,4081,908(5,0643,184Eastport Holdings, LLCSubordinated Debt (15.8% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 4/29/20)16,5001,168—15,496——1,00416,500Eastport Holdings, LLCMembership Units (22.9% ownership)——4,733(1,470—14,34717,6101,168—20,229(1,470—15,35134,110F-39(4)(1)(2)(3))))))))))))))(5))))))))TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 5. Transactions With Affiliated Companies – (continued) Company​​Type of Investment​​PrincipalAmount​​Amount ofInterest, Feesor DividendsCredited toIncome​​December 31,2017Fair Value​​GrossAdditions​GrossReductionsRealizedGain/(Loss)UnrealizedGain/(Loss)December 31,2018Fair Value​GA Communications, Inc.Series A-1 Preferred Stock (1,998 shares, 8.0% PIK Dividend)$—$3,225$276$—$—$(19$3,482GA Communications, Inc.Series B-1 Common Stock (200,000 shares)—1,932———(6071,325—5,157276——(6264,807J&J Produce Holdings, Inc.Subordinated Debt (13.0% Cash, Due 6/16/19)$6,4068056,17038——26,210J&J Produce Holdings, Inc.Common Stock (8,182 shares)———————J&J Produce Holdings, Inc.Common Stock Warrants (6,369 shares)———————8056,17038——26,210LJS Partners, LLCCommon Stock (1,587,848 shares)—7,650293——(4,9253,018—7,650293——(4,9253,018MJC Holdings, LLCSeries A Preferred Units (2,000,000 units)———(2828—————(2828——MMI Holdings, LLCFirst Lien Debt (12.0% Cash, Due 1/31/20)2,6003172,600————2,600MMI Holdings, LLCSubordinated Debt (6.0% Cash, Due 1/31/20)40024400————400MMI Holdings, LLCPreferred Units (1,000 units, 6.0% PIK Dividend)—1,52092———1,612MMI Holdings, LLCCommon Membership Units (45 units)—193———(81853414,71392——(84,797MTI Holdings, LLCMembership Units (2,000,000 units)—100—(139139(100——100—(139139(100—Sierra Hamilton Holdings CorporationCommon Stock (15,068,000 shares)—8,528———(1,6746,854—8,528———(1,6746,854Source Capital Penray, LLCMembership Units (11.3% ownership)121101———(101—121101———(101—STX Healthcare Management Services, Inc.Common Stock (1,200,000 shares)—93—(108108(93——93—(108108(93—F-40(4)(1)(2)(3)(5))))))))(5)))))))))))))))TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 5. Transactions With Affiliated Companies – (continued) CompanyType of InvestmentPrincipalAmountAmount ofInterest, Feesor DividendsCredited toIncomeDecember 31,2017Fair ValueGrossAdditionsGrossReductionsRealizedGain/(Loss)UnrealizedGain/(Loss)December 31,2018Fair Value​US Bath Group, LLCFirst Lien Debt (11.4% Cash (1 month LIBOR + 9.0%, 1.0% Floor), Due 1/2/23)$12,750$1,806$—$15,000$(2,250$—$—$12,750US Bath Group, LLCMembership Units (500,000 units)——500——1,5832,0831,806—15,500(2,250—1,58314,833U.S. Well Services, LLCFirst Lien Debt (8.3% Cash (1 month LIBOR + 6.0%, 1.0% Floor), Due 2/2/22)—1562,299—(2,299———U.S. Well Services, LLCFirst Lien Debt (13.3% PIK (1 month LIBOR + 11.0%, 1.0% Floor), Due 2/2/22)—5679,516409(9,925———U.S. Well Services, LLCClass A Units (5,680,688 Units)—15,004—(6,260—(8,744—U.S. Well Services, LLCClass B Units (2,076,298 Units)—955—(441—(514—72327,774409(18,925—(9,258—V12 Holdings, Inc.Subordinated Debt——1,035—(23293(154742—1,035—(23293(154742Total Affiliate investments$8,183$103,957$52,258$(60,214$2,920$(5,982$92,939Control investmentsAAE Acquisition, LLCSecond Lien Debt (6.0% Cash, Due 8/24/19)$16,327$488$—$16,327$—$—$—$16,327AAE Acquisition, LLCMembership Units (2.2% fully diluted)——17——(17—AAE Acquisition, LLCWarrants (37.8% fully diluted)———————488—16,344——(1716,327CableOrganizer Acquisition, LLCFirst Lien Debt (10.0% Cash, Due 5/24/19)1,708121—1,708———1,708CableOrganizer Acquisition, LLCFirst Lien Debt (12.0% Cash, 4.0% PIK, Due 6/30/19)8,8891,17312,373515(2,354(1,64618,889CableOrganizer Acquisition, LLCPreferred Units (4,000,000 units)—2,354——(2,354—CableOrganizer Acquisition, LLCCommon Stock (21.3% fully diluted)—118———(118—CableOrganizer Acquisition, LLCCommon Stock Warrants (10.0% fully diluted)—60———(60—1,29412,5514,577(2,354(1,646(2,53110,597F-41(4)(1)(2)(3)))))))))))))))))))))))))))TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 5. Transactions With Affiliated Companies – (continued) Company​​Type of Investment​PrincipalAmountAmount ofInterest, Feesor DividendsCredited toIncomeDecember 31,2017Fair ValueGrossAdditionsGrossReductionsRealizedGain/(Loss)UnrealizedGain/(Loss)December 31,2018Fair Value​Capitala Senior Loan Fund II, LLCMembership Units (80% ownership)$—$—$13,600$—$—$95$13,695——13,600——9513,695Eastport Holdings, LLCSubordinated Debt (15.8% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 4/29/20)$—2,14416,500493(15,231—(1,762—Eastport Holdings, LLCMembership Units (22.9% ownership)—26,449—(4,733—(21,716—2,14442,949493(19,964—(23,478—Kelle’s Transport Service, LLCFirst Lien Debt (4.0% Cash, Due 2/15/20)—822,0001,300(3,300———Kelle’s Transport Service, LLCFirst Lien Debt (2.2% Cash, Due 2/15/20)—1269,560—(10,000(3,6694,109—Kelle’s Transport Service, LLCMembership Units (27.5% fully diluted)———————20811,5601,300(13,300(3,6694,109—Micro Precision, LLCSubordinated Debt (10.0% Cash, Due 1/1/19)1,8621861,862————1,862Micro Precision, LLCSubordinated Debt (14.0% Cash, 4.0% PIK, Due 1/1/19)4,3256014,154171———4,325Micro Precision, LLCSeries A Preferred Units (47 units)—1,629———1,1882,8177877,645171——1,1889,004Navis Holdings, Inc.First Lien Debt (15.0% Cash, Due 10/30/20)7,5001,1496,5001,000———7,500Navis Holdings, Inc.Class A Preferred Stock (1,000 shares, 10.0% Cash Dividend)1001,000————1,000Navis Holdings, Inc.Common Stock (300,000 shares)—5,005———(6574,3481,24912,5051,000——(65712,848On-Site Fuel Service, Inc.First Lien Debt (18.0% Cash, Due 12/19/18)—30—11,020—(11,020——On-Site Fuel Service, Inc.Subordinated Debt (18.0% Cash, Due 12/19/18)——11,588—(11,020—(568—On-Site Fuel Service, Inc.Series A Preferred Stock (32,782 shares)————(3,2783,278—On-Site Fuel Service, Inc.Series B Preferred Stock (23,648 shares)————(2,3642,364—On-Site Fuel Service, Inc.Common Stock (33,058 shares)————(3333—3011,58811,020(11,020(16,6955,107—F-42(4)(1)(2)(3))))))))))))(5)))))))))))(1)Represents the total amount of interest, original issue discount, fees or dividends credited to income for theportion of the year an investment was included in Affiliate or Control categories, respectively.(2)Gross additions include increases in the cost basis of investments resulting from new portfolio investments,follow-on investments, accrued PIK and accretion of OID. Gross additions also include transfers intoAffiliate or Control classification.(3)Gross reductions include decreases in the cost basis of investments resulting from principal repayments andsales. Gross reductions also includes transfers out of Affiliate or Control classification.(4)All debt investments are income producing. Equity and warrant investments are non-income producing,unless otherwise noted.(5)The equity investment is income producing, based on rate disclosed.TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 5. Transactions With Affiliated Companies – (continued) CompanyType of InvestmentPrincipalAmountAmount ofInterest, Feesor DividendsCredited toIncomeDecember 31,2017Fair ValueGrossAdditionsGrossReductions​​RealizedGain/(Loss)​​UnrealizedGain/(Loss)​​December 31,2018Fair Value​Portrait Studio, LLCFirst Lien Debt (9.0% Cash (1 month LIBOR + 7.0%, 1.0% Floor, 2.0% Ceiling), Due 12/31/22)$—$167$1,860$2,400$(4,260$—$—$—Portrait Studio, LLCFirst Lien Debt (9.4% Cash (1 month LIBOR + 7.0%, 1.0% Floor, 5.0% Ceiling), Due 12/31/22)4,5004354,500————4,500Portrait Studio, LLCPreferred Units (4,350,000 Units)—2,450———(2762,174Portrait Studio, LLCMembership Units (150,000 Units)———————6028,8102,400(4,260—(2766,674Total Control investments$6,802$107,608$50,905$(50,898$(22,010$(16,460$69,145F-43(4)(1)(2)(3))))))))TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 5. Transactions With Affiliated Companies – (continued) During the year ended December 31, 2017, the Company had investments in portfolio companiesdesignated as affiliates under the 1940 Act. Transactions with affiliates were as follows (dollars in thousands):Company​​Type of Investment​​Principal Amount​​Amount of Interest, Fees or Dividends Credited to Income​​December 31, 2016 Fair Value​​Gross Additions​​Gross Reductions​​Realized Gain/(Loss)​​Unrealized Gain/(Loss)​​December 31, 2017 Fair Value​Affiliate investmentsAAE Acquisition, LLCSecond Lien Debt (8.0% Cash, 4.0% PIK, Due 8/24/19)$15,846$757$—$15,846$ —$ —$(243$15,603AAE Acquisition, LLCMembership Units (2.2% fully diluted)——16——(16—AAE Acquisition, LLCWarrants (37.8% fully diluted)———————757—15,862——(25915,603Burgaflex Holdings, LLCSubordinated Debt (14.0% Cash, Due 8/9/19)3,0005153,000————3,000Burgaflex Holdings, LLCSubordinated Debt (12.0% Cash, Due 8/9/19)5,8288865,828————5,828Burgaflex Holdings, LLCCommon Stock (1,253,198 shares)—1,248———(7914571,40110,076———(7919,285City Gear, LLCSubordinated Debt (13.0% Cash, Due 10/20/19)8,2311,0858,231————8,231City Gear, LLCPreferred Membership Units (2.8% fully diluted, 9.0% Cash Dividend)1151,269————1,269City Gear, LLCMembership Unit Warrants (11.4% fully diluted)—9,736———(1,4888,2481,20019,236———(1,48817,748GA Communications, Inc.Series A-1 Preferred Stock (1,998 shares, 8.0% PIK Dividend)—2,864255——1063,225GA Communications, Inc.Series B-1 Common Stock (200,000 shares)—1,046———8861,932—3,910255——9925,157J&J Produce Holdings, Inc.Subordinated Debt (6.0% Cash, 7.0% PIK, Due 6/16/19)6,3686326,182186——(1986,170J&J Produce Holdings, Inc.Common Stock (8,182 shares)———————J&J Produce Holdings, Inc.Common Stock Warrants (6,369 shares)———————6326,182186——(1986,170F-44(4)(1)(2)(3))))))(5)))(5)))TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 5. Transactions With Affiliated Companies – (continued) Company​​Type of Investment​​PrincipalAmount​​Amount ofInterest, Feesor DividendsCredited toIncome​​December 31,2016Fair ValueGrossAdditionsGrossReductionsRealizedGain/(Loss)UnrealizedGain/(Loss)December 31,2017Fair Value​LJS Partners, LLCCommon Stock (1,500,000 shares)$—$8,497$—$(630$—$(217$7,650—8,497—(630—(2177,650MJC Holdings, LLCSeries A Preferred Units (2,000,000 units)—5,011—(5,4734,473(4,011——5,011—(5,4734,473(4,011—MMI Holdings, LLCFirst Lien Debt (12.0% Cash, Due 1/31/19)$2,6003172,600————2,600MMI Holdings, LLCSubordinated Debt (6.0% Cash, Due 1/31/19)40024400————400MMI Holdings, LLCPreferred Units (1,000 units, 6.0% PIK Dividend)—1,43385——21,520MMI Holdings, LLCCommon Membership Units (45 units)—228———(351933414,66185——(334,713MTI Holdings, LLCMembership Units (2,000,000 units)—537—(437437(437100—537—(437437(437100Sierra Hamilton Holdings CorporationCommon Stock (15,068,000 shares)——6,958——1,5708,528——6,958——1,5708,528Source Capital Penray, LLCSubordinated Debt (13.0% Cash, Due 4/8/19)—781,425—(1,425———Source Capital Penray, LLCMembership Units (11.3% ownership)526805—(750—461016042,230—(2,175—46101STX Healthcare Management Services, Inc.Common Stock (1,200,000 shares)—109—(1616(1693—109—(1616(1693U.S. Well Services, LLCFirst Lien Debt (7.4% Cash (1 month LIBOR + 6.0%, 1.0% Floor), Due 2/2/22)2,299132—2,299———2,299U.S. Well Services, LLCFirst Lien Debt (12.4% PIK (1 month LIBOR + 11.0%, 1.0% Floor), Due 2/2/22)9,51683—9,516———9,516U.S. Well Services, LLCClass A Units (5,680,688 Units)——6,260——8,74415,004U.S. Well Services, LLCClass B Units (2,076,298 Units)——441——514955215—18,516——9,25827,774F-45(4)(1)(2)(3)))))))))(5))))))))))))))TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 5. Transactions With Affiliated Companies – (continued) Company​​Type of Investment​​PrincipalAmount​​Amount ofInterest, Feesor DividendsCredited toIncome​December 31,2016Fair ValueGrossAdditionsGrossReductionsRealizedGain/(Loss)UnrealizedGain/(Loss)December 31,2017Fair Value​V12 Holdings, Inc.Subordinated Debt$—$—$1,015$—$—$—$20$1,035—1,015———201,035Total Affiliate investments$5,150$61,464$41,862$(8,731$4,926$4,436$103,957Control investmentsCableOrganizer Acquisition, LLCFirst Lien Debt (12.0% Cash, 4.0% PIK, Due 5/24/18)$12,373$1,473$11,882$491$—$—$—$12,373CableOrganizer Acquisition, LLCCommon Stock (21.3% fully diluted)—200———(82118CableOrganizer Acquisition, LLCCommon Stock Warrants (10.0% fully diluted)—101———(41601,47312,183491——(12312,551Capitala Senior Liquid Loan Fund I, LLCCommon Stock (80.0% Ownership)5——————5——————Eastport Holdings, LLCSubordinated Debt (14.5% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 4/29/20)16,5003,13816,500757——(75716,500Eastport Holdings, LLCMembership Units (33.3% ownership)—13,395———13,05426,4493,13829,895757——12,29742,949Kelle’s Transport Service, LLCFirst Lien Debt (4.0% Cash, Due 2/15/20)2,00022—2,000———2,000Kelle’s Transport Service, LLCFirst Lien Debt (1.5% Cash, Due 2/15/20)13,67477—13,669——(4,1099,560Kelle’s Transport Service, LLCMembership Units (27.5% fully diluted)———————99—15,669——(4,10911,560Micro Precision, LLCSubordinated Debt (10.0% Cash, Due 9/15/18)1,8621861,862————1,862Micro Precision, LLCSubordinated Debt (14.0% Cash, 4.0% PIK, Due 9/15/18)4,1545773,989165———4,154Micro Precision, LLCSeries A Preferred Units (47 units)—2,523———(8941,6297638,374165——(8947,645Navis Holdings, Inc.First Lien Debt (15.0% Cash, Due 10/30/20)6,5009896,500————6,500Navis Holdings, Inc.Class A Preferred Stock (1,000 shares, 10.0% Cash Dividend)1001,000————1,000F-46(4)(1)(2)(3))))))))))(5)(1)Represents the total amount of interest, original issue discount, fees or dividends credited to income for theportion of the year an investment was included in Affiliate or Control categories, respectively.(2)Gross additions include increases in the cost basis of investments resulting from new portfolio investments,follow-on investments and accrued PIK and OID. Gross additions also include transfers into an Affiliate orControl classification.(3)Gross reductions include decreases in the cost basis of investments resulting from principal repayments andsales. Gross reductions also includes transfers out of Affiliate or Control classification.(4)All debt investments are income producing. Equity and warrant investments are non-income producing,unless otherwise noted.TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 5. Transactions With Affiliated Companies – (continued) Company​Type of InvestmentPrincipalAmountAmount ofInterest, Feesor DividendsCredited toIncomeDecember 31,2016Fair ValueGrossAdditionsGrossReductionsRealizedGain/(Loss)UnrealizedGain/(Loss)December 31,2017Fair Value​Navis Holdings, Inc.Common Stock (300,000 shares)$250$5,634$—$ —$—$(629$5,0051,33913,134———(62912,505On-Site Fuel Service, Inc.Subordinated Debt (18.0% Cash, Due 12/19/18)$14,072—10,3031,182——10311,588On-Site Fuel Service, Inc.Series A Preferred Stock (32,782 shares)———————On-Site Fuel Service, Inc.Series B Preferred Stock (23,648 shares)———————On-Site Fuel Service, Inc.Common Stock (33,058 shares)————————10,3031,182——10311,588Portrait Studio, LLCFirst Lien Debt (8.6% Cash (1 month LIBOR + 7.0%, 2.0% Ceiling), Due 12/31/22)1,860——1,860———1,860Portrait Studio, LLCFirst Lien Debt (8.6% Cash (1 month LIBOR + 7.0%, 5.0% Ceiling), Due 12/31/22)4,500——4,500———4,500Portrait Studio, LLCPreferred Units (4,350,000 Units)——2,450———2,450Portrait Studio, LLCMembership Units (150,000 Units)—————————8,810———8,810Print Direction, Inc.First Lien Debt (10.0% Cash 2.0% PIK, due 2/24/19)—43412,7612,087—(19,4034,555—Print Direction, Inc.Common Stock (18,543 shares)——40—(3,0302,990—Print Direction, Inc.Common Stock Warrants (820 shares)———————43412,7612,127—(22,4337,545—Total Control investments$7,251$86,650$29,201$—$(22,433$14,190$107,608F-47(4)(1)(2)(3)))(6)))))(5)The equity investment is income producing, based on rate disclosed.(6)Non-accrual investment.•determines the composition of our portfolio, the nature and timing of the changes to our portfolio andthe manner of implementing such changes;•identifies, evaluates and negotiates the structure of the investments we make (including performingdue diligence on our prospective 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 timerequire.TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 5. Transactions With Affiliated Companies – (continued) Note 6. AgreementsOn September 24, 2013, the Company entered into an investment advisory agreement (the “InvestmentAdvisory Agreement”) with our Investment Advisor, which was initially approved by the Board on June 10,2013. Unless earlier terminated in accordance with its terms, the Investment Advisory Agreement will remain ineffect if approved annually by the Board or by a majority of our outstanding voting securities, including, ineither case, by a majority of our non-interested directors. The Investment Advisory Agreement was most recentlyre-approved by the Board, including a majority of our non-interested directors, at an in-person meeting on July26, 2018. 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 InvestmentAdvisory Agreement, the Investment Advisor:The Investment Advisor’s services under the Investment Advisory Agreement are not exclusive, and it isfree to furnish similar services 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 inthe performance of its duties or by reason of the reckless disregard of its duties and obligations, the InvestmentAdvisor and its officers, managers, partners, agents, employees, controlling persons, members and any otherperson or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities,costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arisingfrom the rendering of our Investment Advisor’s services under the Investment Advisory Agreement or otherwiseas Investment Advisor for the Company.Pursuant to the Investment Advisory Agreement, the Company has agreed to pay the Investment Advisor afee for investment advisory and management services consisting of two components — a base management feeand an incentive fee.The base management fee is calculated at an annual rate of 1.75% of the gross assets, which are the totalassets reflected on the consolidated statements of assets and liabilities and includes any borrowings forinvestment purposes. Although the Company does not anticipate making significant investments in derivativefinancial instruments, the fair value of any such investments, which will not necessarily equal their notionalvalue, will be included in the calculation of gross assets. For services rendered under the Investment AdvisoryAgreement, the base management fee is payable quarterly in arrears. The base management fee is calculatedbased on the average value of the gross assets at the end of the two most recently completed calendar quarters,and appropriately adjusted for any share issuances or repurchases during the current calendar quarter.The incentive fee consists of the following two parts:F-48•no incentive fee in any calendar quarter in which the pre-incentive fee net investment income does notexceed the hurdle of 2.0%;•100% of the pre-incentive fee net investment income with respect to that portion of such pre-incentivefee net investment income, if any, that exceeds the hurdle but is less than 2.5% in any calendar quarter(10.0% annualized). The Company refers to this portion of the pre-incentive fee net investmentincome (which exceeds the hurdle but is less than 2.5%) as the “catch-up.” The “catch-up” is meant toprovide the Investment Advisor with 20% of the pre-incentive fee net investment income as if a hurdledid 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 anycalendar quarter (10.0% annualized) is payable to the Investment Advisor (once the hurdle is reachedand the catch-up is achieved, 20% of all pre-incentive fee investment income thereafter is allocated tothe Investment Advisor).TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 6. Agreements – (continued) The first part of the incentive fee is calculated and payable quarterly in arrears based on the pre-incentivefee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee netinvestment income means interest income, dividend income and any other income (including any other fees(other than fees for providing managerial assistance), such as commitment, origination, structuring, diligenceand 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, expenses payable under theAdministration Agreement to our Administrator, and any interest expense and dividends paid on any issued andoutstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes,in the case of investments with a deferred interest feature (such as original issue discount, debt instruments withPIK 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 orunrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate ofreturn on the value of our net assets at the end of the immediately preceding calendar quarter, is compared to ahurdle of 2.0% per quarter (8.0% annualized). The net investment income used to calculate this part of theincentive fee is also included in the amount of the gross assets used to calculate the 1.75% base management fee.The Company pays the Investment Advisor an incentive fee with respect to the pre-incentive fee net investmentincome in each calendar quarter as follows:The Investment Advisor has voluntarily agreed to waive all or such portion of the quarterly incentive feesearned by the Investment Advisor that would otherwise cause the Company’s quarterly net investment income tobe less than the distribution payments declared by the Board. Quarterly incentive fees are earned by theInvestment Advisor pursuant to the Investment Advisory Agreement. Incentive fees subject to the waiver cannotexceed the amount of incentive fees earned during the period, as calculated on a quarterly basis. The InvestmentAdvisor will not be entitled to recoup any amount of incentive fees that it waives. The waiver was effective inthe 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 upon termination of the Investment Advisory Agreement, as of the termination date), and will equal 20% ofour realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year,computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less theaggregate amount of any previously paid capital gain incentive fees with respect to each of the investments inour portfolio.The Company will defer cash payment of the portion of any incentive fee otherwise earned by theInvestment Advisor that would, when taken together with all other incentive fees paid to the InvestmentF-49TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 6. Agreements – (continued) Advisor during the most recent 12 full calendar month period ending on or prior to the date such payment is tobe made, exceed 20% of the sum of  (a) the pre-incentive fee net investment income during such period, (b) thenet unrealized appreciation or depreciation during such period and (c) the net realized capital gains or lossesduring such period. Any deferred incentive fees will be carried over for payment in subsequent calculationperiods to the extent such payment is payable under the Investment Advisory Agreement. As of December 31,2018 and December 31, 2017, the Company had incentive fees payable to the Investment Advisor of  $2.5million and $2.2 million, respectively.For the years ended December 31, 2018, 2017 and 2016, the Company incurred $9.0 million, $9.8 millionand $10.6 million in base management fees, respectively. The Company incurred $0.2 million, $1.3 million and$6.8 million in incentive fees related to pre-incentive fee net investment income for the years ended December31, 2018, 2017 and 2016, respectively. For the years ended December 31, 2018, 2017 and 2016, our InvestmentAdvisor waived incentive fees of  $0.0 million, $1.0 million and $1.7 million, respectively.On September 24, 2013, the Company entered into the Administration Agreement, pursuant to which theAdministrator has agreed to furnish the Company with office facilities, equipment and clerical, bookkeeping andrecord keeping services at such facilities. The Administrator also performs, or oversees the performance of therequired administrative services, which include, among other things, being responsible for the financial recordsthat the Company is required to maintain and preparing reports to our stockholders. In addition, theAdministrator assists in determining and publishing the net asset value, oversees the preparation and filing ofthe tax returns and the printing and dissemination of reports to the stockholders, and generally oversees thepayment of the expenses and the performance of administrative and professional services rendered to theCompany by others.Payments under the Administration Agreement are equal to an amount based upon the allocable portion ofthe Administrator’s overhead in performing its obligations under the Administration Agreement, including rent,the fees and expenses associated with performing compliance functions and the allocable portion of thecompensation of the chief financial officer and the chief compliance officer, and their respective administrativesupport staff. Under the Administration Agreement, the Administrator will also provide, on the Company’sbehalf, managerial assistance to those portfolio companies that request such assistance. Unless terminated earlierin 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 July 26, 2018. To theextent that the Administrator outsources any of its functions, the Company will pay the fees associated with suchfunctions on a direct basis without any incremental profit to our Administrator. Stockholder approval is notrequired to amend the Administration Agreement.For the years ended December 31, 2018, 2017, and 2016, the Company paid the Administrator $1.4 million,$1.1 million and $1.1 million, respectively, for the Company’s allocable portion of the Administrator’soverhead.The Administration Agreement provides that, absent willful misfeasance, bad faith or negligence in theperformance of its duties or by reason of the reckless disregard of its duties and obligations, our Administratorand its officers, managers, partners, agents, employees, controlling persons, members and any other person orentity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs andexpenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from therendering of our Administrator’s services under the Administration Agreement or otherwise as Administrator forthe Company.F-50TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 7. Related Party TransactionsAt December 31, 2018 and December 31, 2017, the Company had the following receivables from (payablesto) related parties relating to certain management fees, incentive fees, reimbursable expenses, and otherpayments owed to related parties (dollars in thousands):December 31, 2018December 31, 2017​CapitalSouth Corporation$—$74CapitalSouth Partners Florida Sidecar Fund II, L.P.