UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-Q





(Mark One)





[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended  September 30, 2019





OR





[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from .................to .................





Commission File Number: 814-00061





CAPITAL SOUTHWEST CORPORATION


(Exact name of registrant as specified in its charter)





Texas75-1072796(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)








5400 Lyndon B Johnson Freeway, Suite 1300, Dallas, Texas75240(Address of principal executive offices)(Zip Code)





Registrant's telephone number, including area code: ( 214) 238-5700





Securities registered pursuant to Section 12(b) of the Act:Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which RegisteredCommon Stock, $0.25 par value per shareCSWCThe Nasdaq Global Select Market5.95% Notes due 2022CSWCLThe Nasdaq Global Select Market





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  X  No





Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer ̈Accelerated filerxNon-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 transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ̈





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No  X





Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.





17,927,329 shares of Common Stock, $0.25 value per share, as of November 1, 2019.





---







TABLE OF CONTENTS





PagePART IFINANCIAL INFORMATIONItem 1.Consolidated Financial Statements3Consolidated Statements of Assets and Liabilities as of September 30, 2019 (Unaudited) and March 31, 20193Consolidated Statements of Operations (Unaudited) for the three and six months ended September 30, 2019 and 20184Consolidated Statements of Changes in Net Assets (Unaudited) for the six months ended September 30, 2019 and 20185Consolidated Statements of Cash Flows (Unaudited) for the six months ended September 30, 2019 and 20186Consolidated Schedule of Investments as of September 30, 2019 (Unaudited) and March 31, 20197Notes to Consolidated Financial Statements (Unaudited)22Consolidated Schedule of Investments in and Advances to Affiliates (Unaudited) for the six months ended September 30, 201961Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations63Item 3.Quantitative and Qualitative Disclosures About Market Risk78Item 4.Controls and Procedures80PART IIOTHER INFORMATIONItem 1.Legal Proceedings81Item1A.Risk Factors81Item 2.Unregistered Sales of Equity Securities and Use of Proceeds81Item 3.Defaults Upon Senior Securities81Item 4.Mine Safety Disclosures81Item 5.Other Information81Item 6.Exhibits82Signatures83











---




PART I – FINANCIAL INFORMATION











|        |                                  
|------- | ---------------------------------
|Item 1. | Consolidated Financial Statements




CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES(In thousands, except shares and per share data)September 30,March 31,20192019(Unaudited)AssetsInvestments at fair value:Non-control/Non-affiliate investments (Cost: $343,790 and $305,596, respectively)$339,357$304,663Affiliate investments (Cost: $80,948 and $79,277, respectively)83,60280,905Control investments (Cost: $73,415 and $93,182, respectively)115,917138,503Total investments (Cost: $498,153 and $478,055, respectively)538,876524,071Cash and cash equivalents30,0199,924Receivables:Dividends and interest8,5639,252Escrow418370Other7581,244Income tax receivable154183Deferred tax asset1,6281,807Debt issuance costs (net of accumulated amortization of $2,191 and $1,814, respectively)3,2093,364Other assets1,4081,628Total assets$585,033$551,843LiabilitiesDecember 2022 Notes (Par value: $77,136 and $77,136, respectively)$75,564$75,099October 2024 Notes (Par value: $65,000 and $0, respectively)63,585—Credit facility108,000141,000Other liabilities5,7916,708Accrued restoration plan liability3,0233,073Deferred tax liability971—Total liabilities256,934225,880Commitments and contingencies (Note 10)Net AssetsCommon stock, $0.25 par value: authorized, 40,000,000 shares; issued, 20,266,841 shares at September 30, 2019 and 19,842,528 shares at March 31, 20195,0674,961Additional paid-in capital291,387281,205Total distributable earnings55,58263,734Treasury stock - at cost, 2,339,512 shares(23,937)(23,937)Total net assets328,099325,963Total liabilities and net assets$585,033$551,843Net asset value per share (17,927,329 shares outstanding at September 30, 2019 and 17,503,016 shares outstanding at March 31, 2019)$18.30$18.62








The accompanying Notes are an integral part of these Consolidated Financial Statements.





3


---







CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)(In thousands, except shares and per share data)Three Months EndedSix Months EndedSeptember 30,September 30,2019201820192018Investment income:Interest income:Non-control/Non-affiliate investments$9,236$7,049$18,267$13,081Affiliate investments2,0011,7994,0513,251Control investments—384265543Dividend income:Non-control/Non-affiliate investments68215525Affiliate investments—441982Control investments3,5193,1127,4326,126Interest income from cash and cash equivalents125289Fees and other income382200800585Total investment income15,21812,59531,01723,702Operating expenses:Compensation1,7081,9633,7293,873Share-based compensation6854821,522957Interest3,7163,1097,5225,482Professional fees4624071,088895Net pension expense35397179General and administrative1,2317932,0201,618Total operating expenses7,8376,79315,95212,904Income before taxes7,3815,80215,06510,798Income tax expense566256890635Net investment income$6,815$5,546$14,175$10,163Realized gainNon-control/Non-affiliate investments$267$17$1,316$217Affiliate investments16771777Control investments——16718,619Total net realized gain on investments before income tax283941,50018,913Net unrealized (depreciation) appreciation on investmentsNon-control/Non-affiliate investments(809)1,877(3,781)6,409Affiliate investments(181)(868)1,025(1,539)Control investments(2,904)(124)(2,819)(16,087)Income tax (provision) benefit(475)63(658)382Total net unrealized (depreciation) appreciation on investments, net of tax(4,369)948(6,233)(10,835)Net realized and unrealized (losses) gains on investments$(4,086)$1,042$(4,733)$8,078Net increase in net assets from operations$2,729$6,588$9,442$18,241Pre-tax net investment income per share - basic and diluted$0.42$0.36$0.85$0.67Net investment income per share – basic and diluted$0.38$0.34$0.80$0.63Net increase in net assets from operations – basic and diluted$0.15$0.40$0.53$1.12Weighted average shares outstanding – basic17,770,01116,318,73717,653,60716,249,892Weighted average shares outstanding – diluted17,770,01116,323,47717,653,60716,254,365


The accompanying Notes are an integral part of these Consolidated Financial Statements.