—21Capitala Investment Advisors, LLC(2,487(2,172Total$(2,487$(2,077These amounts are reflected in the accompanying consolidated statements of assets and liabilities under thecaptions, “Due from related parties” and “Management and incentive fees payable.”On August 31, 2016, the Company sold assets to FSC II in exchange for 100% of the partnership interests inFSC II. Concurrent with the sale of these assets to FSC II, the Company received cash consideration of  $47.6million from an affiliated third-party purchaser in exchange for 100% of the partnership interests of FSC II. TheCompany’s Board pre-approved this transaction pursuant to Section 57(f) of the 1940 Act. The Administratoralso serves as the administrator to FSC II. See Note 4 for a further description of this transaction.The Company may invest in the same unitranche facility as CSLF II whereby CSLF II provides the first-outportion of the unitranche facility and the Company and other lenders provide the last-out portion of theunitranche facility. Under a guarantee agreement, the Company may be required to purchase its pro-rata portionof first-out loans from CSLF II upon certain triggering events, including acceleration upon payment default ofthe underlying borrower. As of December 31, 2018, the Company has evaluated the fair value of the guaranteeunder the guidance of ASC Topic 460 — Guarantees and determined that the fair value of the guarantee isimmaterial as the risk of payment default for first-out loans in CSLF II is considered remote. The maximumexposure to credit risk as of December 31, 2018 is $4.3 million and extends to the stated maturity of theunderlying loans in CSLF II.Note 8. BorrowingsSBA DebenturesThe Company, through its two wholly owned subsidiaries, uses debenture leverage provided through theSBA to fund a portion of its investment portfolio. As of December 31, 2018 and December 31, 2017, theCompany had $165.7 million and $170.7 million, respectively, of SBA-guaranteed debentures outstanding. TheCompany has issued all SBA-guaranteed debentures that were permitted under each of the Legacy Funds’respective SBIC licenses (as applicable), and there are no unused SBA debenture commitments remaining. SBA-guaranteed debentures are secured by a lien on all assets of Fund II and Fund III. As of December 31, 2018 andDecember 31, 2017, Fund II and Fund III had total assets of approximately $332.7 million and $341.5 million,respectively. On June 10, 2014, the Company received an exemptive order from the SEC exempting theCompany, Fund II, and Fund III from certain provisions of the 1940 Act (including an exemptive order grantingrelief from the asset coverage requirements for certain indebtedness issued by Fund II and Fund III as SBICs) andfrom certain reporting requirements mandated by the Securities Exchange Act of 1934, as amended, with respectto Fund II and Fund III. The Company intends to comply with the conditions of the order.F-51))))TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 8. Borrowings – (continued) The following table summarizes the interest expense and annual charges, deferred financing costs, averagebalance outstanding, and average stated interest and annual charge rate on the SBA-guaranteed debentures forthe years ended December 31, 2018, 2017 and 2016 (dollars in thousands):For the year ended​​December 31,2018​​December 31,2017​December 31,2016Interest expense and annual charges$6,244$6,336$6,873Deferred financing costs612611627Total interest and financing expenses$6,856$6,947$7,500Average outstanding balance$169,028$170,700$178,695Average stated interest and annual charge rate3.693.713.83As of December 31, 2018 and December 31, 2017, the Company’s issued and outstanding SBA-guaranteeddebentures mature as follows (dollars in thousands):Fixed Maturity DateInterestRateSBA AnnualChargeDecember 31,2018December 31,2017​March 1, 20194.6200.941$—$5,000September 1, 20203.2150.28519,00019,000March 1, 20214.0840.51515,70015,700March 1, 20214.0840.28546,00046,000March 1, 20222.7660.28510,00010,000March 1, 20222.7660.51550,00050,000March 1, 20232.3510.51525,00025,000$165,700$170,7002021 NotesOn June 16, 2014, the Company issued $113.4 million in aggregate principal amount of 7.125% fixed-ratenotes due 2021 (the “2021 Notes”). On May 26, 2017, the Company caused notices to be issued to the holders ofits 2021 Notes regarding the Company’s exercise of its option to redeem all of the issued and outstanding 2021Notes. The Company redeemed all $113.4 million in aggregate principal amount of the 2021 Notes 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, theCompany recognized a loss on the extinguishment of debt of $2.7 million for the year ended December 31,2017, due to the amortization of the deferred financing costs remaining on the 2021 Notes.F-52%%%%%%%%%%%%%%%%%TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 8. Borrowings – (continued) The following table summarizes the interest expense, deferred financing costs, average outstanding balanceand average stated interest rate on the 2021 Notes for the years ended December 31, 2018, 2017, and 2016(dollars in thousands):For the year endedDecember 31,2018December 31,2017December 31,2016​Interest expense$ —$3,908$8,082Deferred financing costs—293557Total interest and financing expenses$—$4,201$8,639Average outstanding balance$—$53,766$113,438Average stated interest rate—7.137.132022 NotesOn May 16, 2017, the Company issued $70.0 million in aggregate principal amount of 6.0% fixed-ratenotes due May 31, 2022 (the “2022 Notes”). On May 25, 2017, the Company issued an additional $5.0 millionin aggregate principal amount of the 2022 Notes pursuant to a partial exercise of the underwriters’ overallotmentoption. The 2022 Notes will mature on May 31, 2022 and may be redeemed in whole or in part at any time orfrom time to time at the Company’s option on or after May 31, 2019 at a redemption price equal to 100% of theoutstanding principal, plus accrued and unpaid interest. Interest was payable quarterly beginning August 31,2017.The following table summarizes the interest expense, deferred financing costs, average outstanding balance,and average stated interest rate on the 2022 Notes for the years ended December 31, 2018, 2017, and 2016(dollars in thousands):For the year endedDecember 31,2018December 31,2017December 31,2016​Interest expense$4,500$2,812$ —Deferred financing costs509303—Total interest and financing expenses$5,009$3,115$—Average outstanding balance$75,000$47,137$—Average stated interest rate6.06.0—2022 Convertible NotesOn May 26, 2017, the Company issued $50.0 million in aggregate principal amount of 5.75% fixed-rateconvertible notes due May 31, 2022 (the “2022 Convertible Notes”). On June 26, 2017, the Company issued anadditional $2.1 million in aggregate principal amount of the 2022 Convertible Notes pursuant to a partialexercise of the underwriters’ overallotment option. Interest was payable quarterly beginning August 31, 2017.The 2022 Convertible Notes are convertible, at the holder’s option, into shares of the Company’s commonstock at any time on or prior to the close of business on the business day immediately preceding the maturitydate. The conversion rate for the 2022 Convertible Notes is initially 1.5913 shares per $25.00 principal amountof 2022 Convertible Notes (equivalent to an initial conversion price of approximately $15.71 per share ofcommon stock). The initial conversion premium is approximately 14.0%.F-53%%%%%TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 8. Borrowings – (continued) Upon conversion, the Company will deliver shares of its common stock (and cash in lieu of fractional shares).The conversion rate is subject to adjustment if certain events occur as outlined in the supplemental indenturerelating to the 2022 Convertible Notes. The Company has determined that the embedded conversion option inthe 2022 Convertible Notes is not required to be separately accounted for as a derivative under U.S. GAAP.In addition, pursuant to a “fundamental change”, as defined in the supplemental indenture relating to the2022 Convertible Notes, holders of the 2022 Convertible Notes may require the Company to repurchase for cashall or part of their 2022 Convertible Notes at a repurchase price equal to 100.0% of the principal amount of the2022 Convertible Notes to be repurchased, plus accrued and unpaid interest through, but excluding, therepurchase date. The 2022 Convertible Notes are not redeemable prior to maturity and no “sinking fund” isprovided for the 2022 Convertible Notes.The following table summarizes the interest expense, deferred financing costs, average outstanding balance,and average stated interest rate on the 2022 Convertible Notes for the years ended December 31, 2018, 2017,and 2016 (dollars in thousands):For the year endedDecember 31,2018December 31,2017December 31,2016​Interest expense$2,995$1,789$ —Deferred financing costs324180—Total interest and financing expenses$3,319$1,969$—Average outstanding balance$52,088$31,218$—Average stated interest rate5.755.75—Credit FacilityOn October 17, 2014, the Company entered into a senior secured revolving credit agreement (the “CreditFacility”) with ING Capital, LLC, as administrative agent, arranger, and bookrunner, and the lenders partythereto. The Credit Facility was amended on May 22, 2015, June 16, 2017, and July 19, 2018 (the“Amendments”). The Amendments were affected, among other things, in order to increase the total borrowingsallowed under the Credit Facility, allow for stock repurchases, extend the maturity date, and to reduce theminimum required interest coverage ratio. The Credit Facility currently provides for borrowings up to $114.5million and may be increased up to $200.0 million pursuant to its “accordion” feature. The Credit Facilitymatures 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) aprime rate, (B) the Federal Funds rate plus 0.5% and (C) three month LIBOR plus 1.0%. The Company’s abilityto elect LIBOR indices with various tenors (e.g., one, two, three or six month LIBOR) on which the interest ratesfor borrowings under the Credit Facility are based, provides the company with increased flexibility to manageinterest rate risks as compared to a borrowing arrangement that does not provide for such optionality. Once aparticular LIBOR rate has been selected, the interest rate on the applicable amount borrowed will reset after theapplicable tenor period and be based on the then applicable selected LIBOR rate (e.g., borrowings for which theCompany has elected the one month LIBOR rate will reset on the one month anniversary of the period based onthe then selected LIBOR rate). For any given borrowing under the Credit Facility, the Company intends to electwhat it believes to be an appropriate LIBOR rate taking into account the Company’s needs at the time as well asthe Company’s view of future interest rate movements. The Credit Facility provides for the ability to step-downthe pricing of the CreditF-54%%(1)Carrying value equals the gross principal outstanding at period end.TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 8. Borrowings – (continued) Facility from LIBOR plus 3.00% to LIBOR plus 2.75% when certain conditions are met. The Company will alsopay an unused commitment fee at a rate of 2.50% per annum on the amount (if positive) by which 40% of theaggregate commitments under the Credit Facility exceeds the outstanding amount of loans under the CreditFacility 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 outstanding balance, and average stated interest rate on the Credit Facility for the years ended December31, 2018, 2017, and 2016 (dollars in thousands):For the year endedDecember 31,2018December 31,2017December 31,2016​Interest expense$305$908$2,303Deferred financing costs441713965Unused commitment fees1,353972304Total interest and financing expenses$2,099$2,593$3,572Average outstanding balance$6,304$22,493$64,625Average stated interest rate4.894.083.51As of December 31, 2018 and December 31, 2017, the Company had $10.0 million and $9.0 million,respectively, outstanding under the Credit Facility. The Credit Facility is secured by investments and cash heldby the Company, exclusive of assets held at our two SBIC subsidiaries. Assets pledged to secure the CreditFacility had a carrying value of  $158.9 million and $192.4 million, respectively, at December 31, 2018 andDecember 31, 2017. As part of the terms of the Credit Facility, the Company may not make cash distributionswith respect to any taxable year that exceed 110% (125% if the Company is not in default and our covered debtdoes not exceed 85% of the borrowing base) of the amounts required to be distributed to maintain eligibility as aRIC and to reduce our tax liability to zero for taxes imposed on our investment company taxable income and netcapital gains.Financial Instruments Disclosed, But Not Carried, At Fair ValueThe following table presents the carrying value and fair value of the Company’s financial liabilitiesdisclosed, but not carried, at fair value as of December 31, 2018, and the level of each financial liability withinthe fair value hierarchy (dollars in thousands):CarryingValueFair ValueLevel 1Level 2Level 3​SBA debentures$165,700$165,436$—$ —$165,4362022 Notes75,00074,70074,700——2022 Convertible Notes52,08849,54649,546——Credit Facility10,00010,030——10,030Total$302,788$299,712$124,246$—$175,466F-55%%%(1)(1)Carrying value equals the gross principal outstanding at period end.TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 8. Borrowings – (continued) The following table presents the carrying value and fair value of the Company’s financial liabilitiesdisclosed, but not carried, at fair value as of December 31, 2017, and the level of each financial liability withinthe fair value hierarchy (dollars in thousands):CarryingValueFair ValueLevel 1Level 2Level 3​SBA debentures$170,700$173,373$—$ —$173,3732022 Notes75,00075,60075,600——2022 Convertible Notes52,08851,77551,775——Credit Facility9,0009,038——9,038Total$306,788$309,786$127,375$—$182,411The estimated fair value of the Company’s SBA debentures was based on future contractual cash paymentsdiscounted at market interest rates to borrow from the SBA as of the measurement date.The estimated fair value of the 2022 Notes and 2022 Convertible Notes was based on their respectiveclosing prices as of the measurement date as they are traded on the NASDAQ Global Select Market under theticker “CPTAL” (2022 Notes) and on the NASDAQ Capital Market under the ticker “CPTAG” (2022 ConvertibleNotes).The estimated fair value of the Credit Facility was based on future contractual cash payments discounted atestimated market interest rates for similar debt.Note 9. Income TaxesThe Company has elected to be treated as a RIC under subchapter M of the Code. As a RIC, the Company isnot taxed on any investment company taxable income or capital gains which it distributes to stockholders. TheCompany intends to make the requisite distributions to its stockholders which will relieve the Company fromU.S. federal income taxes. The Company elected to amend its tax year end from August 31 to December 31 andhas filed a tax return for the four months ended December 31, 2017. The election to change the tax year end isnot expected to have a material impact on the Company’s consolidated statements of operations, the Company’stax status as a RIC, or the nature of distributions paid to our stockholders.Dividends from net investment income and distributions from net realized capital gains are determined inaccordance with U.S. federal tax regulations, which may differ from amounts in accordance with U.S. GAAP andthose differences could be material.Permanent differences between taxable income and net investment income for financial reporting purposesare reclassified among the capital accounts in the financial statements to reflect their tax character. During theperiods ended December 31, 2018, December 31, 2017, August 31, 2017 and August 31, 2016, the Companyreclassified for book purposes amounts arising from permanent differences in the book and tax basis ofpartnership investments sold, sales relating to defaulted bond accruals, and book and tax character ofdistributions paid. Such reclassifications are reported in “Tax reclassifications of stockholders’ equity inaccordance with generally accepted accounting principles” in the statements of changes in net assets for theyears ended December 31, 2018, 2017 and 2016, respectively.F-56(1)TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 9. Income Taxes – (continued) The following permanent differences due to adjustments for the realized gains (losses) upon disposition ofpartnership interests and for the transfer of distributions between accumulated capital gains and accumulated netinvestment income were reclassified for tax purposes for the tax periods ended December 31, 2018, December31, 2017, August 31, 2017 and August 31, 2016 (dollars in thousands):Tax year ended December 31, 2018​Tax period ended December 31, 2017​​Tax year ended August 31, 2017​​Tax year ended August 31, 2016Increase (decrease) in accumulated net investmentincome$  38$  —$ (67$ 13,838Increase (decrease) in accumulated net realized gains on investments——88(13,816Decrease in capital in excess of par value(38—(21(22For the tax periods ended December 31, 2018, December 31, 2017, August 31, 2017 and August 31, 2016,the tax basis components of distributable earnings were as follows (dollars in thousands):Tax year ended December 31, 2018Tax period ended December 31, 2017Tax year ended August 31, 2017Tax year ended August 31, 2016Undistributed ordinary income$1,016$9,851$8,999$5,646Accumulated capital losses(79,063(44,078(43,618(44,296Unrealized appreciation6,51934,06525,99447,837Other temporary differences(610(9,426(8,276(2,570Total$(72,138$(9,588$(16,901$6,617Capital losses in excess of capital gains earned in a tax year may generally be carried forward and used tooffset capital gains, subject to certain limitations. Under the Regulated Investment Company Modernization Actof 2010, capital losses incurred after September 30, 2011 will not be subject to expiration. As of December 31,2018, the Company has a short-term capital loss carry forward of $4.2 million and a long-term capital loss carryforward of  $74.8 million.Taxable income generally differs from net increase (decrease) in net assets resulting from operations forfinancial reporting purposes due to temporary and permanent differences in the recognition of income andexpenses and generally excludes unrealized appreciation (depreciation) on investments as investment gains andlosses are not included in taxable income until they are realized.The following table reconciles net increase (decrease) in net assets resulting from operations to taxableincome for the tax periods ended December 31, 2018, December 31, 2017, August 31, 2017 and August 31, 2016(dollars in thousands):​​Tax year ended December 31, 2018​​Tax period ended December 31, 2017Tax year ended August 31, 2017Tax year ended August 31, 2016Net increase (decrease) in net assets resulting fromoperations$(16,026$(17,150$1,647$10,291Net change in unrealized (appreciation) depreciation oninvestments(840(1,69818,518(20,809Capital loss carryforward (utilization)34,985460(67944,296Tax provision (benefit)(1,9161,289——F-57)))))))))))))))))))))))TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 9. Income Taxes – (continued) ​​Tax yearendedDecember 31,2018​​Tax periodendedDecember 31,2017​​Tax yearendedAugust 31,2017​​Tax yearendedAugust 31,2016​Other deductions for book in excess of deductions for tax(9,05124,9819,053(3,654Total taxable income$7,152$7,882$28,539$30,124For income tax purposes, distributions paid to stockholders are reported as ordinary income, return ofcapital, long term capital gains or a combination thereof. The tax character of distributions paid for the taxperiods ended December 31, 2018, December 31, 2017, August 31, 2017, and August 31, 2016 (dollars inthousands):Tax year ended December 31, 2018Tax period ended December 31, 2017Tax Year ended August 31, 2017Tax year ended August 31, 2016​Ordinary income$15,986$6,052$25,187$24,478Long-term capital gains———8,378Return of capital————Total$15,986$6,052$25,187$32,856For U.S. federal income tax purposes, as of December 31, 2018, the aggregate net unrealized appreciationfor all securities was $6.5 million. As of December 31, 2018, gross unrealized appreciation was $31.9 millionand gross unrealized depreciation was $25.4 million. The aggregate cost of securities for U.S. federal income taxpurposes was $442.4 million. For U.S. federal income tax purposes, as of December 31, 2017, the aggregate netunrealized appreciation for all securities was $34.1 million. As of December 31, 2017, gross unrealizedappreciation was $79.7 million and gross unrealized depreciation was $45.6 million. The aggregate cost ofsecurities for U.S. federal income tax purposes was $465.9 million as of December 31, 2017.The Company has formed and expects to continue to form certain Taxable Subsidiaries, which are taxed ascorporations for income tax purposes. These Taxable Subsidiaries allow the Company to make equityinvestments in companies organized as pass-through entities while continuing to satisfy the requirements of aRIC under the Code. The Taxable Subsidiaries are wholly owned consolidated subsidiaries of the Company.The Company acquired the non-controlling interest in Print Direction, Inc. on December 1, 2017 andconverted the entity to CPTA Master Blocker, Inc. (Georgia), retaining its net operating losses in the transactionpursuant to Section 351 of the Code. As of December 31, 2018, the Taxable Subsidiaries had net operatinglosses for U.S. federal income tax purposes of approximately $11.9 million. If not utilized, $6.0 million of thesenet operating losses will expire in the year ended December 31, 2037, $2.4 million of these net operating losseswill expire in the year ended December 31, 2036, and $3.5 million of these net operating losses have noexpiration.On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act,which significantly changes the existing U.S. tax laws, including a reduction in the corporate tax rate from 35%to 21%, a move from a worldwide tax system to a territorial system, as well as other changes. The TaxableSubsidiaries’ provisional tax is based on the new lower blended federal and state corporate tax rate of 24.86%.The implementation of the Tax Act did not have a material impact on the Company’s financial position andresults of operations.F-58))TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 9. Income Taxes – (continued) Deferred U.S. federal income taxes reflect the net tax effect of temporary differences between the carryingamount of assets and liabilities for financial reporting and U.S. federal income tax purposes. Components ofdeferred tax assets (liabilities) as of December 31, 2018 and 2017 are as follows (dollars in thousands):December 31,2018December 31,2017​Deferred tax assets:Net operating loss carryforwards$2,963$2,216Other deferred tax assets58—Less valuation allowance(364(3632,6571,853Deferred tax liabilities:Net unrealized appreciation on investments(825(2,809Basis reduction in partnership investments(1,204(333(2,029(3,142Net