4


---







CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS(Unaudited)(In thousands)20192018Net assets, March 31$325,963$308,288Operations:Net investment income7,3604,617Net realized gain on investments1,21718,819Net unrealized depreciation on investments, net of tax(1,864)(11,783)Net increase in net assets from operations6,71311,653Dividends to shareholders ($0.49 and $0.89 per share, respectively)(8,629)(14,503)Capital share transactions:Change in restoration plan liability711Issuance of common stock3,972—Exercise of employee stock options—1,457Share-based compensation expense837475Common stock withheld for payroll taxes upon vesting of restricted stock(49)—Increase (decrease) in net assets2,851(907)Net assets, June 30$328,814$307,381Operations:Net investment income6,8155,546Net realized gain on investments28394Net unrealized (depreciation) appreciation on investments, net of tax(4,369)948Net increase in net assets from operations2,7296,588Dividends to shareholders ($0.50 and $0.44 per share, respectively)(8,964)(7,191)Capital share transactions:Change in pension plan funded status812Issuance of common stock4,827—Exercise of employee stock options—576Share-based compensation expense685482(Decrease) increase in net assets(715)467Net assets, September 30$328,099$307,848





The accompanying Notes are an integral part of these Consolidated Financial Statements.





5


---




Table of Contents





CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(In thousands)Six Months EndedSeptember 30,20192018Cash flows from operating activitiesNet increase in net assets from operations$9,442$18,241Adjustments to reconcile net increase in net assets from operations to net cash used in operating activities:Purchases and originations of investments(64,725)(167,697)Proceeds from sales and repayments of debt investments in portfolio companies39,96452,638Proceeds from sales and return of capital of equity investments in portfolio companies7,27124,884Payment of accreted original issue discounts570306Depreciation and amortization1,249708Net pension benefit(34)(26)Realized gain on investments before income tax(1,500)(18,913)Net unrealized depreciation (appreciation) on investments5,57511,217Accretion of discounts on investments(968)(687)Payment-in-kind interest and dividends(889)(136)Stock option and restricted awards expense1,522957Deferred income taxes1,149(201)Changes in other assets and liabilities:Decrease (increase) in dividend and interest receivable928(3,088)Increase in escrow receivables(48)—Decrease in tax receivable284,669Decrease (increase) in other receivables486(62)(Increase) decrease in other assets(478)443Increase in taxes payable413—Decrease in other liabilities(231)(1,324)Decrease in payable for unsettled transaction(1,158)—Net cash used in operating activities(1,434)(78,071)Cash flows from financing activitiesProceeds from common stock offering8,937—Equity offering costs paid(106)—Borrowings under credit facility47,000117,000Repayments of credit facility(80,000)(30,000)Debt issuance costs paid(360)(539)Proceeds from notes63,70018,081Dividends to shareholders(17,593)(26,219)Proceeds from exercise of employee stock options—2,034Common stock withheld for payroll taxes upon vesting of restricted stock(49)—Net cash provided by financing activities21,52980,357Net increase in cash and cash equivalents20,0952,286Cash and cash equivalents at beginning of period9,9247,907Cash and cash equivalents at end of period$30,019$10,193Supplemental cash flow disclosures:Cash paid for income taxes$—$11Cash paid for interest6,0904,553





The accompanying Notes are an integral part of these Consolidated Financial Statements.








6


---




Table of Contents





CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED SCHEDULE OF INVESTMENTS(Unaudited)September 30, 2019Portfolio Company1Type of Investment2IndustryCurrent Interest Rate3Acquisition Date14MaturityPrincipalCostFair Value4Non-control/Non-affiliate Investments5AAC HOLDINGS, INC.First Lien16Healthcare servicesL+6.75% (Floor 1.00%)/Q, 4.00% PIK, Current Coupon 13.33%6/28/20176/30/2023$9,079$8,916$6,809First Lien - Priming FacilityL+11.00% (Floor 1.00%)/Q, Current Coupon 13.29%3/21/20193/31/20201,1701,1641,17010,0807,979ACE GATHERING, INC.Second Lien15Energy services (midstream)L+8.50% (Floor 2.00%)/Q, Current Coupon 10.60%12/13/201812/13/20239,8139,6399,724ADAMS PUBLISHING GROUP, LLCFirst LienMedia, marketing & entertainmentL+7.50% (Floor 1.00%)/Q, Current Coupon 9.78%7/2/20187/2/202311,38611,19511,193Delayed Draw Term Loan10L+7.50% (Floor 1.00%)/Q, Current Coupon 9.61%7/2/20187/2/202336133535511,53011,548AG KINGS HOLDINGS INC.8,16First LienFood, agriculture & beverageL+10.02% (Floor 1.00%)/M, Current Coupon 12.69%8/4/20168/8/20219,3089,1946,958ALLIANCE SPORTS GROUP, L.P.Senior subordinated debtConsumer products & retail11.00%8/1/20172/1/202310,1009,9639,6663.88% preferred membership interest—8/1/2017——2,5002,50012,46312,166AMERICAN NUTS OPERATIONS LLC13First Lien - Term LoanFood, agriculture and beverageL+9.50% (Floor 1.00%)/Q, Current Coupon 11.82%4/10/20184/10/202317,28117,01816,340First Lien - Term Loan C10L+9.50% (Floor 1.00%)/Q, Current Coupon 11.82%12/21/20184/10/20231,8041,7781,7053,000,000 units of Class A common stock9—4/10/2018——3,00073321,79618,778