deferred tax asset (liability)$628$(1,289At December 31, 2018 and December 31, 2017, the valuation allowance on deferred tax assets was$0.4 million which represents the state tax effect of net operating losses that we do not believe we will realizethrough future taxable income. The Company believes it is more likely than not that there is an ability to realizeits remaining deferred tax assets through future table income. Any adjustments to the Company’s valuationallowance will depend on estimates of future taxable income and will be made in the period such determinationis made.Total income tax expense (benefit) differs from the amount computed by applying the federal statutoryincome tax rate of 21% to net investment loss and net realized and unrealized appreciation (depreciation) oninvestments for the years ended December 31, 2018, 2017, and 2016, as follows (dollars in thousands):For the year endedDecember 31,2018December 31,2017December 31,2016​Tax expense (benefit) at statutory rates$(1,447$1,998$ —State income tax expense (benefit), net of federal benefit(266188—Tax benefit on net operating losses—(908—Adjustment to unrealized appreciation(159——Other adjustments(40——Tax expense on permanent items—140—Revaluation for federal rate change—(492—Revaluation for state rate change(5Change in valuation allowance1363—Total tax provision (benefit), net$(1,916$1,289$—Total income taxes are computed by applying the federal statutory rate of 21% plus an estimated blendedstate rate of 3.86%.F-59)))))))))))))))))TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 9. Income Taxes – (continued) For the years ended December 31, 2018, 2017 and 2016, the components of the Company’s tax provisioninclude the following:For the year endedDecember 31,2018December 31,2017December 31,2016​Deferred tax provision (benefit)Federal$(1,615$778$ —State(302148—Less valuation allowance1363—Total tax provision (benefit), net$(1,916$1,289$—Note 10. Directors’ FeesOur independent directors receive an annual fee of  $50,000. They also receive $5,000 plus reimbursementof reasonable out-of-pocket expenses incurred in connection with attending each board meeting and $5,000 plusreimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committeemeeting. In addition, the chairman of the audit committee receives an annual fee of  $10,000 and each chairmanof any other committee receives an annual fee of  $5,000 for their additional services, if any, in these capacities.For the years ended December 31, 2018, 2017 and 2016, the Company recognized directors’ fees expense of $0.4 million. No compensation is expected to be paid to directors who are “interested persons” of the Company,as such term is defined in Section 2(a)(19) of the 1940 Act.Note 11. Stockholders’ EquityOn September 24, 2013, we issued 8,974,420 shares of common stock to the limited partners of the LegacyFunds, in exchange for 100% of their membership interests or certain investment assets of such Legacy Funds, asthe case may be. On September 30, 2013, we issued 4,000,000 shares of common stock in connection with theclosing of our IPO. The shares issued in the IPO were priced at $20.00 per share. We received proceeds of  $74.25million 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 commonstock at a public offering price of  $18.32 per share. The total proceeds received in the offering net ofunderwriting discounts and offering costs were approximately $61.7 million. As of December 31, 2018, theCompany had 16,051,547 shares of common stock outstanding.Note 12. Summarized Financial Information of Our Unconsolidated SubsidiariesThe Company holds a control interest, as defined by the 1940 Act, in five portfolio companies that areconsidered significant subsidiaries under the guidance in Regulation S-X, but are not consolidated in theCompany’s consolidated financial statements. Below is a brief description of each such portfolio company,along with summarized financial information as of December 31, 2018 and 2017, and for the years endedDecember 31, 2018, 2017, and 2016.During the year ended December 31, 2018, the Company sold its investment in Kelle’s Transport Service,LLC and realized a loss of  $3.7 million. During the year ended December 31, 2018, the Company wrote-off itsinvestment in On-Site Fuel Service, Inc. and realized a loss of  $16.7 million.F-60)))TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 12. Summarized Financial Information of Our Unconsolidated Subsidiaries – (continued) AAE Acquisition, LLCAAE Acquisition, LLC, formed on May 21, 2004 as a Delaware limited liability company, is an aerialequipment rental and services business primarily serving the Gulf Coast region. The income (loss) the Companygenerated from AAE Acquisition, LLC, which includes all interest, dividends, PIK interest and PIK dividends,fees, and unrealized appreciation (depreciation), was $1.7 million, $1.7 million, and $(1.1) million for the yearsended December 31, 2018, December 31, 2017, and December 31, 2016, respectively.CableOrganizer Acquisition, LLCCableOrganizer Acquisition, LLC, a Delaware limited liability company that began operations on April 23,2013, is a leading online provider of cable and wire management products. The income (loss) the Companygenerated from CableOrganizer Acquisition, LLC, which includes all interest, dividends, PIK interest and PIKdividends, fees, and unrealized appreciation (depreciation), was $(2.4) million, $1.8 million, and $1.9 million forthe years ended December 31, 2018, December 31, 2017, and December 31, 2016, respectively.Eastport Holdings, LLCEastport Holdings, LLC, an Ohio limited liability company organized on November 1, 2011, is a holdingcompany consisting of marketing and advertising companies located across the U.S. The income the Companygenerated from Eastport Holdings, LLC, which includes all interest, dividends, PIK interest and dividends, fees,and unrealized appreciation (depreciation), was $11.4 million and $14.3 million for the years ended December31, 2017 and December 31, 2016, respectively. On August 27, 2018, the Written Call Option associated with theCompany’s investment in Eastport Holdings, LLC was exercised and, as a result of the reduced ownershippercentage, is no longer considered a control investment. The income the Company generated from EastportHoldings, LLC while it was considered a control investment from January 1, 2018 to August 27, 2018 was $2.1million. The summarized financial information disclosed below is as of August 31, 2018 and for the eightmonths ended August 31, 2018 as this is the period that Eastport Holdings, LLC was considered a controlinvestment.Micro Precision, LLCMicro Precision, LLC, formed on August 5, 2011 as a Delaware limited liability company, is a primecontractor supplying critical parts and mechanical assemblies to the U.S. Department of Defense as well asdesigner and manufacturer of locomotive air horns. The income (loss) the Company generated from MicroPrecision, LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealizedappreciation (depreciation), was $2.1 million, $0.0 million, and $1.8 million for the years ended December 31,2018, December 31, 2017, and December 31, 2016, respectively.Navis Holdings, Inc.Navis Holdings, Inc., incorporated in Delaware on December 21, 2010, designs and manufactures leadingmachinery for the global knit and woven finishing textile industries. The income the Company generated fromNavis Holdings, Inc., which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealizedappreciation (depreciation) was $0.6 million, $0.7 million, and $1.9 million for the years ended December 31,2018, December 31, 2017, and December 31, 2016, respectively.F-61TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 12. Summarized Financial Information of Our Unconsolidated Subsidiaries – (continued) The summarized unaudited financial information of our unconsolidated subsidiaries was as follows (dollarsin thousands):As ofBalance Sheets – AAE Acquisition, LLCDecember 31,2018December 31,2017​Current assets$7,277$6,712Noncurrent assets22,99427,668Total assets$30,271$34,380Current liabilities$53,939$2,897Noncurrent liabilities2,12251,428Total liabilities$56,061$54,325Total deficit$(25,790$(19,945For the year endedStatements of Operations – AAE Acquisition, LLC​​December 31,2018​​December 31,2017​December 31,2016​Net sales$27,162$26,677$28,352Cost of goods sold20,09820,26522,402Gross profit$7,064$6,412$5,950Other expenses$12,768$11,916$11,812Net loss before income taxes(5,704(5,504(5,862Income tax provision———Net loss$(5,704$(5,504$(5,862As ofBalance Sheets – CableOrganizer Acquisition, LLCDecember 31,2018December 31,2017​Current assets$2,987$5,182Noncurrent assets8,4598,354Total assets$11,446$13,536Current liabilities$13,094$5,205Noncurrent liabilities—12,346Total liabilities$13,094$17,551Total deficit$(1,648$(4,015For the year endedStatements of Operations – CableOrganizer Acquisition, LLC.December 31,2018​December 31,2017​​December 31,2016​Net sales$18,115$27,133$23,277Cost of goods sold12,18319,81915,715Gross profit$5,932$7,314$7,562Other expenses$7,960$10,690$10,344Net loss before income taxes(2,028(3,376(2,782Income tax provision———Net loss$(2,028$(3,376$(2,782F-62))))))))))))))))TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 12. Summarized Financial Information of Our Unconsolidated Subsidiaries – (continued) As ofBalance Sheets – Eastport Holdings, LLCAugust 31,2018December 31,2017​Current assets$99,483$94,396Noncurrent assets185,292180,266Total assets$284,775$274,662Current liabilities$163,085$153,182Noncurrent liabilities60,93956,272Total liabilities$224,024$209,454Total equity$60,751$65,208​​For the eight months ended August 31,2018​​For the year ended​Statements of Operations – Eastport Holdings, LLC​​December 31,2017​​December 31,2016​Net sales$373,943$510,400$499,986Cost of goods sold267,395364,605377,036Gross profit$106,548$145,795$122,950Other expenses$103,811$135,597$111,677Net income before income taxes2,73710,19811,273Income tax provision335278—Net income$2,402$9,920$11,273As ofBalance Sheets – Micro Precision, LLCDecember 31,2018December 31,2017​Current assets$5,880$6,187Noncurrent assets19,43615,864Total assets$25,316$22,051Current liabilities$7,712$6,511Noncurrent liabilities13,96115,790Total liabilities$21,673$22,301Total equity (deficit)$3,643$(250For the year endedStatements of Operations – Micro Precision, LLC​​December 31,2018​​December 31,2017December 31,2016​Net sales$12,083$14,053$17,788Cost of goods sold6,5958,67712,183Gross profit$5,488$5,376$5,605Other expenses$5,562$6,590$6,836Net loss before income taxes(74(1,214(1,231Income tax provision———Net loss$(74$(1,214$(1,231F-63)))))))TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 12. Summarized Financial Information of Our Unconsolidated Subsidiaries – (continued) As ofBalance Sheets – Navis Holdings, Inc.December 31,2018December 31,2017​Current assets$5,868$4,723Noncurrent assets5,1452,162Total assets$11,013$6,885Current liabilities$5,542$2,463Noncurrent liabilities8,0606,738Total liabilities$13,602$9,201Total deficit$(2,589$(2,316For the year endedStatements of Operations – Navis Holdings, Inc.​​December 31,2018​December 31,2017December 31,2016​Net sales$14,305$13,947$17,803Cost of goods sold8,4568,72910,933Gross profit$5,849$5,218$6,870Other expenses$5,977$4,684$5,070Net income (loss) before income taxes(1285341,800Income tax provision201,185701Net income (loss)$(148$(651$1,099Note 13. Earnings Per ShareIn accordance with the provisions of ASC Topic 260 — Earnings per Share (“ASC 260”), basic earningsper share is computed by dividing earnings available to common stockholders by the weighted average numberof shares outstanding during the period. Other potentially dilutive common shares, and the related impact toearnings, are considered when calculating earnings per share. For the years ended December 31, 2018 and 2017,3.3 million in convertible shares related to the 2022 Convertible Notes were considered anti-dilutive. For theyear ended December 31, 2016, there were no potentially dilutive shares.The following information sets forth the computation of the weighted average basic and diluted netincrease (decrease) in net assets per share resulting from operations for the years ended December 31, 2018, 2017and 2016 (dollars in thousands, except share and per share data):For the year endedBasic and dilutedDecember 31,2018​December 31,2017​​December 31,2016​Net increase (decrease) in net assets resulting fromoperations$(16,026$(6,984$9,152Weighted average common stock outstanding – basic and diluted15,993,43615,903,16715,819,175Net increase (decrease) in net assets per share resultingfrom operations – basic and diluted$(1.00$(0.44$0.58F-64)))))))))TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 14. DistributionsThe Company’s distributions are recorded as payable on the declaration date. Stockholders have the optionto receive payment of the distribution in cash, shares of common stock, or a combination of cash and commonstock.The following tables summarize the Company’s distribution declarations during the years ended December31, 2018, 2017 and 2016 (in thousands, except share and per share data):Date Declared​​Record Date​​Payment Date​AmountPer ShareCashDistributionDRIPSharesIssuedDRIPShareValue​January 2, 2018January 22, 2018January 30, 2018$0.0833$1,2757,280$54January 2, 2018February 20, 2018February 27, 20180.08331,2758,07654January 2, 2018March 23, 2018March 29, 20180.08331,2747,63156April 2, 2018April 19, 2018April 27, 20180.08331,2787,00653April 2, 2018May 22, 2018May 30, 20180.08331,2776,87554April 2, 2018June 20, 2018June 28, 20180.08331,2806,59152July 2, 2018July 23, 2018July 30, 20180.08331,2796,51553July 2, 2018August 23, 2018August 30, 20180.08331,2776,69956July 2, 2018September 20, 2018September 27, 20180.08331,24910,06684October 1, 2018October 23, 2018October 30, 20180.08331,24910,91885October 1, 2018November 21, 2018November 29, 20180.08331,24911,34286October 1, 2018December 20, 2018December 28, 20180.08331,25511,31782Total Distributions Declared and Distributed for 2018​$1.00$15,217100,316$769Date Declared​​Record Date​​Payment Date​AmountPer ShareCashDistributionDRIPSharesIssuedDRIPShareValue​January 3, 2017January 20, 2017January 30, 2017$0.1300$1,9935,304$70January 3, 2017February 20, 2017February 27, 20170.13001,9935,19570January 3, 2017March 23, 2017March 30, 20170.13001,9984,94867April 3, 2017April 19, 2017April 27, 20170.13001,9965,16469April 3, 2017May 23, 2017May 29, 20170.13001,9905,88076April 3, 2017June 21, 2017June 29, 20170.13001,9697,95997July 3, 2017July 21, 2017July 28, 20170.13001,9955,88973July 3, 2017August 23, 2017August 30, 20170.13001,95713,162111July 3, 2017September 20, 2017September 28, 20170.13001,9899,08580October 2, 2017October 23, 2017October 30, 20170.08331,2805,87648October 2, 2017November 21, 2017November 29, 20170.08331,2786,85649October 2, 2017December 20, 2017December 28, 20170.08331,2737,86855Total Distributions Declared and Distributed for 2017​$1.42$21,71183,186$865F-65TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 14. Distributions – (continued) Date Declared​​Record Date​​Payment Date​​AmountPer Share​​CashDistributionDRIPSharesIssuedDRIPShareValue​January 4, 2016January 22, 2016January 28, 2016$0.1567$2,3928,135$80January 4, 2016February 19, 2016February 26, 20160.15672,4057,07670January 4, 2016March 22, 2016March 30, 20160.15672,3977,07977April 1, 2016April 22, 2016April 28, 20160.15672,3926,62585April 1, 2016May 23, 2016May 30, 20160.15672,3728,147104April 1, 2016June 21, 2016June 29, 20160.15672,3698,229108July 1, 2016July 22, 2016July 29, 20160.15672,3827,02598July 1, 2016August 22, 2016August 30, 20160.15672,3916,25690July 1, 2016September 22, 2016September 29, 20160.15672,3808,242101September 22, 2016October 21, 2016October 28, 20160.13001,9776,61982September 22, 2016November 21, 2016November 29, 20160.13001,92611,384136September 22, 2016December 21, 2016December 29, 20160.13001,9895,88372Total Distributions Declared and Distributed for 2016​$1.80$27,37290,700$1,103F-66(1)Based on daily weighted average balance of shares outstanding during the period.TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 15. Financial HighlightsThe following is a schedule of financial highlights for the years ended December 31, 2018, 2017, 2016,2015 and 2014 (dollars in thousands, except share and per share data):For the year ended December 31,​​2018​​2017201620152014​Per share data:Net asset value at beginning of year$13.91$15.79$17.04$18.56$20.71Net investment income1.000.981.841.671.54Net realized gain (loss) on investments(2.18(1.52(1.440.350.06Net unrealized appreciation (depreciation)on investments(0.370.440.35(1.11(1.87Net unrealized appreciation (depreciation)on Written Call Option0.43(0.26(0.17——Tax benefit (provision)0.12(0.08———Distributions declared from net investmentincome(1.00(1.42(1.80(1.88(1.88Distributions declared from net realized gains———(0.50—Issuance of common stock———(0.15—Accretive impact of stock repurchase———0.13—Other(0.03(0.02(0.03(0.03—Net asset value at end of year$11.88$13.91$15.79$17.04$18.56Net assets at end of year$190,644$221,887$250,582$268,802$240,837Shares outstanding at end of year16,051,54715,951,23115,868,04515,777,34512,974,420Per share market value at end of year$7.17$7.28$12.93$12.08$17.87Total return based on market value12.14(35.6824.07(20.43(0.85Ratio/Supplemental data:Ratio of net investment income to averagenet assets7.606.5411.329.557.78Ratio of incentive fee, net of incentive feewaiver, to average net assets0.120.152.011.881.11Ratio of interest and financing expenses to average net assets8.207.947.687.175.21Ratio of loss on extinguishment of debt to average net assets—1.15———Ratio of tax (benefit) provision to averagenet assets(0.910.54———Ratio of other operating expenses net of management fee waiver to average net assets6.525.755.615.525.20Ratio of total expenses including taxprovision, net of fee waivers to averagenet assets13.9315.5315.3014.5711.52Portfolio turnover rate22.6916.3421.3325.9918.62Average debt outstanding$302,420$325,314$356,758$324,824$255,268Average debt outstanding per commonshare$18.84$20.39$22.48$20.59$19.67Asset coverage ratio per unit$2,391$2,630$2,592$2,465$1,788F-67(1)(1))))(1))))(1)))(1)))))))))(7)))))(2)%)%%)%)%%%%%%(6)%%%%%%%%%%%%%%%)%%%%%(8)%%%%%(6)(8)%%%%%(3)%%%%%(4)(5)(2)Total investment return is calculated assuming a purchase of common shares at the current market value onthe first day 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 underthe Company’s DRIP. Total investment return does not reflect brokerage commissions.(3)Portfolio turnover rate is calculated using the lesser of year-to-date sales or year-to-date purchases over theaverage of the invested 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 liabilitiesand indebtedness not represented by senior securities, to the aggregate amount of senior securitiesrepresenting indebtedness. We have excluded our SBA-guaranteed debentures from the asset coveragecalculation as of December 31, 2018, 2017, 2016, and 2015 pursuant to the exemptive relief granted by theSEC in June 2014 that permits us to exclude such debentures from the definition of senior securities in the200% asset coverage ratio we are required to maintain under the 1940 Act. Asset coverage per unit isexpressed in terms of dollar amounts per $1,000 of indebtedness.(6)The ratio of waived incentive fees to average net assets was 0.00%, 0.40%, 0.65%, and 0.40% for the yearsended December 31, 2018, 2017, 2016 and 2015, respectively. There were no waived incentive fees for theyear ended December 31, 2014.(7)Includes the impact of different share amounts used in calculating per share data as a result of calculatingcertain per share data based on weighted average shares outstanding during the period and certain per sharedata based on shares outstanding as of a period end or transaction date.(8)The ratio of waived management fees to average net assets was 0.09% for the year ended December 31,2014. There were no waived management fees for the years ended December 31, 2018, 2017, 2016 and2015.TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 15. Financial Highlights – (continued) Note 16. Selected Quarterly Financial Data (Unaudited)For the quarter ended(Dollars in thousands, except per share data)​​December 31,2018September 30,2018June 30,2018March 31,2018Total investment income$11,308$11,530$11,882$12,572Net investment income$3,501$3,851$4,231$4,438Net increase (decrease) in net assets resulting fromoperations$(9,201$(11,916$4,948$141Net investment income per share$0.22$0.24$0.26$0.28Net increase (decrease) in net assets resulting fromoperations per share$(0.57$(0.74$0.31$0.01Net asset value per share at end of period$11.88$12.71$13.71$13.66F-68))(1)(1)))(1)Calculated based on weighted average shares outstanding during the quarter.TABLE OF CONTENTSCAPITALA FINANCE CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 Note 16. Selected Quarterly Financial Data (Unaudited) – (continued) For the quarter ended(Dollars in thousands, except per share data)​​December 31,2017September 30,2017June 30,2017March 31,2017Total investment income$11,600$12,312$12,362$14,815Net investment income$4,220$4,410$703$6,191Net increase (decrease) in net assets resulting fromoperations$(587$(5,753$(5,525$4,881Net investment income per share$0.26$0.28$0.04$0.39Net increase (decrease) in net assets resulting fromoperations per share$(0.04$(0.36$(0.35$0.31Net asset value per share at end of period$13.91$14.21$14.97$15.71Note 17. Subsequent EventsManagement has evaluated subsequent events through the date of issuance of the consolidated financialstatements included herein. There have been no subsequent events that occurred during such period that wouldbe required to be recognized in the consolidated financial statements as of December 31, 2018.DistributionsOn January 2, 2019, the Company’s Board declared normal monthly distributions for January, February,and March of 2019 as set forth below:Date DeclaredRecord DatePayment DateDistributions per Share​January 2, 2019January 24, 2019January 30, 2019$0.0833​​January 2, 2019February 20, 2019February 27, 2019$0.0833​​January 2, 2019March 21, 2019March 28, 2019$0.0833​​Portfolio ActivityOn January 4, 2019, the Company invested $9.2 million in first lien debt and $0.9 million in membershipunits of Reliant Account Management, LLC.On February 1, 2019, the Company invested $3.8 million in second lien debt of AAE Acquisition, LLC.On February 27, 2019, the Company sold its warrants in B&W Quality Growers, LLC for $5.9 million.BorrowingsOn February 22, 2019, the Company completed an amendment to its Credit Facility that reduced itsminimum net asset value to $150.0 million and reduced the minimum required asset coverage ratio to 2:1 debt-to-equity.On March 1, 2019, the Company prepaid $15.7 million in outstanding SBA debentures for Fund II andrelinquished the related SBIC license.F-69)))(1)(1))))TABLE OF CONTENTSITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURES(a) Evaluation of Disclosure Controls and ProceduresAs of December 31, 2018 (the end of the period covered by this report), we, including our Chief ExecutiveOfficer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended).Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer,concluded that our disclosure controls and procedures were effective and provided reasonable assurance thatinformation required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosurecontrols and procedures, management recognized that any controls and procedures, no matter how well designedand operated can provide only reasonable assurance of achieving the desired control objectives, andmanagement necessarily was required to apply its judgment in evaluating the cost-benefit relationship of suchpossible controls and procedures.(b) Report of Management on Internal Control Over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financialreporting, and for performing an assessment of the effectiveness of internal control over financial reporting.Internal control over financial reporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordancewith U.S. GAAP. The Company’s internal control over financial reporting includes those policies and proceduresthat (i) pertain to assets of the Company; (ii) provide reasonable assurance that transactions are recorded asnecessary 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 anddirectors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on thefinancial statements.Management performed an assessment of the effectiveness of the Company’s internal control over financialreporting as of December 31, 2018 based upon the criteria in the 2013 Internal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management’sassessment, management determined that the Company’s internal control over financial reporting was effectiveas of December 31, 2018.The Company’s independent registered public accounting firm that audited the financial statements hasissued an audit report on the effectiveness of our internal control over financial reporting as of December 31,2018. This report appears on page F-2 of this Annual Report on Form 10-K.