7


---

Table of Contents





CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED SCHEDULE OF INVESTMENTS(Unaudited)September 30, 2019Portfolio Company1Type of Investment2IndustryCurrent Interest Rate3Acquisition Date14MaturityPrincipalCostFair Value4AMERICAN TELECONFERENCING SERVICES, LTD. (DBA PREMIERE GLOBAL SERVICES, INC.)First LienTelecommunicationsL+6.50% (Floor 1.00%)/Q, Current Coupon 8.69%9/21/201612/8/20215,9345,8543,744Second LienL+9.50% (Floor 1.00%)/Q, Current Coupon 11.84%11/3/20166/6/20222,0061,9615327,8154,276AMWARE FULFILLMENT LLCFirst LienDistributionL+9.50% (Floor 1.00%)/M, Current Coupon 11.59%7/29/201612/31/202012,39012,32512,297ASC ORTHO MANAGEMENT COMPANY, LLC13Revolving Loan10Healthcare servicesL+7.50% (Floor 1.00%)8/31/20188/31/2023—(23)—First LienL+7.50% (Floor 1.00%)/Q, Current Coupon 9.82%8/31/20188/31/20239,1458,9948,939Second Lien13.25% PIK8/31/201812/1/20233,4683,4023,3822,042 Common Units9—8/31/2018——75056913,12312,890BINSWANGER HOLDING CORP.First LienDistributionL+8.50% (Floor 1.00%)/M, Current Coupon 10.63%3/9/20173/9/202211,77011,64011,446900,000 shares of common stock—3/9/2017——90078612,54012,232BLASCHAK COAL CORP.Second Lien15Commodities & miningL+10.00%/Q, 1.00% PIK, Current Coupon 13.32%7/30/20187/30/20238,5808,4398,314CALIFORNIA PIZZA KITCHEN, INC.First LienRestaurantsL+6.00% (Floor 1.00%)/M, Current Coupon 8.53%8/19/20168/23/20224,8504,8234,350CAPITAL PAWN HOLDINGS, LLCFirst LienConsumer products & retailL+9.50%/Q, Current Coupon 11.82%12/21/20177/8/202011,44811,36511,368





8


---

Table of Contents





CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED SCHEDULE OF INVESTMENTS(Unaudited)September 30, 2019Portfolio Company1Type of Investment2IndustryCurrent Interest Rate3Acquisition Date14MaturityPrincipalCostFair Value4CLICKBOOTH.COM, LLCRevolving Loan10Media, marketing & entertainmentL+8.50% (Floor 1.00%)12/5/201712/5/2022—(13)—First LienL+8.50% (Floor 1.00%)/Q, Current Coupon 10.82%12/5/201712/5/202215,64215,42115,95515,40815,955DANFORTH ADVISORS, LLC13Revolving Loan10Business servicesL+7.25% (Floor 2.00%)9/28/20189/28/2023—(16)—First LienL+7.25% (Floor 2.00%)/Q, Current Coupon 9.57%9/28/20189/28/20237,2507,1297,250875 Class A equity units9—9/28/2018——8751,2747,9888,524DELPHI INTERMEDIATE HEALTHCO, LLCFirst LienHealthcare servicesL+7.50% (Floor 1.00%)/Q, Current Coupon 9.70%11/3/201710/3/202210,52710,4559,538DIGITAL RIVER, INC.First LienSoftware & IT servicesL+6.00% (Floor 1.00%)/Q, Current Coupon 8.12%1/25/20162/12/202112,66212,65612,662DRIVEN, INC.First LienBusiness servicesL+8.00% (Floor 2.00%)/Q, Current Coupon 10.31%6/28/20196/28/202412,00011,77011,772DUNN PAPER, INC.Second LienPaper & forest productsL+8.75% (Floor 1.00%)/M, Current Coupon 10.79%9/28/20168/25/20233,0002,9612,952ENVIRONMENTAL PEST SERVICE MANAGEMENT COMPANY, LLCFirst LienConsumer servicesL+7.00%/Q, Current Coupon 9.32%6/22/20186/22/202315,37315,16015,373Delayed Draw Term Loan10L+7.00%/Q, Current Coupon 9.32%6/22/20186/22/20236,1436,0416,14321,20121,516FAST SANDWICH, LLCRevolving Loan10RestaurantsL+9.00% (Floor 1.00%)5/24/2018——(50)—First LienL+9.00% (Floor 1.00%)/Q, Current Coupon 11.32%5/24/20185/23/20233,1973,1543,1333,1043,133





9


---

Table of Contents





CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED SCHEDULE OF INVESTMENTS(Unaudited)September 30, 2019Portfolio Company1Type of Investment2IndustryCurrent Interest Rate3Acquisition Date14MaturityPrincipalCostFair Value4IENERGIZER LIMITED9First LienBusiness servicesL+6.00% (Floor 1.00%)/M, Current Coupon 8.06%4/17/20194/17/202413,50013,37413,500JVMC HOLDINGS CORP.First LienFinancial servicesL+6.50% (Floor 1.00%)/M, Current Coupon 8.54%2/28/20192/28/20248,6408,5628,640LGM PHARMA, LLC13First LienHealthcare productsL+8.50% (Floor 1.00%)/M, Current Coupon 10.60%11/15/201711/15/202211,60111,43811,426110,000 units of Class A common stock9—11/15/2017——1,10082112,53812,247LIGHTING RETROFIT INTERNATIONAL, LLC (DBA ENVOCORE)First LienEnvironmental servicesL+10.25% (Floor 1.00%)/Q, Current Coupon 12.35%6/30/20176/30/202213,27113,18112,81325,603 shares of Series C preferred stock—8/13/2018——2629396,825 shares of Series B preferred stock—6/30/2017——50030613,70713,148RESEARCH NOW GROUP, INC.Second LienBusiness servicesL+9.50% (Floor 1.00%)/M, Current Coupon 11.75%12/8/201712/20/202510,5009,87010,384SCRIP INC.8First LienHealthcare productsL+9.95% (Floor 2.00%)/M, Current Coupon 11.96%3/21/20193/21/202416,75016,29016,415100 shares of common stock—3/21/2019——1,0001,00017,29017,415TAX ADVISORS GROUP, LLC13143.3 Class A units9Financial services—6/23/2017——5411,053TINUITI INC.1,114 Preferred UnitsMedia, marketing & entertainment12.00% PIK2/1/2017——1,1302,9441,443 Common Units—2/1/2017——2771,0561,4074,000





10


---

Table of Contents





CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED SCHEDULE OF INVESTMENTS(Unaudited)September 30, 2019Portfolio Company1Type of Investment2IndustryCurrent Interest Rate3Acquisition Date14MaturityPrincipalCostFair Value4VISTAR MEDIA INC.First LienMedia, marketing & entertainmentL+8.00% (Floor 1.00%)/M, Current Coupon 10.09%2/17/20174/3/202313,90812,80313,908171,617 shares of Series A preferred stock—4/3/2019——1,8743,698Warrants (Expiration - April 3, 2029)—4/3/2019——6201,64815,29719,254VTX HOLDINGS, INC.8First LienSoftware & IT servicesL+8.95% (Floor 2.00%)/Q, Current Coupon 11.23%7/23/20197/23/202420,07519,52919,7841,000,000 Series A Preferred Units—7/23/2019——1,0001,00020,52920,784Total Non-control/Non-affiliate Investments$343,790$339,357Affiliate Investments6CHANDLER SIGNS, LLC13Senior subordinated debtBusiness services12.00%1/4/20167/4/2021$4,569$4,532$4,5691,500,000 units of Class A-1 common stock9—1/4/2016——1,5002,7146,0327,283DYNAMIC COMMUNITIES, LLC13Revolving Loan10Business servicesL+8.00% (Floor 1.00%)7/17/20187/17/2023—(4)—First LienL+8.00% (Floor 1.00%)/M, Current Coupon 10.04%7/17/20187/17/202310,92010,74410,8332,000,000 Preferred Units9—7/17/2018——2,0002,84912,74013,682





11


---

Table of Contents





CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED SCHEDULE OF INVESTMENTS(Unaudited)September 30, 2019Portfolio Company1Type of Investment2IndustryCurrent Interest Rate3Acquisition Date14MaturityPrincipalCostFair Value4ITA HOLDINGS GROUP, LLC13Revolving Loan10Transportation & logisticsL+9.00% (Floor 1.00%)/Q, Current Coupon 11.26%2/14/20182/14/20231,7191,6841,723First Lien - Term LoanL+8.00% (Floor 1.00%)/Q, Current Coupon 10.32%2/14/20182/14/20238,4838,3738,483First Lien - Term B LoanL+11.00% (Floor 1.00%)/Q, Current Coupon 13.32%6/5/20182/14/20234,2424,1734,373First Lien - PIK Note A10.00% PIK3/29/20192/14/20232,3081,7872,178First Lien - PIK Note B10.00% PIK3/29/20192/14/2023919186Warrants (Expiration - March 29, 2029)9—3/29/2019——5382,9099.25% Class A Membership Interest9—2/14/2018——1,5002,24518,14621,997ROSELAND MANAGEMENT, LLCRevolving Loan10Healthcare servicesL+7.00% (Floor 2.00%)11/9/201811/9/2023—(28)—First LienL+7.00% (Floor 2.00%)/Q, Current Coupon 9.32%11/9/201811/9/202310,42110,26510,42110,000 Class A Units—11/9/2018——1,0001,78911,23712,210SIMR, LLCFirst LienHealthcare servicesL+9.00% (Floor 2.00%)/M, Current Coupon 11.13%9/7/20189/7/202311,20711,01910,5455,724,000 Class B Common Units—9/7/2018——5,7243,32216,74313,867





12


---

Table of Contents





CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED SCHEDULE OF INVESTMENTS(Unaudited)September 30, 2019Portfolio Company1Type of Investment2IndustryCurrent Interest Rate3Acquisition Date14MaturityPrincipalCostFair Value4ZENFOLIO INC.Revolving Loan10Business servicesL+9.00% (Floor 1.00%)7/17/20177/17/2022—(11)—First LienL+9.00% (Floor 1.00%)/Q, Current Coupon 11.32%7/17/20177/17/202214,40614,16114,017190 shares of common stock—7/17/2017——1,90054616,05014,563Total Affiliate Investments$80,948$83,602Control Investments7I-45 SLF LLC9,1180% LLC equity interestMulti-sector holdings—10/20/2015——$68,000$61,909MEDIA RECOVERY, INC.11800,000 shares of Series A convertible preferred stockIndustrial products—11/4/1997——8007,9794,000,002 shares of common stock—11/4/1997——4,61546,0295,41554,008Total Control Investments$73,415$115,917TOTAL INVESTMENTS12$498,153$538,876





|  |                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------
|1 | All debt investments are income-producing, unless otherwise noted. Equity investments are non-income producing, unless otherwise noted.

|  |                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------
|2 | All of the Company’s investments, unless otherwise noted, are pledged as collateral for the Company’s senior secured credit facility.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3 | The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“P”) and reset daily (D), monthly (M), quarterly (Q), or semiannually (S).  For each the Company has provided the spread over LIBOR or Prime and the current contractual interest rate in effect atSeptember 30, 2019.  Certain investments are subject to a LIBOR or Prime interest rate floor. Certain investments, as noted, accrue payment-in-kind ("PIK") interest.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4 | The Company's investment portfolio is comprised entirely of debt and equity securities of privately held companies for which quoted prices falling within the categories of Level 1 and Level 2 inputs are not available. Therefore, the Company values all of its portfolio investments at fair value, as determined in good faith by the Board of Directors, using significant unobservable Level 3 inputs. Refer to Note 4 for further discussion.




13


---

Table of Contents





|  |                                                                                                                                                                                                                                                                                                                                                                                                  
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|5 | Non-Control/Non-Affiliate investments are generally defined by the Investment Company Act of 1940 (the “1940 Act”) as investments that are neither control investments nor affiliate investments. AtSeptember 30, 2019, approximately63.0%of the Company’s investment assets were non-control/non-affiliate investments. The fair value of these investments as a percent of net assets is103.4%.

|  |                                                                                                                                                                                                                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6 | Affiliate investments are generally defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned and the investments are not classified as control investments. AtSeptember 30, 2019, approximately15.5%of the Company’s investment assets were affiliate investments. The fair value of these investments as a percent of net assets is25.5%.

|  |                                                                                                                                                                                                                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|7 | Control investments are generally defined by the 1940 Act as investments in which more than 25% of the voting securities are owned. AtSeptember 30, 2019, approximately21.5%of the Company’s investment assets were control investments. The fair value of these investments as a percent of net assets is35.3%.

|  |                                                                 
|- | ----------------------------------------------------------------
|8 | The investment is structured as a first lien last out term loan.