(c) Changes in Internal Controls Over Financial ReportingManagement has not identified any change in the Company’s internal control over financing reporting thatoccurred during the fourth quarter of 2018 that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.ITEM 9B. OTHER INFORMATIONNone.96TABLE OF CONTENTSPART IIIWe will file a definitive Proxy Statement for our 2019 Annual Meeting of Stockholders with the Securitiesand Exchange Commission (the “SEC”), pursuant to Regulation 14A, not later than 120 days after the end of ourfiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3)to Form 10-K. Only those sections of our definitive Proxy Statement that specifically address the items set forthherein 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 ProxyStatement relating to our 2019 Annual Meeting of Stockholders, to be filed with the SEC within 120 daysfollowing the end of our fiscal year.ITEM 11. EXECUTIVE COMPENSATIONThe information required by Item 11 is hereby incorporated by reference from our definitive ProxyStatement relating to our 2019 Annual Meeting of Stockholders, to be filed with the SEC within 120 daysfollowing the end of our fiscal year.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERSThe information required by Item 12 is hereby incorporated by reference from our definitive ProxyStatement relating to our 2019 Annual Meeting of Stockholders, to be filed with the SEC within 120 daysfollowing the end of our fiscal year.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCEThe information required by Item 13 is hereby incorporated by reference from our definitive ProxyStatement relating to our 2019 Annual Meeting of Stockholders, to be filed with the SEC within 120 daysfollowing 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 ProxyStatement relating to our 2019 Annual Meeting of Stockholders, to be filed with the SEC within 120 daysfollowing the end of our fiscal year.97a.The following documents are filed as part of this Annual Report:TABLE OF CONTENTSPART IVITEM 15. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULESThe following consolidated financial statements are set forth in Item 8:INDEX TO CONSOLIDATED FINANCIAL STATEMENTSPageReport of Independent Registered Public Accounting FirmF-1Report of Independent Registered Public Accounting Firm on Internal Control Over FinancialReportingF-2Audited Financial Statements:Consolidated Statements of Assets and Liabilities as of December 31, 2018 and December 31, 2017F-3Consolidated Statements of Operations for the years ended December 31, 2018, December 31, 2017and December 31, 2016F-4Consolidated Statements of Changes in Net Assets for the years ended December 31, 2018, December31, 2017 and December 31, 2016F-5Consolidated Statements of Cash Flows for the years ended December 31, 2018, December 31, 2017and December 31, 2016F-6Consolidated Schedules of Investments as of December 31, 2018 and December 31, 2017F-7Notes to Consolidated Financial StatementsF-2098TABLE OF CONTENTSb. Exhibits​Exhibit NumberDescription of Document​​3.1Articles of Amendment and Restatement​​3.2Certificate of Limited Partnership of CapitalSouth Partners Fund II Limited Partnership​​3.3Certificate of Limited Partnership of CapitalSouth Partners SBIC Fund III, L.P.​​3.4Bylaws​​3.5Form of Amended and Restated Limited Partnership Agreement of CapitalSouth Partners Fund IILimited Partnership​​3.6Form of Amended and Restated Agreement of Limited Partnership of CapitalSouth Partners SBICFund III, L.P.​​4.1Form of Common Stock Certificate​​4.2Form of Base Indenture​​4.3Form 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​​4.4Form 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​​10.1Form of Dividend Reinvestment Plan​​10.2Form of Investment Advisory Agreement by and between Registrant and Capitala InvestmentAdvisors, LLC​​10.3Form of Custodian Agreement​​10.4Form of Administration Agreement by and between Registrant and Capitala Advisors Corp.​​10.5Form of Indemnification Agreement by and between Registrant and each of its directors​​10.6Form of Trademark License Agreement by and between Registrant and Capitala Investment Advisors,LLC​​10.7Form 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​​10.8Form 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​​10.9Form 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​​10.10Form 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​​10.11Form 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,as administrative agent, arranger, and bookrunner​​10.12Form 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)​​10.13Form of Amendment No. 3, dated as of July 19, 2018, to the Senior Secured Revolving CreditAgreement, dated as of October 17, 2014, among Capitala Finance Corp., as borrower, the lendersfrom time to time party thereto, and ING Capital LLC, as administrative agent, arranger andbookrunner, and First National Bank of Pennsylvania, as documentation agent.​99(1)(2)(2)(1)(3)(3)(1)(4)(8)(9)(1)(1)(1)(1)(1)(1)(5)(5)(6)(8)(10)(11)(1)Previously filed in connection with the Pre-Effective Amendment No. 1 to Capitala Finance Corp.’sregistration statement on Form 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.’sregistration statement on Form 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.’sregistration statement on Form 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.’sregistration statement on Form 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.’sregistration statement on Form 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.’sregistration statement on Form 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.(11)Previously filed in connection with Capitala Finance Corp.’s report on Form 8-K filed on July 20, 2018.(12)Previously filed in connection with Capitala Finance Corp’s report on Form 8-K filed on February 28,2019.(13)Previously filed in connection with Capitala Finance Corp.’s Annual Report on Form 10-K filed onFebruary 27, 2018.TABLE OF CONTENTS​ExhibitNumberDescription of Document​​10.14Form of Amendment No. 4, dated as of February 22, 2019, to the Senior Secured Revolving CreditAgreement, dated as of October 17, 2014, among Capitala Finance Corp., as borrower, the lendersfrom time to time party thereto, and ING Capital LLC, as administrative agent, arranger andbookrunner, and First National Bank of Pennsylvania, as documentation agent.​​10.15Second Amended and Restated Limited Liability Company Agreement of Capitala Senior Loan FundII, LLC (filed herewith)​​14.1Code of Business Conduct​​14.2Code of Ethics​​21.1List of Subsidiaries (filed herewith)​​31.1Certification 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)​​31.2Certification 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)​​32.1Certification of Chief Executive Officer 18 U.S.C. Section 1350, as adopted pursuant to section 906 ofthe Sarbanes-Oxley Act of 2002 (filed herewith)​​32.2Certification of Chief Financial Officer 18 U.S.C. Section 1350, as adopted pursuant to section 906 ofthe Sarbanes-Oxley Act of 2002 (filed herewith)​c. Consolidated Financial Statement Schedules100(12)(1)(13)TABLE OF CONTENTSNo consolidated financial statement schedules are filed herewith because (1) such schedules are notrequired or (2) the information has been presented in the aforementioned consolidated financial statements.ITEM 16. FORM 10-K SUMMARYNone.101By/s/ Joseph B. Alala IIIBy/s/ Stephen A. ArnallBy/s/ Kevin A. KoontsTABLE OF CONTENTSSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registranthas duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto dulyauthorized.Capitala Finance Corp.Date: March 4, 2019Joseph B. Alala III Chief Executive Officer(Principal Executive Officer) Capitala Finance Corp.Date: March 4, 2019Stephen A. ArnallChief Financial Officer(Principal Financial Officer)Capitala Finance Corp.Date: March 4, 2019Kevin A. KoontsChief Accounting Officer(Principal Accounting Officer)Capitala Finance Corp.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and on the dates indicated.Signature​TitleDate​/s/ Joseph B. Alala IIIJoseph B. Alala IIIChief Executive Officer, President and Chairman of theBoard of Directors(Principal Executive Officer)March 4, 2019/s/ M. Hunt BroyhillM. Hunt BroyhillDirectorMarch 4, 2019/s/ R. Charles MoyerR. Charles MoyerDirectorMarch 4, 2019/s/ Larry W. CarrollLarry W. CarrollDirectorMarch 4, 2019/s/ H. Paul ChapmanH. Paul ChapmanDirectorMarch 4, 2019102 Exhibit 10.15 SECOND AMENDED AND RESTATEDLIMITED LIABILITY COMPANY AGREEMENTOFCAPITALA SENIOR LOAN FUND II, LLC (A Delaware Limited Liability Company) DATED AS OF DECEMBER 20, 2018 THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED ORRESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS,PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TOBEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.  TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS ARTICLE 2 GENERAL PROVISIONS Section 2.1Amendment and Restatement of Existing Agreement9Section 2.2Formation of Fund9Section 2.3Fund Name9Section 2.4Registered Agent and Office9Section 2.5Purpose and Powers of the Fund9Section 2.6Fiscal Year9Section 2.7Liability of Members10Section 2.8Member List10 ARTICLE 3 FUND CAPITAL AND INTERESTS Section 3.1Capital Commitments10Section 3.2Temporary Advances11Section 3.3Defaulting Members11Section 3.4Interest or Withdrawals12Section 3.5Admission of Additional Members12 ARTICLE 4 ALLOCATIONS Section 4.1Members Receiving Allocations12Section 4.2Allocation of Net Profits and Net Losses12Section 4.3Special Allocations12Section 4.4Loss Limitation14Section 4.5Curative Allocations14Section 4.6Tax Allocations: Code Section 704(c)15Section 4.7Other Allocation Rules15 -i-  TABLE OF CONTENTS(continued) Page ARTICLE 5 DISTRIBUTIONS Section 5.1General15Section 5.2Withholding16Section 5.3Reserves; Certain Limitations; Distributions in Kind16 ARTICLE 6 MANAGEMENT OF FUND Section 6.1Board of Managers16Section 6.2Appointment and Removal of Managers17Section 6.3Meetings of the Board of Managers17Section 6.4Delegation of Authority18Section 6.5Investment Committee19Section 6.6Administrative Services Agreement20Section 6.7Leverage Matters20Section 6.8Specific Consent Regarding Affiliate Transactions20Section 6.9Reliance by Third Parties20Section 6.10Partnership Representative21Section 6.11Fund Expenses21Section 6.12Action by the Members21 ARTICLE 7 DUTIES; LIABILITY; INDEMNIFICATION Section 7.1Duties21Section 7.2Outside Transactions; Investment Opportunities; Time and Attention21Section 7.3Limited Liability; Exculpation22Section 7.4Indemnification23 ARTICLE 8 TRANSFERS OF FUND INTERESTS; WITHDRAWALS Section 8.1Transfers by Members24Section 8.2Withdrawal by Members26 -ii-  TABLE OF CONTENTS(continued) Page ARTICLE 9 TERM, DISSOLUTION AND LIQUIDATION OF FUND Section 9.1Term27Section 9.2Dissolution27Section 9.3Wind-down27 ARTICLE 10 ACCOUNTING, REPORTING AND VALUATION PROVISIONS Section 10.1Books and Accounts29Section 10.2Financial Reports; Tax Return29Section 10.3Tax Elections30Section 10.4Confidentiality30Section 10.5Valuation32 ARTICLE 11 MISCELLANEOUS PROVISIONS Section 11.1[Reserved]32Section 11.2Force Majeure32Section 11.3Applicable Law33Section 11.4Waivers33Section 11.5Notices33Section 11.6Construction33Section 11.7Amendments34Section 11.8Legal Counsel34Section 11.9Execution34Section 11.10Binding Effect34Section 11.11Severability35Section 11.12Entire Agreement35 -iii-  SECOND AMENDED AND RESTATEDLIMITED LIABILITY COMPANY AGREEMENTOF CAPITALA SENIOR LOAN FUND II, LLC(A Delaware Limited Liability Company) This SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (this “Agreement”) of Capitala Senior LoanFund II, LLC, a Delaware limited liability company (the “Fund”), made and entered into as of December 20, 2018, is by and between Capitala FinanceCorp., a Maryland corporation (the “BDC”) and Trinity Universal Insurance Company, a Texas corporation (“Trinity” and, together with the BDC, the“Members”). Capitalized terms used but not defined herein shall have the meanings set forth in ARTICLE 1. RECITALS WHEREAS, the Fund was formed on January 5, 2015 by the filing of its certificate of formation with the Delaware Secretary of State with the nameCapitala Senior Liquid Loan Fund I, LLC and was initially governed by the Limited Liability Company Agreement of the Fund dated as of January 5, 2015(the “Original Agreement”); WHEREAS, the Original Agreement was amended and restated in its entirety by a First Amended and Restated Limited Liability CompanyAgreement dated as of March 24, 2015 (the “Existing Agreement”); WHEREAS, as of June 29, 2018, Stephen Riddell was replaced by Peter Sherman as a BDC Manager pursuant to Section 6.2(b) of the ExistingAgreement; WHEREAS, as of June 29, 2018, Stephen Riddell was replaced by Peter Sherman as the BDC’s appointee to the Investment Committee pursuant toSection 6.5(b) of the Existing Agreement; WHEREAS, as of November 27, 2018 the certificate of formation of the Fund was amended to change the name of the Fund from “Capitala SeniorLiquid Loan Fund I, LLC” to “Capitala Senior Loan Fund II, LLC”; and WHEREAS, the Existing Agreement is hereby amended and restated in its entirety pursuant to Section 11.7 thereof, to reflect the Fund’s previousname change, to reflect the previous changes to the composition of the Board of Managers and the Investment Committee, and to make certain significantmodifications, and the terms and conditions contained therein are hereby amended and restated in their entirety as set forth herein. NOW, THEREFORE, in consideration of the mutual covenants set forth herein, and for other good and valuable consideration, the receipt andsufficiency of which are hereby acknowledged, the parties hereto hereby amend and restate the Existing Agreement, which is replaced and superseded in itsentirety by this Agreement, as follows:  ARTICLE 1 DEFINITIONS The following capitalized terms shall have the meanings specified below: “Acceptance Period” has the meaning set forth in Section 8.1(g). “Act” has the meaning set forth in Section 2.2. “Adjusted Capital Account Deficit” means, with respect to any Member, the deficit balance, if any, in such Member’s Capital Account as of the endof the relevant year, after giving effect to the following adjustments: (a) Credit to such Capital Account of any amounts which such Member is deemed to be obligated to restore pursuant to the penultimatesentences in Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (b) Debit to such Capital Account the items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d)and shall be interpreted consistently therewith. “Administrative Agent” means Capitala Advisors Corp., a North Carolina corporation. “Administrative Services Agreement” means the Amended and Restated Administrative Services Agreement between the Fund and theAdministrative Agent, dated as of the date hereof, as further amended from time to time with the approval of the Board of Managers. “Affiliate” with respect to a Person, means any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by,or is under common control with, such Person. “Agreement” has the meaning set forth in the introductory paragraph. “Allocation Requirements” has the meaning set forth in Section 7.2(b). “Approved Investment Agreement” has the meaning set forth in Section 6.8. “BDC” has the meaning set forth in the introductory paragraph. 2  “BDC Managers” has the meaning set forth in Section 6.2(a). “Board of Managers” has the meaning set forth in Section 6.1. “Business Day” means any day other than a Saturday, Sunday or holiday observed by the New York Stock Exchange LLC. “Call Due Date” has the meaning set forth in Section 3.1(a). “Capital Account” means, with respect to any Member, the capital account maintained for such Member in accordance with the followingprovisions: (a) To each Member’s Capital Account there shall be credited (i) such Member’s Capital Contribution, (ii) such Member’s distributive share ofNet Profits and any items in the nature of income or gain that are specially allocated to such Member pursuant to Section 4.3, Section 4.4 or Section 4.5, and(iii) the amount of any Fund liabilities assumed by such Member or which are secured by any property distributed to such Member. The principal amount of apromissory note that is not readily traded on an established securities market and is contributed to the Fund by the maker of the note (or a Member related tothe maker of the note within the meaning of Regulations Section 1.704-1(b)(2)(ii)(c)) shall not be included in the Capital Account of any Member until theFund makes a taxable disposition of the note or until (and to the extent) principal payments are made on the note, all in accordance with Regulations Section1.704-1(b)(2)(iv)(d)(2); (b) To each Member’s Capital Account there shall be debited (i) the amount of cash and the Gross Asset Value of any property distributed tosuch Member pursuant to any provision of this Agreement, (ii) such Member’s distributive share of Net Losses and any items in the nature of expenses orlosses that are specially allocated to such Member pursuant to Section 4.3, Section 4.4 or Section 4.5, and (iii) the amount of any liabilities of such Memberassumed by the Fund or which are secured by any property contributed by such Member to the Fund; (c) In the event a Membership Interest is assigned in accordance with the terms of this Agreement, the Transferee shall succeed to the CapitalAccount of the Transferor to the extent it relates to the assigned Membership Interest; and (d) In determining the amount of any liability for purposes of subparagraphs (a) and (b) above, there shall be taken into account Code Section752(c) and any other applicable provisions of the Code and Regulations. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply withRegulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the Administrative Agentshall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits orcredits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Fund or any Members), are computed inorder to comply with such Regulations, the Administrative Agent may with the consent of the Board of Managers make such modification. TheAdministrative Agent with the consent of the Board of Managers also shall (i) make any adjustments that are necessary or appropriate to maintain equalitybetween the Capital Accounts of the Members and the amount of capital reflected on the Fund’s balance sheet, as computed for book purposes, in accordancewith Regulations Section 1.704-1(b)(2)(iv)(q), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause thisAgreement not to comply with Regulations Section 1.704-1(b). 3  “Capital Call Notice” has the meaning set forth in Section 3.1(a). “Capital Commitment” means, with respect to any Member, the total amount set forth in such Member’s Subscription Agreement delivered on thedate hereof, which amount is set forth on the Members List and which amount such Member has agreed to contribute to the Fund as such Member’s CapitalContribution. “Capital Contribution” means, with respect to any Member, the aggregate amount of cash actually contributed to the equity capital of the Fund bysuch Member on or after the date hereof as set forth in Section 3.1. The Capital Contribution of a Member that is a Transferee of all or a portion of aMembership Interest shall include the Capital Contribution of the Transferor of such Membership Interest (or a pro rata portion thereof in the case of aTransfer of less than the entire Membership Interest of the Transferor). For the avoidance of doubt, any capital contributions made by the Members prior tothe date hereof pursuant to the Existing Agreement shall not constitute “Capital Contributions” for purposes of this Agreement. “Code” means the Internal Revenue Code of 1986, as from time to time amended. “Confidential Information” has the meaning set forth in Section 10.4(a). “Damages” has the meaning set forth in Section 7.3(b). “Defaulting Member” has the meaning set forth in Section 3.3. “Depreciation” means, for any given fiscal year, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable withrespect to an asset of the Fund for such year, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes atthe beginning of such year, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income taxdepreciation, amortization, or other cost recovery deduction for such year bears to such beginning adjusted tax basis; provided, however, that if the adjustedbasis for federal income tax purposes of an asset at the beginning of such year is zero, Depreciation shall be determined with reference to such beginningGross Asset Value using any reasonable method selected by the Administrative Agent. “ERISA” means the Employee Retirement Income Security Act of 1974, as from time to time amended. “ERISA Plan” means a Person that is an “employee benefit plan” within the meaning of, and subject to the provisions of, ERISA. “Existing Agreement” has the meaning set forth in the Recitals. 4  “Fund” has the meaning set forth in the introductory paragraph. “Fund Expenses” has the meaning set forth in Section 6.11. “Fund Minimum Gain” means “partnership minimum gain” as defined in Regulations Section 1.704-2(b)(2) and determined in accordance withRegulations Section 1.704-2(d). “Gross Asset Value” means, with respect to any asset, the asset’s adjusted basis for federal income tax purposes, except as follows (provided that anydetermination by the Administrative Agent pursuant to this sentence shall be effective only if approved by the Board of Managers): (a) the initial Gross Asset Value of any asset contributed by a Member to the Fund shall be the gross fair market value of such asset, asdetermined by the Administrative Agent; (b) the Gross Asset Values of all Fund assets shall be adjusted to equal their respective gross fair market values (taking Code Section 7701(g)into account), as determined by the Administrative Agent as of the following times: (i) the acquisition of additional Membership Interests in the Fund by anyPerson in exchange for more than a de minimis capital contribution or upon the exercise of an option; (ii) the distribution by the Fund to a Member of morethan a de minimis amount of Fund property as consideration for Membership Interests; (iii) the grant of an interest in the Fund (other than a de minimisinterest) as consideration for the provision of services to or for the benefit of the Fund; and (iv) the liquidation of the Fund within the meaning of RegulationsSection 1.704-1(b)(2)(ii)(g); (c) the Gross Asset Value of any item of Fund assets distributed to any Member shall be adjusted to equal the gross fair market value (takingCode Section 7701(g) into account) of such asset on the date of distribution as determined by the Administrative Agent; and (d) the Gross Asset Values of Fund assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assetspursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining CapitalAccounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and subparagraph (f) of the definition of “Net Profits” and “Net Losses”; provided, however,that Gross Asset Values shall not be adjusted pursuant to this subparagraph (d) to the extent that an adjustment pursuant to subparagraph (b) is required inconnection with a transaction that would otherwise result in an adjustment pursuant to this subparagraph (d). If the Gross Asset Value of an asset has been determined or adjusted pursuant to subparagraph (b) or (d), such Gross Asset Value shall thereafter beadjusted by the Depreciation taken into account with respect to such asset, for purposes of computing Net Profits and Net Losses. “Indemnified Person” has the meaning set forth in Section 7.3(b). “Initial Investments” has the meaning set forth in Section 3.2(b). 5  “Investment” means an investment in Underlying Loans held, directly or indirectly, by the Fund from time to time. Investments do not includeinterests in any subsidiaries of the Fund and also do not include Leverage. “Investment Committee” has the meaning set forth in Section 6.5(a). “Investment Company Act” has the meaning set forth in Section 7.2(b). “Leverage” means any form of direct or indirect leverage of any kind. “LIBOR Rate” means the one-month London InterBank Offered Rate, which for purposes hereof shall be deemed to equal for each day of a calendarquarter such rate as of the first day of such quarter. “Liquidator” means the Person or Persons conducting the liquidation of the Fund, chosen in accordance with Section 9.3(a). “Manager” has the meaning set forth in Section 6.1. “Member” has the meaning set forth in the introductory paragraph hereto, and also includes any other Person that becomes a Member of the Fund inaccordance with the terms hereof. “Member List” has the meaning set forth in Section 2.8. “Member Nonrecourse Debt” has the same meaning as the term “partner nonrecourse debt” in Regulations Section 1.704-2(b)(4). “Member Nonrecourse Debt Minimum Debt Gain” means an amount, with respect to each Member Nonrecourse Debt, equal to the Fund MinimumGain that would result if such Member Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3). “Member Nonrecourse Deductions” has the same meaning as the term “partner nonrecourse deductions” in Regulations Sections 704-2(i)(l) and1.704-2(i)(l) and 1.704-2(i)(2). “Membership Interest” means a Person’s share of the Net Profits and Net Losses of, and right to receive distributions from, the Fund. “Membership Interest Percentage” in respect of a Member means the percentage of the Capital Commitments of all of the Members represented bysuch Member’s Capital Commitment. “Net Profits” or “Net Losses” means, with respect to any fiscal year, an amount equal to the Fund’s taxable income or loss for such year, determinedin accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to CodeSection 703(a)(1) shall be included in taxable income or loss), with the following adjustments (without duplication): 6  (a) Any income of the Fund that is exempt from federal income tax and not otherwise taken into account in computing Net Profits or Net Lossespursuant to this definition of “Net Profits” and “Net Losses” shall be added to such taxable income or loss; (b) Any expenditures of the Fund described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant toRegulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Net Profits or Net Losses pursuant to this definition of “NetProfits” and “Net Losses” shall be subtracted from such taxable income or loss; (c) In the event the Gross Asset Value of any Fund asset is adjusted pursuant to subparagraphs (b) or (c) of the definition of Gross Asset Value,the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the Gross Asset Value of the asset) or an item of loss (if theadjustment decreases the Gross Asset Value of the asset) from the disposition of such asset and shall be taken into account for purposes of computing NetProfits or Net Losses; (d) Gain or loss resulting from any disposition of property with respect to which gain or loss is recognized for federal income tax purposes shallbe computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from itsGross Asset Value; (e) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss,there shall be taken into account Depreciation for such year, computed in accordance with the definition of Depreciation; (f) To the extent an adjustment to the adjusted tax basis of any Fund asset pursuant to Code Section 734(b) is required, pursuant to RegulationsSection 1.704-(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Member’sinterest in the Fund, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if theadjustment decreases such basis) from the disposition of such asset and shall be taken into account for purposes of computing Net Profits or Net Losses; and (g) Notwithstanding any other provision of this definition, any items which are specially allocated pursuant to Section 4.3, Section 4.4 orSection 4.5 shall not be taken into account in computing Net Profits or Losses. The amounts of the items of Fund income, gain, loss or deduction available to be specially allocated pursuant to Section 4.3, Section 4.4 or Section4.5 shall be determined by applying rules analogous to those set forth in subparagraphs (a) through (f) above. “Nonrecourse Deductions” has the meaning set forth in Regulations Section 1.704-2(b)(1) and 1.704-2(i)(2). “Nonrecourse Liability” has the meaning set forth in Regulations Section 1.704-2(b)(3). “Notice of Intent” has the meaning set forth in Section 8.1(g). 7  “Officer” has the meaning set forth in Section 6.4(a). “Original Agreement” has the meaning set forth in the Recitals. “Organization Costs” means all out-of-pocket costs and expenses reasonably incurred by the Fund, the BDC, the Administrative Agent or theirAffiliates in connection with the recapitalization of the Fund, the change of the name of the Fund, the amendment of the Fund’s certificate of formation, theamendment of this Agreement, the making of new subscriptions to the Fund by the BDC and Trinity, and the preparation by the Fund to recommence itsbusiness operations, including, without limitation, reasonable and documented (i) fees and disbursements of legal counsel to the Fund, the AdministrativeAgent and its Affiliates, (ii) accountant fees and other fees for professional services, and (iii) travel costs and other out-of-pocket expenses. “Partnership Representative” has the meaning set forth in Section 6.10. “Permitted Affiliate Transfer” has the meaning set forth in Section 8.1(a). “Permitted Affiliate Transferee” means the Affiliate of a Member to whom the Member’s Membership Interest is transferred pursuant to a PermittedAffiliate Transfer. “Person” means an individual, corporation, partnership, association, joint venture, company, limited liability company, trust, governmentalauthority or other entity. “Proceeding” has the meaning set forth in Section 7.4(a). “RBH” has the meaning set forth in Section 11.8. “Regulations” means the regulations promulgated by the United States Department of the Treasury pursuant to and in respect of provisions of theCode. All references herein to sections of the Regulations shall include any corresponding provision or provisions of succeeding, similar, substitute,proposed or final Regulations. “Regulatory Allocations” has the meaning set forth in Section 4.5. “Reserved Amount” has the meaning set forth in Section 5.3(a). “Sale Period” has the meaning set forth in Section 8.1(g). “SEC” has the meaning set forth in Section 9.2(c). “Temporary Advance” has the meaning set forth in Section 3.2(a). “Temporary Advance Rate” with respect to any period means the rate equal to (i) the sum of the average LIBOR Rate during such period (expressedas an annual rate) plus three percent (3.0%) per annum, multiplied by (ii) a fraction, the numerator of which is the number of days in such period and thedenominator of which is 365; provided that the Temporary Advance Rate for any Temporary Advance outstanding for less than four days shall equal zero. 8  “Transfer” means the transfer of ownership by sale, exchange, assignment, gift, pledge , donation, grant or other transfer of any kind, whethervoluntary or involuntary, including transfers by operation of law or legal process and whether voluntary or involuntary. “Trinity” has the meaning set forth in the introductory paragraph. “Trinity Managers” has the meaning set forth in Section 6.2(a). “Underlying Loans” has the meaning set forth in Section 2.5. “Value” as of the date of computation with respect to some or all of the assets or liabilities of the Fund, the value of such assets or liabilitiesdetermined in accordance with Section 10.5. Terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa. Unless otherwise specified, references herein toapplicable statutes or other laws are references to the federal laws of the United States. ARTICLE 2 GENERAL PROVISIONS Section 2.1 Amendment and Restatement of Existing Agreement. As stated in the Recitals, this Agreement amends and restates the ExistingAgreement, which is replaced and superseded in its entirety by this Agreement. Section 2.2 Formation of Fund. The Fund was formed under and shall be operated in accordance with the terms of the Delaware LimitedLiability Company Act, as amended (the “Act”). Section 2.3 Fund Name. The name of the Fund shall be “Capitala Senior Loan Fund II, LLC,” or such other name as approved by the Board ofManagers. Section 2.4 Registered Agent and Office. The registered agent and office of the Fund shall be as provided in the Fund’s certificate of formation,or as otherwise determined by the Board of Managers. Section 2.5 Purpose and Powers of the Fund. The purpose of the Fund shall be to make loans, and purchase assignments or participations inloans that have already been made (in either case, “Underlying Loans”), either directly or indirectly through subsidiaries or other Persons, and to engage inany other lawful business. Section 2.6 Fiscal Year. The fiscal year of the Fund shall be the period beginning on January 1 and ending on December 31 of each year. 9  Section 2.7 Liability of Members. Except as expressly provided in this Agreement, a Member shall have such liability for the repayment,satisfaction and discharge of the debts, liabilities and obligations of the Fund only as is provided by the Act. A Member that receives a distribution made bythe Fund in violation of the Act shall be liable to the Fund for the amount of such distribution to the extent, and only to the extent, required by the Act. TheMembers shall not otherwise be liable for the repayment, satisfaction or discharge of the Fund’s debts, liabilities and obligations, except that each Membershall be required to make its Capital Contribution in accordance with the terms of this Agreement and shall be required to repay any distributions by theFund to such Member which are not made in accordance with this Agreement. Section 2.8 Member List. The Administrative Agent shall cause to be maintained in the principal office of the Fund a list (the “Member List”)setting forth, with respect to each Member, such Member’s name, address, Capital Commitment, Capital Contributions and such other information as theAdministrative Agent may deem necessary or desirable or as required by the Act. The Administrative Agent shall from time to time update the Member List asnecessary to reflect accurately the information therein. Any reference in this Agreement to the Member List shall be deemed to be a reference to the MemberList as in effect from time to time. No action of the Members or of the Board of Managers shall be required for the Administrative Agent to supplement oramend the Member List. Revisions to the Member List made by the Administrative Agent as a result of changes to the information set forth therein made inaccordance with this Agreement shall not constitute an amendment of this Agreement. ARTICLE 3 FUND CAPITAL AND INTERESTS Section 3.1 Capital Commitments. (a) Making of Capital Calls. For the avoidance of doubt, any capital commitment to the Fund any Member may have had under the ExistingAgreement prior to the date hereof is hereby cancelled. Each Member’s Capital Commitment shall be set forth on the Member List and in such Member’sSubscription Agreement and shall be payable in cash in U.S. dollars. Each such payment shall be made from time to time after notice from the AdministrativeAgent specifying the amount then to be paid (such notice, a “Capital Call Notice”). Such amount shall be payable on the date set forth in such noticeprovided by the Administrative Agent (the “Call Due Date”), but such date may not be sooner than three Business Days following the date on which theAdministrative Agent provides the Members with such notice. The Administrative Agent shall be required to obtain the approval of the Board of Managersfor each such capital call made to the Members. Capital Contributions shall be made by all Members pro rata based on their respective CapitalCommitments. (b) Return of Unused Contributions. Any Capital Contributions that have been drawn down from the Members but that have not been used bythe Fund either for investment in Underlying Loans or the payment of Fund Expenses within ninety (90) days of the Call Due Dates with respect to suchCapital Contributions will be distributed to such Members in the same proportion in which such Capital Contributions were made. 10  Section 3.2 Temporary Advances. (a) General. The BDC, in its discretion, may make loans (“Temporary Advances”) to temporarily fund obligations of the Fund in respect ofUnderlying Loans (which have been made or acquired with the approval of the Board of Managers) or Fund Expenses until Capital Contributions are madeby the Members as set forth in Section 3.1, and for the purpose identified in Section 3.2(b). Each Temporary Advance plus interest at the Temporary AdvanceRate shall constitute an obligation of the Fund to the BDC and shall be returned by the Fund to the BDC. (b) Advance for Existing Investments. On or before the date of this Agreement, the BDC has made one or more Temporary Advances to the Fundfor the purpose of funding two Underlying Loans in aggregate combined amounts of $10,000,000 (such Underlying Loans, the “Initial Investments”). TheInitial Investments were approved by the Investment Committee in accordance with both the Existing Agreement and this Agreement, as applicable. For theavoidance of doubt, such Temporary Advances shall not constitute Capital Contributions by the BDC to the Fund, and the BDC shall be entitled to be repaidthe amount of such Temporary Advances from Capital Contributions made by the Members (including the BDC) after the date hereof. The Members alsoagree that no interest shall be charged in respect of the Temporary Advances for the Initial Investments. The Members hereby ratify the Initial Investmentsand all documentation entered into in connection with any of the foregoing, and hereby approve of the Administrator (x) making a capital call to theMembers (including the BDC) for the purpose of repaying the amount of such Temporary Advances to the BDC (which capital call, to the extent made to theBDC, may be met by the BDC by the BDC cancelling the obligation of the Fund to repay the BDC the corresponding portion of the Temporary Advance),and (y) causing the proceeds of such capital call to be paid to the BDC (or at the BDC’s request, used to fund a Capital Contribution obligation of the BDC tothe Fund). Section 3.3 Defaulting Members. Upon the failure of any Member (a “Defaulting Member”) to pay in full any portion of such Member’sCapital Commitment on or before the tenth Business Day after the applicable Call Due Date, the Board of Managers, in its sole discretion, shall have the rightto pursue one or more of the following remedies on behalf of the Fund: (a) elect to charge the Defaulting Member interest at the Default Rate on the amount due from the Call Due Date until the earlier of (i) the dateon which such payment is received by the Fund from the Defaulting Member, and (ii) the date, if any, on which the Defaulting Member’s Membership Interestis sold pursuant to Section 3.3(c); (b) cause the Fund to cease making distributions to the Defaulting Member, and apply any distributions that would otherwise be made to theDefaulting Member to the unpaid portion of the Defaulting Member’s Capital Commitment, or distribute such distributions that would otherwise be made tothe Defaulting Member to the other Members; (c) sell to any Person (including any other Member or any of its Affiliates) the Defaulting Member’s Membership Interest for consideration atthe valuation most recently approved in accordance with Section 10.5, such consideration to be paid to the Defaulting Member; or (d) exercise and/or pursue any other legal remedy the Fund may have. 11  The Board of Managers’ election to pursue any one of such remedies shall not be deemed to preclude the Board of Managers from pursuing anyother such remedy, or any other available remedy, simultaneously or subsequently. Notwithstanding any provision of this Agreement to the contrary, aDefaulting Member shall remain fully liable to the creditors of the Fund to the extent provided by law as if such default had not occurred. Section 3.4 Interest or Withdrawals. No Member shall be entitled to receive any interest on any Capital Contribution to the Fund. Except asotherwise specifically provided herein, no Member shall be entitled to withdraw any part of its Capital Contributions or Capital Account balance. Section 3.5 Admission of Additional Members. (a) The Members may, with the approval of the Board of Managers, (i) admit additional Members upon terms approved by the Board ofManagers, or (ii) permit existing Members to subscribe to additional interests in the Fund. (b) Each additional Member shall execute and deliver a written instrument satisfactory to the Board of Managers whereby such Memberbecomes a party to this Agreement, as well as a subscription agreement and any other documents required by the Board of Managers. Each such additionalMember shall thereafter be entitled to all the rights and subject to all the obligations of Members as set forth herein. Upon the admission of or the increase inthe interest of any Member as herein provided, the Administrative Agent is hereby authorized to update the Member List, as required, to reflect suchadmission or increase. ARTICLE 4 ALLOCATIONS Section 4.1 Members Receiving Allocations. All Net Profits and Net Losses shall be allocated to the Persons shown in the records of theAdministrative Agent to have been Members as of the last day of the taxable year for which the allocation is to be made. Notwithstanding the foregoing, ifthere is a Transfer of Membership Interests during a taxable year, Net Profits and Net Losses shall be allocated between the Transferor and the Transferee ofsuch Membership Interests to reflect their varying interests during the year in a manner selected by the Administrative Agent and permissible under federaltax law, which in all cases shall take into account any extraordinary non-recurring items of profit or loss of the Fund. Section 4.2 Allocation of Net Profits and Net Losses. Except as otherwise provided in this Agreement, all Net Profits and Net Losses shall beallocated among the Members pro rata in accordance with their respective Membership Interest Percentages. Section 4.3 Special Allocations. The following special allocations shall be made in the following order: 12  (a) Minimum Gain Chargeback. Except as otherwise provided in Regulations Section 1.704-2(f), notwithstanding any other provision of thisARTICLE 4, if there is a net decrease in Fund Minimum Gain during any year, each Member shall be specially allocated items of Fund income and gain forsuch year (and, if necessary, subsequent years) in an amount equal to such Member’s share of the net decrease in Fund Minimum Gain, determined inaccordance with Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amountsrequired to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This Section 4.3(a) is intended to comply with the minimum gain chargeback requirement in Regulations Section 1.704-2(f) andshall be interpreted consistently therewith. (b) Member Nonrecourse Debt Minimum Gain Chargeback. Except as otherwise provided in Regulations Section 1.704-2(i)(4),notwithstanding any other provision of this ARTICLE 4, if there is a net decrease in Member Nonrecourse Debt Minimum Gain attributable to a MemberNonrecourse Debt during any year, each Member that has a share of the Member Nonrecourse Debt Minimum Gain attributable to such Member NonrecourseDebt, determined in accordance with Regulations Section 1.704-2(i)(5), shall be specially allocated items of Fund income and gain for such year (and, ifnecessary, subsequent years) in an amount equal to such Member’s share of the net decrease in Member Nonrecourse Debt, determined in accordance withRegulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to beallocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Sections 1.704-2(i)(4) and1.704-2(j)(2). This Section 4.3(b) is intended to comply with the minimum gain chargeback requirement in Regulations Section 1.704-2(i)(4) and shall beinterpreted consistently therewith. (c) Qualified Income Offset. In the event any Member unexpectedly receives any adjustments, allocations, or distributions described inRegulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704 1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Fund income and gain shall be specially allocated tosuch Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of theMember as quickly as possible, provided that an allocation pursuant to this Section 4.3(c) shall be made only if and to the extent that the Member wouldhave an Adjusted Capital Account Deficit after all other allocations provided for in this ARTICLE 4 have been made as if this Section 4.3(c) were not in theAgreement. (d) Gross Income Allocation. In the event any Member has a deficit balance in its Capital Account at the end of any year which is in excess ofthe amount such Member is obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), each suchMember shall be specially allocated items of Fund income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuantto this Section 4.3(d) shall be made only if and to the extent that such Member would have a deficit balance in its Capital Account in excess of the amountthe Member is obligated to restore after all other allocations provided for in this ARTICLE 4 have been made as if Section 4.3(c) and this Section 4.3(d) werenot in the Agreement. (e) Nonrecourse Deductions. Nonrecourse Deductions for any year shall be specially allocated to the Members pro rata in accordance with theirrespective Membership Interest Percentages. 13  (f) Member Nonrecourse Deductions. Any Member Nonrecourse Deductions for any year shall be specially allocated to the Member that bearsthe economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance withRegulations Section 1.704-2(i)(1). (g) Section 754 Adjustments. To the extent that, under Regulations Section 1.704 1(b)(2)(iv)(m)(2) or 1.704 1(b)(2)(iv)(m)(4), an adjustment tothe adjusted tax basis of any Fund asset pursuant to Code Section 734(b) or Code Section 743(b) is required in determining Capital Accounts as the result ofa distribution to a Member in complete liquidation of such Member’s Membership Interest, the amount of such adjustment to Capital Accounts shall betreated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall bespecially allocated to the Members in accordance with their respective Membership Interest Percentages in the event Regulations Section 1.704 1(b)(2)(iv)(m)(2) applies, or to the Member to whom such distribution was made in the event Regulations Section 1.704 1(b)(2)(iv)(m)(4) applies. Section 4.4 Loss Limitation. Net Losses allocated pursuant to Section 4.2 and Section 4.3 shall not exceed the maximum amount of Net Lossesthat can be allocated without causing any Member to have an Adjusted Capital Account Deficit at the end of any year. In the event some but not all of theMembers would have Adjusted Capital Account Deficits as a consequence of an allocation of Net Losses pursuant to Section 4.2 and Section 4.3, thelimitation set forth in this Section 4.4 shall be applied on a Member-by-Member basis, and Net Losses not allocable to any Member as a result of suchlimitation shall be allocated to the other Members in accordance with the positive balances in such Members’ Capital Accounts so as to allocate themaximum permissible Net Losses to each Member under Regulations Section 1.704-1(b)(2)(ii)(d). Section 4.5 Curative Allocations. The allocations set forth in Section 4.3 and Section 4.4 (the “Regulatory Allocations”) are intended tocomply with certain requirements of the Regulations. It is the intent of the Members that, to the extent possible, all Regulatory Allocations shall be offseteither with other Regulatory Allocations or with special allocations of other items of Fund income, gain, loss or deduction pursuant to this Section 4.5.Therefore, notwithstanding any other provision of this ARTICLE 4 (other than the Regulatory Allocations), the Administrative Agent shall make suchoffsetting special allocations of Fund income, gain, loss or deduction in whatever manner it determines appropriate so that, after such offsetting allocationsare made, each Member’s Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if theRegulatory Allocations were not part of the Agreement and all Fund items were allocated pursuant to Section 4.1 and Section 4.2. 