|  |                                                                                                                                                                                                                                                                                                                                   
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|9 | Indicates assets that are considered "non-qualifying assets" under section 55(a) of the 1940 Act.  Qualifying assets must represent at least 70% of total assets at the time of acquisition of any additional non-qualifying assets. As ofSeptember 30, 2019, approximately15.6%of the Company's assets are non-qualifying assets.

|   |                                                                                                                                            
|-- | -------------------------------------------------------------------------------------------------------------------------------------------
|10 | The investment has an unfunded commitment as ofSeptember 30, 2019. Refer to Note 10 - Commitments and Contingencies for further discussion.

|   |                                                     
|-- | ----------------------------------------------------
|11 | Income producing through dividends or distributions.

|   |                                                                                                                                                                                                                                                                                                                                   
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|12 | As ofSeptember 30, 2019, the cumulative gross unrealized appreciation for U.S. federal income tax purposes is approximately$66.7 million; cumulative gross unrealized depreciation for federal income tax purposes is$23.8 million.  Cumulative net unrealized appreciation is$43.0 million, based on a tax cost of$495.9 million.

|   |                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|13 | ASC Ortho Management Company, LLC common units, Danforth Advisors, LLC common units, American Nuts Operations LLC Class A common stock, LGM Pharma, LLC Class A common stock, Tax Advisors Group, LLC Class A units, Chandler Signs, LP Class A-1 common stock, Dynamic Communities, LLC Preferred units, and ITA Holdings Group, LLC membership interest are held through a wholly-owned taxable subsidiary.

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|14 | The Company generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"). These investments, which as ofSeptember 30, 2019represented164.2%of the Company's net assets or92.1%of the Company's total assets, are generally subject to certain limitations on resale, and may be deemed "restricted securities" under the Securities Act.

|   |                                                                                                                                                                                                              
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|15 | The investment is structured as a split lien term loan, which provides the Company with a first lien priority on certain assets of the obligor and a second lien priority on different assets of the obligor.

|   |                                                                                                                                            
|-- | -------------------------------------------------------------------------------------------------------------------------------------------
|16 | Investment is on non-accrual status as ofSeptember 30, 2019, meaning the Company has ceased to recognize interest income on the investment.



















The accompanying Notes are an integral part of these Consolidated Financial Statements.








14


---




Table of Contents





CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED SCHEDULE OF INVESTMENTS(Unaudited)March 31, 2019Portfolio Company1Type of Investment2, 14IndustryCurrent Interest Rate3MaturityPrincipalCostFair Value4Non-control/Non-affiliate Investments5AAC HOLDINGS, INC.First LienHealthcare servicesL+6.75% (Floor 1.00%)/Q, 4.00% PIK, Current Coupon 13.49%6/30/2023$9,084$8,912$8,403First LienL+11.00% (Floor 1.00%)/M3/31/20201,1701,1581,18210,0709,585ACE GATHERING, INC.Second Lien15Energy services (midstream)L+8.50% (Floor 2.00%)/Q, Current Coupon 11.09%12/13/20239,9389,7479,783ADAMS PUBLISHING GROUP, LLCFirst LienMedia, marketing & entertainmentL+7.50% (Floor 1.00%)/Q, Current Coupon 10.30%7/2/202313,56613,32013,308Delayed Draw Term Loan10L+7.50% (Floor 1.00%)7/2/2023—(29)—13,29113,308AG KINGS HOLDINGS INC.8,16First LienFood, agriculture & beverageL+10.02% (Floor 1.00%)/M, Current Coupon 12.69%8/8/20219,3089,1948,330ALLIANCE SPORTS GROUP, L.P.Senior subordinated debtConsumer products & retail11.00%2/1/202310,1009,9469,8073.88% preferred membership interest———2,5002,50012,44612,307AMERICAN NUTS OPERATIONS LLC13First Lien - Term LoanFood, agriculture and beverageL+9.50% (Floor 1.00%)/Q, Current Coupon 12.30%4/10/202317,36917,07516,822First Lien - Term Loan C10L+9.50% (Floor 1.00%)/Q, Current Coupon 12.30%4/10/20231,7501,7231,6953,000,000 units of Class A common stock9———3,0001,50521,79820,022AMERICAN TELECONFERENCING SERVICES, LTD. (DBA PREMIERE GLOBAL SERVICES, INC.)First LienTelecommunicationsL+6.50% (Floor 1.00%)/Q, Current Coupon 9.24%12/8/20216,0235,9223,953Second LienL+9.50% (Floor 1.00%)/Q, Current Coupon 12.30%6/6/20222,0061,9541,1037,8765,056





15


---

Table of Contents





CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED SCHEDULE OF INVESTMENTS(Unaudited)March 31, 2019Portfolio Company1Type of Investment2, 14IndustryCurrent Interest Rate3MaturityPrincipalCostFair Value4AMWARE FULFILLMENT LLCFirst LienDistributionL+9.50% (Floor 1.00%)/M, Current Coupon 12.10%12/31/202012,75312,66612,651ASC ORTHO MANAGEMENT COMPANY, LLC13Revolving Loan10Healthcare servicesL+7.50% (Floor 1.00%)8/31/2023—(27)—First LienL+7.50% (Floor 1.00%)/Q, Current Coupon 10.30%8/31/20239,2619,0949,095Second Lien13.25% PIK12/1/20233,2503,1783,1782,042 Common Units9———75075012,99513,023BINSWANGER HOLDING CORP.First LienDistributionL+8.00% (Floor 1.00%)/M, Current Coupon 10.60%3/9/202212,15011,99212,016900,000 shares of common stock———9001,01312,89213,029BLASCHAK COAL CORP.Second Lien15Commodities & miningL+10.00%/Q, 1.00% PIK, Current Coupon 13.81%7/30/20238,5378,3838,511CALIFORNIA PIZZA KITCHEN, INC.First LienRestaurantsL+6.00% (Floor 1.00%)/M, Current Coupon 8.50%8/23/20224,8754,8444,723CAPITAL PAWN HOLDINGS, LLCFirst LienConsumer products & retailL+9.50%/Q, Current Coupon 12.30%7/8/202011,44811,31511,310CLICKBOOTH.COM, LLCRevolving Loan10Media, marketing & entertainmentL+8.50% (Floor 1.00%)12/5/2022—(15)—First LienL+8.50% (Floor 1.00%)/Q, Current Coupon 11.31%12/5/202216,95316,68417,29216,66917,292DANFORTH ADVISORS, LLC13Revolving Loan10Business servicesL+7.25% (Floor 2.00%)9/28/2023—(18)—First LienL+7.25% (Floor 2.00%)/Q, Current Coupon 10.05%9/28/20237,2507,1177,145875 Class A equity units9———8758757,9748,020