14  Section 4.6 Tax Allocations: Code Section 704(c). In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss,and deduction with respect to any property contributed to the capital of the Fund shall, solely for tax purposes, be allocated among the Members so as to takeaccount of any variation between the adjusted basis of such property to the Fund for federal income tax purposes and its initial Gross Asset Value (computedin accordance with the definition of Gross Asset Value) using one or more methods set forth in Regulations Section 1.704-3 as selected by the AdministrativeAgent with the consent of the Board of Managers. In the event the Gross Asset Value of any Fund asset is adjusted pursuant to subparagraph (b) of thedefinition of Gross Asset Value, subsequent allocations of income, gain, loss, and deduction with respect to such asset shall take account of any variationbetween the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and theRegulations thereunder using one or more methods selected by the Administrative Agent with the consent of the Board of Managers. Any elections or otherdecisions relating to such allocations shall be made by the Administrative Agent with the consent of the Board of Managers in any manner that reasonablyreflects the purpose and intention of this Agreement. Allocations pursuant to this Section 4.6 are solely for purposes of federal, state, and local taxes and shallnot affect, or in any way be taken into account in computing, any Member’s Capital Account or share of Net Profits, Net Losses, other items, or distributionspursuant to any provision of this Agreement. Section 4.7 Other Allocation Rules. The Members are aware of the income tax consequences of the allocations made by this ARTICLE 4 andhereby agree to be bound by the provisions of this ARTICLE 4 in reporting their shares of Fund income and loss for income tax purposes. Solely forpurposes of determining a Member’s proportionate share of the “excess nonrecourse liabilities” of the Fund within the meaning of Regulations Section 1.7523(a)(3), the Members’ interests in the Fund’s Net Profits are in proportion to their Membership Interest Percentages. To the extent permitted by RegulationsSection 1.704-2(h)(3), the Administrative Agent shall endeavor to treat distributions as having been made from the proceeds of a Nonrecourse Liability or aMember Nonrecourse Debt only to the extent that such distributions would cause or increase an Adjusted Capital Account Deficit for any Member. ARTICLE 5 DISTRIBUTIONS Section 5.1 General. (a) Regularly Quarterly Distributions. To the extent of available cash and cash equivalents, the Administrative Agent shall cause the Fund tomake distributions quarterly in such amounts as determined by the Board of Managers, shared among the Members as set forth below; provided that theamount of any such distribution may be reduced as provided by Section 5.2 and Section 5.3. (b) Other Distributions. As determined by the Board of Managers, the Fund may make one or more distributions, from time to time, in additionto those pursuant to Section 5.1(a) from available cash and cash equivalents received from one or more Investments, provided that the amount of any suchdistribution may be reduced as provided by Section 5.2 and Section 5.3. (c) Distributions Priority. Except as otherwise provided in this ARTICLE 5 or Section 9.3, distributions shall be shared among the Members asfollows: (i) First, to pay any outstanding Temporary Advances and any interest accrued thereon; and 15  (ii) Second, to the Members as distributions in respect of their interests in the Fund in proportion to their respective MembershipInterest Percentages. Section 5.2 Withholding. The Administrative Agent may cause the Fund to withhold from any distribution to any Member any amount whichthe Fund has paid or is obligated to pay in respect of any withholding or other tax, including without limitation, any interest, penalties or additions withrespect thereto, imposed on any interest or income of or distributions to such Member, and such withheld amount shall be considered an interest payment or adistribution, as the case may be, to such Member for purposes hereof. If no payment is then being made to such Member in an amount sufficient to pay theFund’s withholding obligation, any amount which the Fund is obligated to pay shall be deemed an interest-free advance from the Fund to such Member,payable by such Member by withholding from subsequent distributions or within ten days after receiving written request for payment from the Fund. Section 5.3 Reserves; Certain Limitations; Distributions in Kind. Notwithstanding the foregoing provisions: (a) The Fund shall withhold from any distribution any amount called for purposes of making an Investment (until the Board of Managers shallhave determined not to make such Investment), as well as any reasonable reserve required by the Board of Managers for working capital of the Fund or forFund Expenses. Any part or all of such reserved amount (“Reserved Amount”) that is released from reserve (other than to make payments on account of apurpose for which the reserve was established) shall be distributed to the Members in accordance with Section 3.1(b), Section 5.1(c) and Section 5.2. (b) In no event shall the Fund make a distribution to the extent that it would (i) render the Fund insolvent, or (ii) violate the Act. (c) The Fund shall make in-kind distributions only with the approval of the Board of Managers. Unless the Board of Managers agrees otherwise,distributions of securities and of other non-cash assets of the Fund shall only be made pro rata to all Members (in proportion to their respective shares of thetotal distribution) with respect to each security or other such asset distributed. ARTICLE 6 MANAGEMENT OF FUND Section 6.1 Board of Managers. The management of the Fund and its affairs shall be vested in a “Board of Managers” consisting of fourmembers (each, a “Manager”) chosen in accordance with Section 6.2. The Managers need not be Members and need not be residents of the State of Delaware.Except to the extent that the approval of the Members or the Investment Committee is expressly required by this Agreement, the Board of Managers shallhave the full, exclusive and complete authority to manage the affairs of the Fund. Without limiting the power and authority of the Board of Managershereunder, Schedule A hereto, which is incorporated by reference herein, sets forth a non-exclusive list of matters which shall require approval by the Boardof Managers. The Managers shall constitute the managers of the Fund for purposes of the Act. Any action authorized by the Board of Managers shallconstitute the act of and serve to bind the Fund. Persons or entities dealing with the Fund are entitled to rely conclusively on the power and authority of theBoard of Managers as set forth in this Agreement. Each member of the Board of Managers shall execute this Agreement. 16  Section 6.2 Appointment and Removal of Managers. (a) Trinity Managers. Trinity shall have the right to appoint up to two Managers (the “Trinity Managers”). The Trinity Managers as of the datehereof are John Boschelli and Jonathan Wilson. Trinity shall have the power to remove a Trinity Manager at any time with or without cause, and in such casemay appoint such Person’s replacement. A Trinity Manager shall also cease to be a Manager upon such Person’s written resignation, death or incapacity, andin any such event Trinity may appoint such Person’s replacement. Trinity shall notify the other Members and the Board of Managers promptly if any TrinityManager ceases to be a Manager and of any replacement of a Trinity Manager. If Trinity ceases to be a Member, or becomes a Defaulting Member, the TrinityManagers shall at the same time cease to be Managers, and Trinity shall no longer have any right to appoint a replacement for such Persons. (b) BDC Manager. The BDC shall have the right to appoint up to two Managers (the “BDC Managers”). The BDC Managers as of the datehereof are Joseph B. Alala, III and Peter Sherman. The BDC shall have the power to remove a BDC Manager at any time with or without cause, and in suchcase may appoint such Person’s replacement. A BDC Manager shall also cease to be a Manager upon such Person’s written resignation, death or incapacity,and in any such event the BDC may appoint such Person’s replacement. The BDC shall notify the other Members and the Board of Managers promptly if anyBDC Manager ceases to be a Manager and of any replacement of a BDC Manager. If the BDC ceases to be a Member, or becomes a Defaulting Member, theBDC Managers shall at the same time cease to be Managers, and the BDC shall no longer have any right to appoint a replacement for such Persons. (c) Member-Appointed Manager. If at any time neither Trinity nor the BDC is a Member, the Fund shall have a single Manager appointed byMembers acting unanimously. Section 6.3 Meetings of the Board of Managers. (a) Meetings Generally. The Board of Managers shall not be required to hold regular meetings. The Board of Managers may provide, byresolution, the time and place for the holding of regular meetings. Special meetings of the Board of Managers may be called by or at the request of anyManager. Such a meeting may be held either within or without the State of Delaware, as fixed by the Person or Persons calling the meeting. (b) Notice of Meetings. Regular meetings of the Board of Managers, if established, may be held without notice. For so long as there are bothTrinity Managers and BDC Managers present, a meeting may only be held with the attendance of at least one Trinity Manager and one BDC Manager. ThePerson or Persons calling a special meeting of the Board of Managers shall, at least two days before the meeting, give or cause to be given notice thereof to allManagers. When a meeting is adjourned to a different date, time or place, notice need not be given of the new date, time or place if the new date, time or placeis announced at the meeting before adjournment. Any Manager may waive notice of any meeting before, during or after the meeting. A Manager’s attendanceat or participation in a meeting waives objection to lack of notice or defective notice of the meeting, unless the Manager at the beginning of the meeting, orpromptly upon arrival, objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to any action taken atthe meeting. 17  (c) Action by the Board of Managers. The affirmative vote of all Managers in attendance at any meeting of the Board of Managers shallconstitute the act of the Board of Managers hereunder and the act of the Managers for purposes of the Act. As used in this Agreement, the phrases “theapproval of the Board Managers,” “the consent of the Board of Managers,” “as determined by the Board of Managers” and similar phrases mean the approvalas set forth in the preceding sentence, except as expressly provided otherwise in this Agreement. (d) Presumption of Assent. A Manager who is present at a meeting of the Board of Managers when board action is taken is deemed to haveassented to the action taken unless (i) the Manager objects at the beginning of the meeting, or promptly upon the Manager’s arrival, to holding the meetingor to transacting business at the meeting, (ii) the Manager’s dissent or abstention from the action taken is entered in the minutes of the meeting, or (iii) theManager files written notice of the Manager’s dissent or abstention with the Administrative Agent for filing in the Fund’s records either at or immediatelyafter the adjournment of the meeting. Such right of dissent or abstention is not available to a Manager who votes in favor of the action taken. (e) Action Without Meeting. The Board of Managers may act without a meeting if one or more written consents, describing the action to betaken, is signed by all of the Managers and delivered to the Administrative Agent for filing in the Fund’s records. (f) Participation in Meeting by Telephone. The Managers may participate in a meeting of the Board of Managers or any committee thereof bymeans of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other andsuch participation shall constitute presence in person at such meeting. (g) Compensation. The Managers will not receive any compensation. However, the Managers shall be reimbursed by the Fund for theirreasonable out-of-pocket expenses, if any, of attendance at meetings of the Board of Managers. Section 6.4 Delegation of Authority. (a) Appointment of Officers. The Board of Managers may from time to time appoint and delegate to one or more individuals (each an “Officer”)any portion of authority granted to the Board of Managers hereunder as the Board of Managers deems appropriate, provided that the appointment of membersof the Investment Committee is governed by Section 6.5(b) and not this Section 6.4(a). No such delegation shall relieve the Managers of their duties andobligations, or limit the authority of the Board of Managers, set forth herein. (b) Removal of Officers. Each Officer shall hold office until such Officer’s death, incapacity, resignation or removal or until the appointment ofa successor. A Person may be removed as an Officer with the consent of the Board of Managers at any time with or without cause, provided that the removal ofmembers of the Investment Committee is governed by Section 6.5(b) and not this sentence. A Person may resign as an Officer at any time by deliveringwritten notice to all Managers. 18  (c) Compensation. An Officer may be paid for his or her services by the Fund as determined by the Board of Managers. (d) President and Chief Executive Officer. Acting in his capacity as a Manager of the Fund, Mr. Alala shall be permitted to sign investmentdocuments in respect of investments that are approved in accordance with this Agreement, including Initial Investments, using the title “President and ChiefExecutive Officer”. However, when he signs in such capacity, he shall be deemed to be acting for purposes of this Agreement as a Manager, and not as anOfficer. For the avoidance of doubt, this paragraph does not grant any independent authority to Mr. Alala to execute any document that he could nototherwise execute as a Manager under this Agreement in the absence of this paragraph. Section 6.5 Investment Committee. (a) Establishment of Investment Committee. Except as otherwise explicitly provided herein, no Investment shall be made or disposed of by theFund, and no consent shall be granted or other action taken by the Fund in its capacity as the owner of an Investment (such as, for example, in respect of anylate payment in respect of an Underlying Loan), unless such action shall first be approved by at least two members, including at least one member appointedby each of Trinity and the BDC, of an “Investment Committee” consisting of four members. The members of the Investment Committee shall be consideredOfficers and not Managers of the Fund for purposes of the Act. (b) Membership of Investment Committee. Trinity shall have the right to appoint two members of the Investment Committee and the BDC shallhave the right to appoint two members of the Investment Committee. Trinity’s appointees to the Investment Committee as of the date hereof are JohnBoschelli and Jonathan Wilson, and the BDC’s appointees to the Investment Committee as of the date hereof are Joseph B. Alala, III and Peter Sherman. TheMember appointing a member of the Investment Committee may also remove and replace that Investment Committee member at any time with or withoutcause, and may also appoint the replacement for such member of the Investment Committee in the event that such Person resigns, dies or becomesincapacitated. If either Trinity or the BDC at any time ceases to be a Member, then such Person’s appointees to the Investment Committee shall alsoautomatically cease to be members of the Investment Committee and such former Member shall no longer have the right to appoint replacement members ofthe Investment Committee. (c) Delegation to Investment Committee. The Board of Managers hereby delegates to the Investment Committee the authority to approve thosematters set forth on Schedule B hereto, which is incorporated by reference herein, which shall require approval by the Investment Committee, but shall notrequire approval by the Board of Managers. 19  Section 6.6 Administrative Services Agreement. The Fund is entering into the Administrative Services Agreement with the AdministrativeAgent, pursuant to which certain administrative functions are delegated to the Administrative Agent. The Administrative Services Agreement is herebyapproved by the Board of Managers, provided that amendments thereto are subject to approval by the Board of Managers. The function of the AdministrativeAgent shall be non-discretionary and administrative only. Section 6.7 Leverage Matters. In the event that the Board of Managers, the Fund or the Administrative Agent makes a good faith determinationthat, at any time, the value of the Fund’s Investments as compared to the value of such Investments as of the end of the immediately preceding fiscal quarter,has declined by an amount exceeding 15% of the total Capital Contributions to the Fund as of the time of determination, a meeting of the Board of Managersshall be called promptly to discuss the Fund’s Leverage; provided, however, that in making the determination required by this sentence the Board ofManagers and the Fund shall make appropriate adjustments for the effect of any dispositions of Investments occurring during the applicable time period. Section 6.8 Specific Consent Regarding Affiliate Transactions. Aside from the Administrative Services Agreement, the Fund shall not enterinto any transaction-related agreement with the BDC, the Administrative Agent or any of their Affiliates without the consent of the Board of Managers.Notwithstanding the foregoing, if permitted under the terms of an agreement entered into with the consent of the Board of Managers (an “ApprovedInvestment Agreement”), (a) the BDC and its Affiliates shall be permitted to exercise any call option or other contract right it may have to purchase all or anyportion of an Investment from the Fund, and the Fund shall comply with any related obligations it may have in respect of such Investment; (b) the Fund shallbe permitted to exercise any put or similar right that it has with respect to any Investment and require the BDC and its Affiliates to purchase all or any portionof an Investment from the Fund, and the BDC and its Affiliates may comply with any related obligations they may have in respect of such exercise; and (c)this Section 6.8 shall not be interpreted to in any way diminish the general authority of the Board of Managers under Section 6.1. The Board of Managershereby authorizes the BDC to cause either BDC Manager, acting in his capacity as a Manager, to cause the Fund to enter into any document necessary toeffect a transaction contemplated by Section 6.8(a) or (b), but only if such transaction was contemplated in, and permitted under, the applicable ApprovedInvestment Agreement. Section 6.9 Reliance by Third Parties. Notwithstanding any other provision of this Agreement, any contract, instrument or act on behalf of theFund by a Manager, or any other Person delegated by the Board of Managers, shall be conclusive evidence in favor of any third party dealing with the Fundthat such Person has the authority, power and right to execute and deliver such contract or instrument and to take such act on behalf of the Fund. This Sectionshall not be deemed to limit the liabilities and obligations of such Person to seek the approval of the Board of Managers or the Investment Committee as setforth in this Agreement. 20  Section 6.10 Partnership Representative. For so long as it is a Member, the BDC shall be the “partnership representative” of the Fund within themeaning of Section 6223 of the Code (in such capacity, the “Partnership Representative”). If the BDC is at any time no longer a Member of the Fund, theBoard of Managers shall appoint a replacement Partnership Representative. The Partnership Representative shall have the right and obligation to take allactions authorized and required, respectively, by the Code for the partnership representative of the Fund. The Partnership Representative shall have the rightto retain professional assistance in respect of any audit of the Fund and all reasonable, documented out-of-pocket expenses and fees incurred by thePartnership Representative on behalf of the Fund as Partnership Representative shall be Fund Expenses and shall be reimbursed by the Fund. The PartnershipRepresentative shall give each Member prompt notice of any inquiry or other communication received from the Internal Revenue Service or other applicabletax authority regarding the tax treatment of the Fund or the Members and shall, to the extent possible, give the Members prior notice of and a reasonableopportunity to review and comment on any written communication the Partnership Representative intends to make to any such taxing authority inconnection with any examination, audit or other inquiry involving the Fund. Section 6.11 Fund Expenses. The Fund shall pay or, if paid by the Administrative Agent, the BDC, any of their Affiliates or any of theiremployees or representatives, reimburse such Person on demand for, all expenses, fees, charges and liabilities incurred in connection with the conduct of theaffairs and the management of the business of the Fund and its Investments (collectively, “Fund Expenses”), including without limitation: (a) all interest andexpenses payable by the Fund on or in connection with any Leverage or any other indebtedness incurred by the Fund; (b) any taxes payable by the Fund toFederal, state, local and other governmental agencies; (c) any amounts payable or reimbursable to the Administrative Agent under the AdministrativeServices Agreement; (d) Organization Costs; (e) expenses of any type incurred in connection with or related to the actual or proposed acquisition ordisposition of Underlying Loans, whether or not the contemplated transaction is consummated; (f) any amounts payable by the Fund in respect of itsInvestments; and (g) legal, insurance, accounting and auditing expenses. The Administrative Agent is hereby authorized by the Board of Managers to use anyavailable funds of the Fund to meet Fund Expenses. Section 6.12 Action by the Members. To the extent that this Agreement or any applicable law requires or permits the Members as a group intheir capacities as members of the Fund to grant any approval or take any action, then such approval or action shall require the unanimous consent of all ofthe Members. ARTICLE 7 DUTIES; LIABILITY; INDEMNIFICATION Section 7.1 Duties. The Managers shall have no fiduciary duties to the Fund, the Members or other Persons other than the contractual duties ofgood faith and fair dealing contemplated by Section 18-1101(c) of the Act. The Officers shall have the same fiduciary duties as the Managers. To themaximum extent permitted by law, the Members, acting in their capacity as such, shall have no duties, fiduciary or otherwise, to the Fund, the Members orother Persons, except to the extent expressly set forth in this Agreement. Section 7.2 Outside Transactions; Investment Opportunities; Time and Attention. (a) No Time Commitment. No Member, Manager or Officer shall be obligated to devote such Person’s full time or any specific portion of suchPerson’s time to the activities and affairs of the Fund. 21  (b) No Deal Flow Right. The Administrative Agent and its Affiliates may manage or administer other investment funds and other accounts withsimilar or dissimilar mandates, and may be subject to the provisions of the Investment Company Act of 1940, as amended (the “Investment Company Act”),including, without limitation, Section 57 thereof, and the Investment Advisers Act of 1940, as amended, and the rules, regulations and interpretations thereof,with respect to the allocation of investment opportunities among such other investment funds and other accounts (the “Allocation Requirements”). Exceptfor any Allocation Requirement that may be applicable to the Fund, neither the Administrative Agent nor any Member, Manager or Officer shall be obligatedto offer any investment opportunity, or portion thereof, to the Fund. (c) Other Activities. Subject to the foregoing provisions of this Section 7.2 and other provisions of this Agreement, each Member, Manager andOfficer, the Administrative Agent and each of their respective Affiliates and owners may engage in, invest in, participate in or otherwise enter into otherbusiness ventures of any kind, nature and description, individually and with others, including, without limitation, the formation and management of otherinvestment funds with or without the same or similar purposes as the Fund, and the ownership of and investment in securities, and neither the Fund nor anyother Member shall have any right in or to any such activities or the income or profits derived therefrom. Section 7.3 Limited Liability; Exculpation. (a) Limited Liability. To the maximum extent permitted by law, no Manager, Officer or Member shall be liable for the debts, liabilities orobligations of the Fund solely by reason of being a Manager, Officer or Member or participating in the management of the Fund’s affairs. (b) Exculpation. To the maximum extent permitted by law, neither any Member (including a Member in its capacity as the PartnershipRepresentative), Manager, Officer or the Administrative Agent, nor any of their Affiliates, directors, managers, officers, owners, employees, or representatives(together, the “Indemnified Persons”) shall be liable to the Fund or to the Members for any cost, expense, damage, liability, or other similar amount(collectively, “Damages”) arising, directly or indirectly, from or in connection with any act or omission of such Person relating to the business and affairs ofthe Fund, so long as such act or omission did not constitute a breach of such Person’s duties (if any) under Section 7.1 (or in the case of the AdministrativeAgent, breach the standard of care set forth in the Administrative Services Agreement). In addition, any Member (including a Member in its capacity as thePartnership Representative), Manager or Officer or any of their Affiliates, directors, managers, officers, owners, employees, or representatives may consult withlegal counsel selected with reasonable care and shall incur no liability to the Fund or any Member to the extent that such Person acted or refrained fromacting in good faith in reliance upon the opinion or advice of such counsel. 