16


---

Table of Contents





CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED SCHEDULE OF INVESTMENTS(Unaudited)March 31, 2019Portfolio Company1Type of Investment2, 14IndustryCurrent Interest Rate3MaturityPrincipalCostFair Value4DELPHI INTERMEDIATE HEALTHCO, LLCFirst LienHealthcare servicesL+7.50% (Floor 1.00%)/Q, Current Coupon 10.23%10/3/202211,40011,31011,023DIGITAL RIVER, INC.First LienSoftware & IT servicesL+6.00% (Floor 1.00%)/Q, Current Coupon 8.60%2/12/20216,2856,2776,128DUNN PAPER, INC.Second LienPaper & forest productsL+8.75% (Floor 1.00%)/M, Current Coupon 11.25%8/25/20233,0002,9572,883ELITE SEM, INC.8First LienMedia, marketing & entertainmentL+8.40% (Floor 1.00%)/M, Current Coupon 11.00%2/1/202214,00013,71714,0001,443 Investment Units (Preferred)12.00% PIK——2,0684,45715,78518,457ENVIRONMENTAL PEST SERVICE MANAGEMENT COMPANY, LLCFirst LienConsumer servicesL+7.25%/Q, Current Coupon 10.06%6/22/202316,16915,92116,169Delayed Draw Term Loan10L+7.25%/Q, Current Coupon 10.06%6/22/20236,4616,3536,46122,27422,630FAST SANDWICH, LLCRevolving Loan10RestaurantsL+9.00% (Floor 1.00%)——(57)—First LienL+9.00% (Floor 1.00%)/Q, Current Coupon 11.80%5/23/20233,2383,1913,1903,1343,190JVMC HOLDINGS CORP.First LienFinancial servicesL+6.50% (Floor 1.00%)/M, Current Coupon 9.00%2/28/20249,1529,0629,062Delayed Draw Term Loan10L+6.50% (Floor 1.00%)2/28/2024—(7)—9,0559,062LGM PHARMA, LLC13First LienHealthcare productsL+8.50% (Floor 1.00%)/M, Current Coupon 10.99%11/15/20229,8759,72310,073Delayed Draw Term LoanL+8.50% (Floor 1.00%)/M, Current Coupon 10.99%11/15/20221,7851,7531,820110,000 units of Class A common stock9———1,100821





17


---

Table of Contents





CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED SCHEDULE OF INVESTMENTS(Unaudited)March 31, 2019Portfolio Company1Type of Investment2, 14IndustryCurrent Interest Rate3MaturityPrincipalCostFair Value412,57612,714LIGHTING RETROFIT INTERNATIONAL, LLC (DBA ENVOCORE)First LienEnvironmental servicesL+9.25% (Floor 1.00%)/Q, Current Coupon 11.84%6/30/202213,68813,58012,60625,603 shares of Series C preferred stock———2628396,825 shares of Series B preferred stock———50030714,10612,941RESEARCH NOW GROUP, INC.Second LienBusiness servicesL+9.50% (Floor 1.00%)/M, Current Coupon 12.00%12/20/202510,5009,83810,437SCRIP INC.8First LienHealthcare productsL+10.00% (Floor 2.00%)/M, Current Coupon 12.49%3/21/202416,75016,25016,250100 shares of common stock———1,0001,00017,25017,250TAX ADVISORS GROUP, LLC13143.3 Class A units9Financial services———541645VISTAR MEDIA INC.First LienMedia, marketing & entertainmentL+10.00% (Floor 1.00%)/M, Current Coupon 12.60%2/16/20227,9757,4477,975Warrants (Expiration - February 17, 2027)———8862,3788,33310,353Total Non-control/Non-affiliate Investments$305,596$304,663Affiliate Investments6CHANDLER SIGNS, LLC13Senior subordinated debtBusiness services12.00% / 1.00% PIK7/4/2021$4,557$4,512$4,4801,500,000 units of Class A-1 common stock9———1,5001,9376,0126,417DYNAMIC COMMUNITIES, LLC13Revolving Loan10Business servicesL+8.00% (Floor 1.00%)7/17/2023—(4)—First LienL+8.00% (Floor 1.00%)/M, Current Coupon 10.59%7/17/202311,06010,86310,9722,000,000 Preferred Units9———2,0002,849





18


---

Table of Contents





CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED SCHEDULE OF INVESTMENTS(Unaudited)March 31, 2019Portfolio Company1Type of Investment2, 14IndustryCurrent Interest Rate3MaturityPrincipalCostFair Value412,85913,821ITA HOLDINGS GROUP, LLC13Revolving Loan10Transportation & logisticsL+9.00% (Floor 1.00%)/Q, 1.00% PIK, Current Coupon 12.60%2/14/20232,0001,9602,000First Lien - Term LoanL+8.00% (Floor 1.00%)/Q, 1.00% PIK, Current Coupon 11.60%2/14/20237,6597,5337,475First Lien - Term B LoanL+11.00% (Floor 1.00%)/Q, 1.00% PIK, Current Coupon 14.60%2/14/20233,8303,7623,829First Lien - PIK Note A10.00% PIK2/14/20232,2501,6922,005First Lien - PIK Note B10.00% PIK2/14/2023898979Warrants (Expiration - March 29, 2029)9———5381,5579.25% Class A Membership Interest9———1,50092317,07417,868ROSELAND MANAGEMENT, LLCRevolving Loan10Healthcare servicesL+7.00% (Floor 2.00%)11/9/2023—(32)—First LienL+7.00% (Floor 2.00%)/Q, Current Coupon 9.80%11/9/202310,47410,30210,47410,000 Class A Units———1,0001,48711,27011,961SIMR, LLCFirst LienHealthcare servicesL+9.00% (Floor 2.00%)/M, Current Coupon 11.62%9/7/202311,54211,33211,4035,724,000 Class B Common Units———5,7245,72417,05617,127ZENFOLIO INC.Revolving Loan10Business servicesL+9.00% (Floor 1.00%)7/17/2022—(13)—First LienL+9.00% (Floor 1.00%)/Q, Current Coupon 11.60%7/17/202213,29813,11913,165190 shares of common stock———1,90054615,00613,711





19


---

Table of Contents





CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED SCHEDULE OF INVESTMENTS(Unaudited)March 31, 2019Portfolio Company1Type of Investment2, 14IndustryCurrent Interest Rate3MaturityPrincipalCostFair Value4Total Affiliate Investments$79,277$80,905Control Investments7I-45 SLF LLC9,1180% LLC equity interestMulti-sector holdings———$68,000$65,743MEDIA RECOVERY, INC.11800,000 shares of Series A convertible preferred stockIndustrial products———8007,7954,000,002 shares of common stock———4,61544,9655,41552,760PRISM SPECTRUM HOLDINGS, LLC13First LienEnvironmental servicesL+9.50% (Floor 2.25%)/M, Current Coupon 12.12%2/6/202313,46113,22913,46196,498.32 Class A units9———6,5386,53919,76720,000Total Control Investments93,182138,503TOTAL INVESTMENTS12$478,055$524,071





|  |                                                                                                                                                     
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|1 | All debt investments are income-producing, unless otherwise noted. Equity investments and warrants are non-income producing, unless otherwise noted.

|  |                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------
|2 | All of the Company’s investments, unless otherwise noted, are encumbered as security for the Company’s senior secured credit facility.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3 | The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“P”) and reset daily (D), monthly (M), quarterly (Q), or semiannually (S).  For each the Company has provided the spread over LIBOR or Prime and the current contractual interest rate in effect atMarch 31, 2019.  Certain investments are subject to a LIBOR or Prime interest rate floor. Certain investments, as noted, accrue payment-in-kind ("PIK") interest.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4 | The Company's investment portfolio is comprised entirely of privately held debt and equity securities for which quoted prices falling within the categories of Level 1 and Level 2 inputs are not available. Therefore, the Company values all of its portfolio investments at fair value, as determined in good faith by the Board of Directors, using significant unobservable Level 3 inputs. Refer to Note 4 for further discussion.

|  |                                                                                                                                                                                                                                                                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|5 | Non-Control/Non-Affiliate investments are generally defined by the Investment Company Act of 1940 (the “1940 Act”) as investments that are neither control investments nor affiliate investments. AtMarch 31, 2019, approximately58.2%of the Company’s investment assets were non-control/non-affiliate investments. The fair value of these investments as a percent of net assets is93.5%.




20


---

Table of Contents





|  |                                                                                                                                                                                                                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6 | Affiliate investments are generally defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned and the investments are not classified as control investments. AtMarch 31, 2019, approximately15.4%of the Company’s investment assets were affiliate investments. The fair value of these investments as a percent of net assets is24.8%.

|  |                                                                                                                                                                                                                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|7 | Control investments are generally defined by the 1940 Act as investments in which more than 25% of the voting securities are owned. AtMarch 31, 2019, approximately26.4%of the Company’s investment assets were control investments. The fair value of these investments as a percent of net assets is42.5%.

|  |                                                                 
|- | ----------------------------------------------------------------
|8 | The investment is structured as a first lien last out term loan.

|  |                                                                                                                                                                                                                                                                                                                                          
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|9 | Indicates assets that are considered "non-qualifying assets” under section 55(a) of the 1940 Act.  Qualifying assets must represent at least 70% of total assets at the time of acquisition of any additional non-qualifying assets. As ofMarch 31, 2019, approximately16.1%of the Company's investment assets are non-qualifying assets.

|   |                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------
|10 | The investment has an unfunded commitment as ofMarch 31, 2019. Refer to Note 12 - Commitments and Contingencies for further discussion.

|   |                                                     
|-- | ----------------------------------------------------
|11 | Income producing through dividends or distributions.

|   |                                                                                                                                                                                                                                                                                                                          
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|12 | As ofMarch 31, 2019, the cumulative gross unrealized appreciation for federal income tax purposes is approximately$56.6 million; cumulative gross unrealized depreciation for federal income tax purposes is$11.6 million.  Cumulative net unrealized appreciation is$45.0 million, based on a tax cost of$477.8 million.

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|13 | ASC Ortho Management Company, LLC common units, Danforth Advisors, LLC common units, American Nuts Operations LLC Class A common stock, LGM Pharma, LLC Class A common stock, Tax Advisors Group, LLC Class A units, Chandler Signs, LP Class A-1 common stock, Dynamic Communities, LLC Preferred units, ITA Holdings Group, LLC membership interest, and Prism Spectrum Holdings LLC Class A units are held through a wholly-owned taxable subsidiary.

|   |                                                                                                                                                                                                                                                                                                                   
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|14 | The Company generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"). These investments are generally subject to certain limitations on resale, and may be deemed "restricted securities" under the Securities Act.

|   |                                                                                                                                                                                                              
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|15 | The investment is structured as a split lien term loan, which provides the Company with a first lien priority on certain assets of the obligor and a second lien priority on different assets of the obligor.

|   |                                                                                                                                         
|-- | ----------------------------------------------------------------------------------------------------------------------------------------
|16 | Investment was on non-accrual status as ofMarch 31, 2019, meaning the Company has ceased to recognize interest income on the investment.




The accompanying Notes are an integral part of these Consolidated Financial Statements.








21


---




Table of Contents





Notes to Consolidated Financial Statements








|   |                                       
|-- | --------------------------------------
|1. | ORGANIZATION AND BASIS OF PRESENTATION




References in this Quarterly Report on Form 10-Q to “we,” “our,” “us,” “CSWC,” or the “Company” refer to Capital Southwest Corporation, unless the context requires otherwise.