22  Section 7.4 Indemnification. (a) Overview. Subject to the limitations and conditions as provided in this Section 7.4, each Indemnified Person who was or is made a party or isthreatened to be made a party to or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative,investigative or arbitrative or in the nature of an alternative dispute resolution in lieu of any of the foregoing (hereinafter a “Proceeding”), or any appeal insuch a Proceeding or any inquiry or investigation that could lead to such a Proceeding, in respect of or relating to the Fund, shall be indemnified by the Fundto the fullest extent permitted by applicable law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extentthat such amendment permits the Fund to provide broader indemnification rights than said law permitted the Fund to provide prior to such amendment)against all Damages actually incurred by such Person in connection with such Proceeding, appeal, inquiry or investigation, unless a court of competentjurisdiction shall have made a final determination that such Damages were primarily the result of gross negligence, fraud or intentional misconductby the Indemnified Person seeking indemnification hereunder, in which case such indemnification shall not cover such Damages to the extent resulting fromsuch gross negligence, fraud or intentional misconduct. Indemnification under this Section 7.4 shall continue as to Indemnified Person who has ceased toserve in the capacity which initially entitled such Person to indemnity hereunder. The rights granted pursuant to this Section 7.4 shall be deemed contractrights, and no amendment, modification or repeal of this Section 7.4 shall have the effect of limiting or denying any such rights with respect to actions takenor Proceedings, appeals, inquiries or investigations arising prior to any amendment, modification or repeal. (b) Reimbursement of Expenses. The right to indemnification conferred in Section 7.4(a) shall include the right to be paid or reimbursed by theFund for the reasonable expenses incurred by an Indemnified Person who was, is or is threatened to be made a named defendant or respondent in a Proceedingin advance of the final disposition of the Proceeding and without any determination as to the Indemnified Person’s ultimate entitlement to indemnification;provided, however, that the payment of such expenses incurred by any such Indemnified Person in advance of the final disposition of a Proceeding shall bemade only upon delivery to the Fund of a written undertaking by such Indemnified Person to repay all amounts so advanced if it shall be finally adjudicatedthat such Indemnified Person is not entitled to be indemnified under this Section 7.4 or otherwise. (c) Determination of Bad Acts. Unless there is a specific finding of gross negligence, fraud or intentional misconduct (or where such a finding isan essential element of a judgment or order), the termination of any Proceeding by judgment, order or settlement, or upon a plea of nolo contendere or itsequivalent, shall not, by itself, create a presumption for the purposes of this Section 7.4 that the Indemnified Person in question engaged in gross negligence,fraud or intentional misconduct. (d) Other Employees and Agents. The Board of Managers may provide for the Fund to advance expenses to other employees and agents of theFund (other than Indemnified Persons) to the same extent and subject to the same conditions under which it may indemnify and advance expenses to anIndemnified Person under Section 7.4(a) and Section 7.4(b). (e) Non-Exclusivity. The right to indemnification and the advancement and payment of expenses conferred in this Section 7.4 shall not beexclusive of any other right that a Member or other Person indemnified pursuant to this Section 7.4 may have or hereafter acquire under any law (common orstatutory) or provision of this Agreement. 23  (f) Successors and Assigns. The indemnification rights provided by this Section 7.4 shall inure to the benefit of the heirs, executors,administrators, successors, and assigns of each Person indemnified pursuant to this Section 7.4. (g) Fund Contributions. If for any reason (other than solely by operation of the terms of this Agreement) the indemnification provided herein isunavailable to an Indemnified Person, or insufficient to hold it harmless, then the Fund shall contribute to the amount paid or payable by such IndemnifiedPerson as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the Fund onthe one hand and the Indemnified Person on the other, but also the relative fault of the Fund and the Indemnified Person as well as any other relevantequitable considerations. ARTICLE 8 TRANSFERS OF FUND INTERESTS; WITHDRAWALS Section 8.1 Transfers by Members. (a) Approval for Transfers. The Membership Interest of a Member may not be Transferred without the approval of the Board of Managers.Notwithstanding the foregoing, without approval of the Board of Managers, any Member may Transfer its entire Membership Interest to an Affiliate of suchMember, if the transferor remains liable for its Capital Commitment (a “Permitted Affiliate Transfer”). No Transfer by a Member shall be binding upon theFund until the Fund receives an executed copy of the agreement providing for such Transfer, which shall be in form and substance satisfactory to the Board ofManagers, and any Transfer pursuant to this Section 8.1(a) shall be subject to satisfaction of the conditions set forth in Section 8.1(f). (b) Admission of Transferee. Any Person which acquires a Membership Interest by Transfer in accordance with the provisions of this Agreementshall be admitted as a substitute Member only upon the approval of the Board of Managers. The admission of a Transferee as a substitute Member shall beconditioned upon the Transferee’s written assumption, in form and substance satisfactory to the Board of Managers, of all obligations of the Transferor inrespect of the Transferred Interest and execution of an instrument satisfactory to the Board of Managers whereby such Transferee becomes a party to thisAgreement. (c) Transfer Upon Death. The legal representative of a deceased Person who holds a Membership Interest is hereby authorized to distribute thedeceased individual’s direct or indirect interest in the Membership Interest, without liquidation thereof, to the Person or Persons entitled thereto under theapplicable laws of testate or intestate succession. The legal representative of a deceased individual holding the direct or indirect interest in the MembershipInterest shall promptly notify the Fund of such individual’s death. Neither the legal representative of the deceased individual nor any distributee of thedeceased individual’s direct or indirect interest in the Membership Interest may require that the Membership Interest be redeemed or liquidated by the Fund.No Transferee of a deceased individual’s Membership Interest shall be a Member unless admitted in accordance with Section 8.1(b). 24  (d) Rights of Non-Member Transferees. Any Transfer of a Membership Interest to a Person that has not been admitted as a Member pursuant toSection 8.1(b) shall be effective to give the Transferee of such Membership Interest only the right to receive, to the extent Transferred, the allocations of NetProfits and Net Losses and distributions to which the Transferor would have been entitled if the Transfer had not been made, and shall not be effective toadmit the Transferee as a Member. Unless admitted as a Member pursuant to Section 8.1(b), such Transferee shall have (i) no right to vote or otherwiseparticipate in any decisions of the Members or matters relating to the Fund, (ii) no right of access to the records of the Fund, and (iii) no other rights of anykind whatsoever except as described in this Section 8.1(d) or as required by applicable law. (e) Obligations of All Transferees. Any Transferee of a Membership Interest, whether or not admitted as a Member, shall be subject to (a) theterms and conditions of this Agreement, including being subject to all of the obligations of the Members set forth herein as if such Transferee had beenadmitted as a Member, and (b) any claims or offsets relating to the Transferred Membership Interest that the Fund has against the Transferor of theMembership Interest at the time of such Transfer. (f) Further Restrictions on Transfer. As additional conditions to the validity of any Transfer of a Membership Interest, such Transfer shall not: (i) violate the registration provisions of the Securities Act of 1933, as amended, or the securities laws of any applicable jurisdiction; (ii) cause the Fund to cease to be entitled to the exemption from the definition of an “investment company” pursuant to Section 3(c)(7)of the Investment Company Act, and the rules and regulations of the Securities and Exchange Commission thereunder; (iii) result in the termination of the Fund under the Code or in the Fund being classified as a “publicly traded partnership” under theCode; (iv) unless the Board of Managers waives in writing the application of this clause (iv) with respect to such assignment (which the Boardof Managers may refuse to do in its absolute discretion), be to a Person which is an ERISA Plan; or (v) cause the Fund or the other Members to be in violation of, or effect a Transfer to a Person that is in violation of, applicable law. As a condition to granting its consent to a Transfer, the Board of Managers may require reasonable evidence as to the foregoing, including, withoutlimitation, an opinion of counsel reasonably acceptable to the Board of Managers. Any purported Transfer as to which the conditions set forth in theforegoing clauses (i) through (v) above are not satisfied shall be void ab initio. A Transferring Member shall be responsible for all costs and expenses incurredby the Fund, including reasonable legal fees and expenses, in connection with any assignment or proposed assignment. 25  (g) Right of First Offer. For so long as the Members are Trinity and the BDC or their respective Permitted Affiliate Transferees, each Memberhereby unconditionally and irrevocably grants to the other Member or its designee a right of first offer to purchase or designate a third party to purchase all,but not less than all, of any Membership Interest that such other Member may propose to Transfer to another Person, except for Permitted Affiliate Transfers,at the valuation most recently approved in accordance with Section 10.5. (i) The Member proposing to make a Transfer that would be subject to this Section 8.1(g) must deliver written notice of its intention toTransfer such interest (the “Notice of Intent”) to the other Member not later than thirty (30) days prior to the proposed closing date of such Transfer.Such Notice of Intent shall contain the material terms and conditions of the proposed Transfer and shall identify the proposed transferee of suchinterest, if known. (ii) The Member receiving the Notice of Intent shall have the right, for a period of fifteen (15) business days from the date of receipt ofthe Notice of Intent (the “Acceptance Period”), to accept the Membership Interest or to designate a third-party purchaser to accept such MembershipInterest at the valuation most recently approved in accordance with Section 10.5 and on the terms stated in the Notice of Intent. Such acceptanceshall be made by delivering a written notice to the selling Member and the Fund within the Acceptance Period stating that it elects to exercise itsright of first offer and, if applicable, providing the identity of any Person that the non-transferring Member designates as the purchaser. (iii) Following expiration of the Acceptance Period without the Member receiving the Notice of Intent having during the AcceptancePeriod accepted the Membership Interest or designated a third-party purchaser to accept such Membership Interest in accordance with theimmediately-preceding subparagraph (ii), the selling Member shall be free to sell its Membership Interest in the Fund to a third party in a Transfer(which third party shall be the party identified in the Notice of Intent, if known by the selling Member) that otherwise meets the requirements of thisSection 8.1 on terms and conditions it deems acceptable (but at a price not less than the price and on terms not more favorable to the purchaserthereof than the price and terms stated in the Notice of Intent); provided that such sale takes place within sixty (60) days after the expiration of theAcceptance Period (the “Sale Period”). To the extent the selling Member Transfers its interest in the Fund during the Sale Period, the selling Membershall promptly notify the Fund, and the Fund shall promptly notify the other Member, as to the terms of such Transfer and the name of the owner(s)to whom the interest was Transferred. If no such sale occurs during the Sale Period, any attempted Transfer of such interest shall again be subject tothe right of first offer set forth in this Section 8.1(g) and the procedures of this Section 8.1(g) shall be repeated de novo. Section 8.2 Withdrawal by Members. Members may withdraw from the Fund only as approved by, and on terms agreed to by, the Board ofManagers. 26  ARTICLE 9 TERM, DISSOLUTION AND LIQUIDATION OF FUND Section 9.1 Term. Except as provided in Section 9.2, the Fund shall continue without dissolution indefinitely. Section 9.2 Dissolution. The Fund shall be dissolved and its affairs wound up upon the occurrence of any of the following events: (a) a determination by the Board of Managers to dissolve the Fund; (b) a written notice by a Member to the other Member to dissolve the Fund, which notice shall become effective as stated therein but no lessthan ninety days after delivery (unless the other Member waives such notification requirement); (c) a determination by the BDC on its providing written notice to the Board of Managers that the U.S. Securities and Exchange Commission(the “SEC”) has raised concerns under the Investment Company Act regarding the BDC’s interest in the Fund, including with respect to consolidation forGAAP or Investment Company Act purposes, or that there has been a determination by the SEC to subject the BDC’s participation in the Fund to anaccounting or reporting treatment or other consequence which the BDC, in its sole discretion, determines to be materially adverse to it; or (d) the entry of a decree of judicial dissolution pursuant to the Act, in which event the provisions of Section 9.3, as modified by said decree,shall govern the winding up of the Fund’s affairs. Section 9.3 Wind-down. (a) Liquidation by the Board of Managers. Upon the dissolution of the Fund, the Fund shall be liquidated in accordance with this Section 9.3and the Act. The liquidation shall be conducted and supervised by the Board of Managers and the Investment Committee in the same manner provided byARTICLE 6 with respect to the operation of the Fund during its term; provided that in the case of a dissolution and winding up of the Fund pursuant toSection 9.2(c), the BDC may elect, by written notice to the Board of Managers, to exercise as liquidating agent all of the rights, powers and authority withrespect to the assets and liabilities of the Fund in connection with the liquidation of the Fund, to the same extent as the Board of Managers and theInvestment Committee would have during the term of the Fund. 27  (i) Investments During Liquidation. From and after the date on which an event set forth in Section 9.2 becomes effective, the Fundshall cease to make Investments after that date, except for (i) Investments which the Fund was committed to make in whole or in part (as evidencedby a commitment letter, term sheet or letter of intent, or definitive legal documents under which less than all advances have been made) on or beforesuch effective date, and (ii) Investments in an issuer in which the Fund then has an Investment in which the Fund participates made with theapproval of the Board of Managers within three (3) Business Days after receipt by the Board of Managers of written notice from any Member of theavailability such an Investment, provided that no such approval shall be required in connection with an Investment in connection with a refinancingof the Fund’s prior Investment in such issuer or the sale of such issuer. Capital calls against the Capital Commitment of the Members shall cease fromand after the date on which an event set forth in Section 9.2 becomes effective; provided that capital calls against the Capital Commitment of theMembers may continue to fund the allocable share of Investments in which the Fund continues to participate (as set forth in the immediatelypreceding sentence), Fund Expenses and all other obligations of the Fund. Subject to the foregoing, the Members shall continue to bear an allocableshare of Fund Expenses and other obligations of the Fund until all Investments in which the Fund participates are repaid or otherwise disposed of inthe normal course of the Fund’s activities. (ii) Distributions During Liquidation. Distributions to the Members during the winding down of the Fund shall be made no lessfrequently than quarterly to the extent consisting of a Member’s allocable share of cash and cash equivalents, after taking into account reasonablereserves deemed appropriate by Board of Managers (or in the event of a dissolution and winding up of the Fund pursuant to Section 9.2(c), by aMember that has elected to act as liquidating agent pursuant to Section 9.3(a)), to fund Investments in which the Fund continues to participate (asset forth in the immediately preceding paragraph), Fund Expenses and all other obligations (including without limitation contingent obligations) ofthe Fund. Unless waived by the Board of Managers, the Fund also shall withhold ten percent (10%) of distributions in any calendar year, whichwithheld amount shall be distributed within sixty (60) days after the completion of the annual audit covering such year. A Member shall remain amember of the Fund until all Investments in which the Fund participates are repaid or otherwise disposed of, the Member’s allocable share of allFund Expenses and all other obligations (including without limitation contingent obligations) of the Fund are paid, and all distributions are madehereunder, at which time the Member shall have no further rights under this Agreement. (b) Final Allocations and Distributions. Upon dissolution of the Fund, final allocations of all items of Net Profits and Net Losses shall be madein accordance with ARTICLE 4. Upon dissolution of the Fund, the assets of the Fund shall be applied in the following order of priority: (i) to creditors (other than Members) in satisfaction of liabilities of the Fund (whether by payment or by the making of reasonableprovision for payment thereof), including to establish any reasonable reserves which the Liquidator may, in its reasonable judgment, deem necessary oradvisable for any contingent, conditional or unmatured liability of the Fund; (ii) to establish any reserves which the Liquidator may, in its reasonable judgment, deem necessary or advisable for any contingent,conditional or unmatured liability of the Fund; and (iii) the balance, if any, to the Members in accordance with Section 5.1(c). 28  (c) Final Accounting. Each Member shall be furnished with a statement prepared by the Fund’s accountant, which shall set forth the assets andliabilities of the Fund as at the date of complete liquidation, and each Member’s share thereof. Upon compliance with the distribution plan set forth in thisSection 9.3, the Members shall cease to be such, and the Liquidator shall execute, acknowledge and cause to be filed a certificate of cancellation of the Fund. ARTICLE 10 ACCOUNTING, REPORTING AND VALUATION PROVISIONS Section 10.1 Books and Accounts. (a) General. Complete and accurate books and accounts shall be kept and maintained for the Fund at its principal office by the AdministrativeAgent. Such books and accounts shall be kept on the accrual basis method of accounting and shall include separate Capital Accounts for each Member. EachMember or its duly authorized representative, at its own expense, shall at all reasonable times and upon reasonable prior written notice to the AdministrativeAgent have access to, and may inspect, such books and accounts and any other records of the Fund for any purpose reasonably related to its interest in theFund. (b) Bank Accounts. All funds received by the Fund shall be deposited in the name of the Fund in such bank account or accounts or with suchcustodian, and securities owned by the Fund may be deposited with such custodian, as may be designated by the Board of Managers from time to time andwithdrawals therefrom shall be made upon such signature or signatures on behalf of the Fund as may be designated by the Board of Managers from time totime. Section 10.2 Financial Reports; Tax Return. (a) Annual Financial Statements. The Administrative Agent shall engage an independent certified public accountant approved by the Board ofManagers to act as the accountant for the Fund and to audit the Fund’s books and accounts as of the end of each fiscal year. As soon as practicable, but nolater than one hundred and twenty days, after the end of such fiscal year, the Board of Managers shall cause the Administrative Agent to prepare and deliver,by any of the methods described in Section 11.5, to each Member and to each former Member who withdrew during such fiscal year: (i) audited financial statements of the Fund as at the end of and for such fiscal year, including a balance sheet and statement of income,together with the report thereon of the Fund’s independent certified public accountant, which annual financial statements shall be approved by the Board ofManagers; (ii) a statement of holdings of Investments of the Fund, including both the cost and the Value of such Investments, and a statement ofsuch Member’s Capital Account; and (iii) to the extent that the requisite information is then available, a Schedule K-1 for such Member with respect to such fiscal year,prepared in accordance with the Code, together with corresponding forms for state income tax purposes, setting forth such Member’s distributive share of NetProfits and Net Losses for such fiscal year and the amount of such Member’s Capital Account at the end of such fiscal year. 29  The Board of Managers shall also cause the Administrative Agent to prepare and deliver, by any of the methods described in Section 11.5,to each Member and each former Member who withdrew during such fiscal year an unaudited draft statement of such Member’s Capital Account no later thanninety days after the end of each fiscal year of the Fund. (b) Tax Returns. The Board of Managers shall cause the Administrative Agent to prepare and timely file after the end of each fiscal year of theFund all federal and state income tax returns of the Fund for such fiscal year. (c) Quarterly Financials. As soon as practicable, but in no event later than forty-five days, after the end of each of the first three fiscal quarters ofa fiscal year, the Board of Managers shall cause the Administrative Agent to prepare and deliver, by any of the methods described in Section 11.5, to eachMember (i) unaudited financial information with respect to such Member’s allocable share of Net Profits and Net Losses and changes to its Capital Accountas of the end of such fiscal quarter, and (ii) a statement of holdings of Investments of the Fund, including both the cost and the Value of such Investments. Section 10.3 Tax Elections. The Partnership Representative with the consent of the Board of Managers may, but shall not be required to, causethe Fund to make any election pursuant to the provisions of Section 754 or 1045 of the Code, or any other election required or permitted to be made by theFund under the Code. Section 10.4 Confidentiality. (a) General. Each Member agrees to maintain the confidentiality of the Fund’s records, reports and affairs, and all information and materialsfurnished to such Member by the Fund, the BDC, the Administrative Agent or their Affiliates with respect to their respective businesses and activities. EachMember further agrees not to provide to any other Person copies of any financial statements, tax returns or other records or reports, or other information ormaterials, regarding the Fund, the BDC, the Administrative Agent or their Affiliates provided or made available to such Member hereunder (“ConfidentialInformation”). Each Member agrees not to disclose to any other Person any Confidential Information without the express prior written consent of the Board ofManagers; provided that any Member may provide Confidential Information (i) to such Member’s employees, accountants, lenders, internal and externalauditors, legal counsel, financial advisors and other fiduciaries and representatives (who may be Affiliates of such Member) as long as such Member instructssuch Persons to maintain the confidentiality thereof and not to disclose to any other Person any information contained therein; (ii) to potential transferees ofsuch Member’s Membership Interest that agree in writing, for the benefit of the Fund, to maintain the confidentiality thereof, but only after reasonableadvance notice to the Fund; (iii) if and to the extent required by law (including judicial or administrative order); provided that, to the extent legallypermissible, the Fund is given prior notice to enable it to seek a protective order or similar relief; (iv) to representatives of any governmental regulatoryagency or authority with jurisdiction over such Member, or as otherwise may be necessary to comply with regulatory requirements applicable to suchMember; (v) in the case of the BDC, to the extent required by law in reporting to its shareholders; and (vi) in order to enforce rights under this Agreement.Notwithstanding the foregoing, the following shall not be considered Confidential Information for purposes of this Agreement: (A) information generallyknown to the public; (B) information obtained by a Member from a third party who is not prohibited from disclosing the information; (C) information in thepossession of a Member prior to its disclosure by the Fund, the BDC, the Administrative Agent or their Affiliates; or (D) information which a Member canshow by written documentation was developed independently of disclosure by the Fund, the BDC, the Administrative Agent or their Affiliates. Withoutlimitation to the foregoing, Trinity shall not engage in the purchase, sale or other trading of securities or derivatives thereof based upon what it knows to bematerial non-public information received from the Fund, the BDC, the Administrative Agent or their Affiliates. 30  (b) Publicity. The parties agree that a public announcement and/or similar publicity with respect to the transactions contemplated hereby willbe issued by the BDC following the date hereof. The contents of such announcement and/or publicity by the BDC will be subject to the approval of Trinity(such approval not to be unreasonably withheld). For the avoidance of doubt, any such announcement and/or publicity may be transmitted by the BDC byemail to its general contacts. (c) Withholding Information. To the extent permitted by applicable law, and notwithstanding the provisions of this ARTICLE 10, each of theFund and the Administrative Agent may, in its reasonable discretion, keep confidential from any Member information to the extent such Person reasonablydetermines that (i) disclosure of such information to such Member likely would have a material adverse effect upon the Fund or any Investment due to anactual or likely conflict of business interests between such Member and one or more other parties or an actual or likely imposition of additional statutory orregulatory constraints upon the Fund, the Administrative Agent or an Investment; or (ii) such Member cannot or will not adequately protect against theimproper disclosure of Confidential Information, the disclosure of which likely would have a material adverse effect upon the Fund, the Administrative Agentor an Investment. Notwithstanding the foregoing, the Fund and the Administrative Agent shall promptly provide to each Member all relevant documents andinformation that would otherwise be required to be provided under this ARTICLE 10 but for the preceding sentence that is related to any notice or request(whether written or oral) received from any governmental or regulatory agency involving any pending or threatened Proceeding in connection with theactivities or operations of the Fund. (d) Other Obligations. The Members (i) acknowledge that the Fund, the BDC, the Administrative Agent, their Affiliates, and their respectivedirect or indirect owners, managers, officers, directors and employees may acquire confidential third-party information that, pursuant to fiduciary, contractual,legal or similar obligations, cannot be disclosed to the Fund or the Members; and (ii) agree that none of such Persons shall be in breach of any duty under thisAgreement or the Act as a result of acquiring, holding or failing to disclose such information to the Fund or the Members. 31  Section 10.5 Valuation. (a) General. Valuations shall be made as of the end of each fiscal quarter and upon liquidation of the Fund in accordance with the followingprovisions and the Fund’s valuation guidelines then in effect (which shall be consistent with the BDC’s valuation guidelines then in effect): (i) Within forty-five (45) days after the date as of which a valuation is to be made, the Administrative Agent shall deliver to the Boardof Managers a report as to the recommended valuation as of such date, and provide such Persons with a reasonable opportunity to request information and toprovide comments with respect to the report. (ii) If the recommended valuation as of such date is approved by the Board of Managers, then the valuation that has been approvedshall be final. (iii) If there is an objection to the recommended valuation by a Manager, then the Administrative Agent shall cause a valuation of theasset(s) subject to unresolved objection to be made as of such date by an approved valuation expert (if not already made), and shall determine a valuation ofsuch asset(s) consistent with the valuation as of such date by the approved valuation expert, and such valuation shall be final. For this purpose, a valuation ofan asset as of such date shall be considered consistent with a valuation of an approved valuation expert if it is equal to the recommended value or within therecommended range of values determined by the approved valuation expert as of such date. An approved valuation expert shall mean an independentvaluation consultant that either has been approved by the Board of Managers or has been referenced in a previous valuation report by the AdministrativeAgent without objection by any Manager. (iv) Liabilities of the Fund shall be taken into account at the amounts at which they are carried on the books of the Fund, and provisionshall be made in accordance with U.S. generally accepted accounting principles for contingent or other liabilities not reflected on such books and, in the caseof the liquidation of the Fund, for the expenses (to be borne by the Fund) of the liquidation and winding up of the Fund’s affairs. (v) No value shall be assigned to the Fund name and goodwill or to the office records, files, statistical data, or any similar intangibleassets of the Fund not normally reflected in the Fund’s accounting records. (b) Binding Valuation. All valuations shall be made in accordance with the foregoing shall be final and binding on all Members, absent actualand apparent error. Valuations of the Fund’s assets by independent valuation consultants shall constitute a Fund Expense. ARTICLE 11 MISCELLANEOUS PROVISIONS Section 11.1 [Reserved]. Section 11.2 Force Majeure. Whenever any act or thing is required of any Person hereunder to be done within any specified period of time, suchPerson shall be entitled to such additional period of time to do such act or thing as shall equal any period of delay resulting from causes beyond thereasonable control of such Person, including, without limitation, bank holidays, and actions of governmental agencies, and excluding, without limitation,economic hardship; provided that this provision shall not have the effect of relieving such Person from the obligation to perform any such act or thing. 32  Section 11.3 Applicable Law. This Agreement shall be governed by, and construed in accordance with, the internal law of the State of Delaware,without regard to the principles of conflicts of laws thereof. Section 11.4 Waivers. No waiver of the provisions hereof shall be valid unless in writing and then only to the extent therein set forth. Any rightor remedy of a Person hereunder may be waived only by such Person, and any such waiver shall be binding only on such Person. Except as specifically hereinprovided, no failure or delay by any Person in exercising any right or remedy hereunder shall operate as a waiver thereof, and a waiver of a particular right orremedy on one occasion shall not be deemed a waiver of any other right or remedy or a waiver on any subsequent occasion. Section 11.5 Notices. All notices, demands, solicitations of consent or approval, and other communications hereunder shall be in writing or byelectronic mail (with or without attached PDFs), and shall be sufficiently given if personally delivered or sent by postage prepaid, registered or certified mail,return receipt requested, or sent by electronic mail, overnight courier or facsimile transmission, addressed as follows: if intended for the Fund, to the Fund’sprincipal office as set forth in the Fund’s records as kept by the Administrative Agent; and if intended for any Member, to the address of such Member setforth on the Fund’s records as maintained by the Administrative Agent, or to such other address as any Member may designate by written notice. Notices shallbe deemed to have been given (i) when personally delivered, (ii) if sent by registered or certified mail, on the earlier of (A) three days after the date on whichdeposited in the mails or (B) the date on which received, or (iii) if sent by electronic mail, overnight courier or facsimile transmission, on the date on whichreceived; provided that notices of a change of address shall not be deemed given until the actual receipt thereof. The provisions of this paragraph shall notprohibit the giving of written notice in any other manner; any such written notice shall be deemed given only when actually received. Section 11.6 Construction. (a) Captions; Interpretation. The captions used herein are intended for convenience of reference only and shall not modify or affect in anymanner the meaning or interpretation of any of the provisions of this Agreement. This Agreement is not intended to carry over any economic entitlements orobligations that may have arisen among the parties under the Existing Agreement due to events preceding this Agreement other than those specificallycontemplated herein and should be interpreted accordingly to the extent applicable. (b) Singular and Plural. As used herein, the singular shall include the plural, the masculine gender shall include the feminine and neuter, andthe neuter gender shall include the masculine and feminine, unless the context otherwise requires. 33  (c) References to this Agreement. The words “hereof,” “herein,” and “hereunder,” and words of similar import, when used in this Agreementshall refer to this Agreement as a whole and not to any particular provision of this Agreement. (d) Articles and Sections. References in this Agreement to Articles and Sections are intended to refer to Articles and Sections of this Agreementunless otherwise specifically stated. (e) Third Parties. Other than the rights of Indemnified Persons to indemnification and exculpation pursuant to Section 7.3 and Section 7.4,nothing in this Agreement shall be deemed to create any right in or benefit for any creditor of the Fund or other Person that is not a party hereto, and thisAgreement shall not be construed in any respect to be for the benefit of any creditor of the Fund or other Person that is not a party hereto. Section 11.7 Amendments. This Agreement may be amended at any time and from time to time with the approval of the Board of Managers. Section 11.8 Legal Counsel. The BDC has engaged Robinson, Bradshaw & Hinson, P.A. (“RBH”), as legal counsel to the Fund, the BDC and theAdministrative Agent. Moreover, RBH has previously represented and/or concurrently represents the interests of the Fund, the BDC, the AdministrativeAgent and/or parties related thereto in connection with matters other than the preparation of this Agreement and may represent such Persons in the future.Each Member: (i) approves RBH’s representation of the Fund, the BDC and the Administrative Agent in the preparation of this Agreement; and (ii)acknowledges that RBH has not been engaged by any other Member to protect or represent the interests of such Member vis-à-vis the Fund or the preparationof this Agreement, and that actual or potential conflicts of interest may exist among the Members in connection with the preparation of this Agreement. Inaddition, each Member: (iii) acknowledges the possibility of a future conflict or dispute among Members or between any Member or Members and the Fundor the Administrative Agent; and (iv) acknowledges the possibility that, under the laws and ethical rules governing the conduct of attorneys, RBH may beprecluded from representing the Fund and/or the BDC and/or the Administrative Agent (or any equity holder thereof) in connection with any such conflict ordispute. Nothing in this Section 11.8 shall preclude the Fund from selecting different legal counsel to represent it at any time in the future and no Membershall be deemed by virtue of this Section 11.8 to have waived its right to object to any conflict of interest relating to matters other than this Agreement or thetransactions contemplated herein. Section 11.9 Execution. This Agreement may be executed in any number of counterparts and all such counterparts together shall constitute oneagreement binding on all Members. Section 11.10 Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the respective heirs, executors,administrators, legal representatives, successors and assigns of the parties hereto; provided that this provision shall not be construed to permit any assignmentor transfer which is otherwise prohibited hereby. 34  Section 11.11 Severability. If any one or more of the provisions contained in this Agreement, or any application thereof, shall be invalid, illegalor unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and all other applications thereof shallnot in any way be affected or impaired thereby. Section 11.12 Entire Agreement. This Agreement and the Subscription Agreements entered into between the Fund and each Member inconnection with the Members’ subscription of interests in the Fund set forth the entire understanding among the parties relating to the subject matter hereof,any and all prior correspondence, conversations, memoranda or other writings (including the Existing Agreement) being merged herein and replaced andbeing without effect hereon. No promises, covenants or representations of any character or nature other than those expressly stated herein or in suchSubscription Agreements have been made to induce any party to enter into this Agreement. [Remainder of page left blank] 35  IN WITNESS WHEREOF, the Members have caused this Agreement to be executed and delivered as of December 20, 2018. BDC: Capitala Finance Corp. By:/s/ Joseph B. Alala, III Name:Joseph B. Alala, III Title:President and Chief Executive Officer TRINITY: Trinity Universal Insurance Company By:/s/ John Boschelli Name:John Boschelli Title:Assistant Treasurer MEMBERS OF THE BOARD OF MANAGERS By:/s/ John Boschelli Name:John Boschelli Title:Manager By:/s/ Jonathan Wilson Name:Jonathan Wilson Title:Manager By:/s/ Joseph B. Alala, III Name:Joseph B. Alala, III Title:Manager By:/s/ Peter Sherman Name:Peter Sherman Title:Manager  Schedule A Without limiting the power and authority of the Board of Managers set forth in the Agreement, approval by the Board of Managers shall be requiredfor the Fund to do any of the following: 1.Enter into any transaction-related agreement with a Member or an Affiliate of a Member (except as expressly permitted by the Agreement, includingas contemplated in Section 6.8(a) and (b)); 2.Make an Investment in a Member or an Affiliate of a Member; 3.Enter into hedging, swaps, forward contracts or other commodities transactions, except as permitted by Section 6.7 of the Agreement; 4.Contract for Leverage on behalf of the Fund; 5.Replace the Administrative Agent for the Fund, or modify or waive the terms of any administrative services agreement; 6.Approve a Transfer of an interest in the Fund where required by ARTICLE 8 of the Agreement 7.Take any action or decision which pursuant to any provision of the Agreement requires approval of the Board of Managers; 8.Modify or waive any provision of the Agreement, including this Schedule A or modify the Certificate of Formation of the Fund in a manner adverseto the rights of any Member under the Agreement; 9.Guarantee or otherwise become liable for, the obligations of other Persons; 10.Materially change the business of the Fund or its subsidiaries from its current business or enter into any line business other than existing or relatedlines of business; 11.Make, change or rescind any tax election; 12.Settle or compromise with respect to any tax audit, claim, deficiency notice, suit or other proceeding relating to taxes; make a request for a writtenruling to any tax authority; or enter into a written and legally binding agreement with any tax authority (including any agreement to extend orwaive any statute of limitations with respect to any taxes); 13.Make short sales of securities; 14.Change the name or principal office of the Fund or open additional offices of the Fund;  15.Retain third-party agents on behalf of the Fund, open accounts with third parties on behalf of the Fund and designate signatures upon whichwithdrawals from accounts shall be made on behalf of the Fund; 16.Adjust Net Profits or Net Losses to amortize Organization Costs or select a period over which to amortize Organization Costs; 17.Determine a period to allocate Net Profits or Net Losses among the Members pursuant to Section 4.1; 18.Approve an independent certified public accountant to act as the accountant for the Fund and to audit the Fund’s books and accounts as of the endof each fiscal year; provided that the retention of Ernst & Young as the Fund’s independent certified accountant for the fiscal year of the date hereofis hereby approved; and 19.Organize, acquire an interest in, or transfer or otherwise dispose of an interest in, any subsidiary of the Fund, any parallel partnerships, corporationsor other entities, or modify or waive the terms thereof. 2  Schedule B 1.Take any action or make any decision that results in the acquisition or disposition of an Investment; 2.Grant any consent or take any other action as the owner of an Investment (such as, for example, in respect of any late payment in respect of anUnderlying Loan); and 3.Materially modify or waive the terms of any Investment. Notwithstanding the foregoing, the approval of the Investment Committee shall not be required in respect of actions taken by the BDC, its Affiliatesand the BDC Managers to the extent permitted by Section 6.8(a) and (b). Exhibit 21.1​List 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)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 tostate a material fact necessary to make the statements made, in light of the circumstances under whichsuch statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the consolidated financial statements, and other financial informationincluded in this report, fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) andinternal control over financial reporting (as defined 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 andprocedures to be designed under our supervision, to ensure that material information relating tothe registrant, is made known to us by others within those entities, particularly during the periodin which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control overfinancial reporting to be designed under our supervision, to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented inthis report our conclusions about the effectiveness of the disclosure controls and procedures, as ofthe end of the period covered by this report based on such evaluation;(d)Disclosed in this report any change in the registrant’s internal control over financial reportingthat occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarterin the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, 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 ofinternal control over financial reporting, to the registrant’s auditors and the audit committee of theregistrant’s Board of Directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal controlover financial reporting which are reasonably likely to adversely affect the registrant’s ability torecord, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal control over financial reporting.Exhibit 31.1​CERTIFICATION 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:Date: March 4, 2019/s/ Joseph B. Alala IIIJoseph B. Alala IIIChief Executive Officer(Principal Executive Officer)Capitala Finance Corp.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 tostate a material fact necessary to make the statements made, in light of the circumstances under whichsuch statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the consolidated financial statements, and other financial informationincluded in this report, fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) andinternal control over financial reporting (as defined 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 andprocedures to be designed under our supervision, to ensure that material information relating tothe registrant, is made known to us by others within those entities, particularly during the periodin which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control overfinancial reporting to be designed under our supervision, to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented inthis report our conclusions about the effectiveness of the disclosure controls and procedures, as ofthe end of the period covered by this report based on such evaluation;(d)Disclosed in this report any change in the registrant’s internal control over financial reportingthat occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarterin the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, 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 ofinternal control over financial reporting, to the registrant’s auditors and the audit committee of theregistrant’s Board of Directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal controlover financial reporting which are reasonably likely to adversely affect the registrant’s ability torecord, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal control over financial reporting.Exhibit 31.2​CERTIFICATION 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:Date: March 4, 2019/s/ Stephen A. ArnallStephen A. ArnallChief Financial Officer(Principal Financial Officer)Capitala Finance Corp.1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities ExchangeAct of 1934, as amended; and2.The information contained in the Report fairly presents, in all material respects, the financialcondition and results of operations of the Company.Exhibit 32.1​CERTIFICATION 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 theannual period ended December 31, 2018, 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 ofthe Sarbanes-Oxley Act of 2002, that:Date: March 4, 2019/s/ Joseph B. Alala IIIJoseph B. Alala IIIChief Executive Officer(Principal Executive Officer)Capitala Finance Corp.1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities ExchangeAct of 1934, as amended; and2.The information contained in the Report fairly presents, in all material respects, the financialcondition and results of operations of the Company.Exhibit 32.2​CERTIFICATION 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 theannual period ended December 31, 2018, 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 ofthe Sarbanes-Oxley Act of 2002, that:Date: March 4, 2019/s/ Stephen A. ArnallStephen A. ArnallChief Financial Officer(Principal Financial Officer)Capitala Finance Corp.

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