Organization





Capital Southwest Corporation is an internally managed investment company that specializes in providing customized financing to middle market companies in a broad range of investment segments located primarily in the United States. Our common stock currently trades on The Nasdaq Global Select Market under the ticker symbol “CSWC.”





CSWC was organized as a Texas corporation on April 19, 1961. On March 30, 1988, CSWC elected to be regulated as a business development company (“BDC”) under the 1940 Act. In order to comply with the 1940 Act requirements for a BDC, we must, among other things, generally invest at least 70% of our assets in eligible portfolio companies and limit the amount of leverage we incur.





We have elected, and intend to qualify annually, to be treated as a regulated investment company (“RIC”) under Subchapter M of the U.S. Internal Revenue Code of 1986, as amended (the “Code”). As such, we generally will not have to pay corporate-level U.S. federal income tax on any ordinary income or capital gains that we distribute to our shareholders as dividends. To continue to maintain our RIC treatment, we must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into the next year and pay a 4% U.S. federal excise tax on such income. Any such carryover taxable income must be distributed through a dividend declared prior to filing the final tax return related to the year that generated such taxable income.





Capital Southwest Management Corporation (“CSMC”), a wholly-owned subsidiary of CSWC, is the management company for CSWC. CSMC generally incurs all normal operating and administrative expenses, including, but not limited to, salaries and related benefits, rent, equipment and other administrative costs required for its day-to-day operations.





CSWC also has a direct wholly-owned subsidiary that has been elected to be a taxable entity (the “Taxable Subsidiary”). The primary purpose of the Taxable Subsidiary is to permit CSWC to hold certain interests in portfolio companies that are organized as limited liability companies, or LLCs (or other forms of pass-through entities) and still allow us to satisfy the RIC tax requirement that at least 90% of our gross income for U.S. federal income tax purposes must consist of qualifying investment income. The Taxable Subsidiary is taxed at normal corporate tax rates based on its taxable income.





We focus on investing in companies with histories of generating revenues and positive cash flow, established market positions and proven management teams with strong operating discipline. We target senior  debt, subordinated debt and equity investments in lower middle market (“LMM”) companies, as well as first and second lien syndicated loans in upper middle market (“UMM”) companies. Our target LMM companies typically have annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) between $3.0 million and $15.0 million, and our LMM investments generally range in size from $5.0 million to $25.0 million. Our UMM investments generally include syndicated first and second lien loans in companies with EBITDA generally greater than $50.0 million and typically range in size from $5.0 million to $15.0 million. We make available significant managerial assistance to the companies in which we invest as we believe that providing managerial assistance to an investee company is critical to its business development activities.





Basis of Presentation





The consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”).  We meet the definition of an investment company and follow the accounting and reporting guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 – Financial Services – Investment Companies (“ASC 946”) . Under rules and regulations applicable to investment companies, we are generally precluded from consolidating any entity other than another investment





22


---

Table of Contents





company, subject to certain exceptions.  One of the exceptions to this general principle occurs if the investment company has an investment in an operating company that provides services to the investment company.  Accordingly, the consolidated financial statements include CSMC, our management company, and the Taxable Subsidiary.





The consolidated financial statements are presented in conformity with U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with U.S. GAAP are omitted. In the opinion of our management, the unaudited consolidated financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of consolidated financial statements for the interim periods included herein. The results of operations for the three and six months ended September 30, 2019 are not necessarily indicative of the operating results to be expected for the full fiscal year. Also, the unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal years ended March 31, 2019 and 2018 . Consolidated financial statements prepared on a U.S. GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the consolidated financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.





Portfolio Investment Classification





We classify our investments in accordance with the requirements of the 1940 Act.  Under the 1940 Act, “Control Investments” are generally defined as investments in which we own more than 25% of the voting securities; “Affiliate Investments” are generally defined as investments in which we own between 5% and 25% of the voting securities, and the investments are not classified as “Control Investments”; and “Non-Control/Non-Affiliate Investments” are generally defined as investments that are neither “Control Investments” nor “Affiliate Investments.”





Under the 1940 Act, a BDC must meet certain requirements, including investing at least 70% of our assets in qualifying assets. As of September 30, 2019 , the Company has 84.4% of our assets in qualifying assets. The principal categories of qualifying assets relevant to our business are:





(1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the Securities and Exchange Commission ("SEC").


(2) Securities of any eligible portfolio company that we control.


(3) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.


(4) Securities of an eligible portfolio company purchased from any person in a private transaction if there is no readily available market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company.


(5) Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities.


(6) Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.


Additionally,  in order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things meet the following requirements:


(1) Continue to maintain our election as a BDC under the 1940 Act at all times during each taxable year.





23


---

Table of Contents





(2) Derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities, loans, gains from the sale of stock or other securities, net income from certain "qualified publicly traded partnerships," or other income derived with respect to our business of investing in such stock or securities.


(3) Diversify our holdings in accordance with two Diversification Requirements: (a) Diversify our holdings such that at the end of each quarter of the taxable year at least 50% of the value of our assets consists of cash, cash equivalents, U.S. Government securities, securities of other RICs, and such other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and  (b) Diversify our holdings such that no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, (i) of one issuer, (ii) of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or (iii) of certain "qualified publicly traded partnerships" (collectively, the "Diversification Requirements").


The two Diversification Requirements must be satisfied quarterly. If a RIC satisfies the Diversification Requirements for one quarter, and then, due solely to fluctuations in market value, fails to meet one of the Diversification Requirements in the next quarter, it retains RIC tax treatment. A RIC that fails to meet the Diversification Requirements as a result of a nonqualified acquisition may be subject to excess taxes unless the nonqualified acquisition is disposed of and the Diversification Requirements are satisfied within 30 days of the close of the quarter in which the Diversification Requirements are failed.





For the quarter ended September 30, 2019 , we satisfied all RIC requirements and have 12.0% in nonqualified assets according to measurement criteria established in Section 851(d) of the Code.








|   |                                           
|-- | ------------------------------------------
|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




The following is a summary of significant accounting policies followed in the preparation of the consolidated financial statements of CSWC.





Fair Value Measurements We account for substantially all of our financial instruments at fair value in accordance with 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, including the categorization of financial instruments into a three-level hierarchy based on the transparency of valuation inputs. ASC 820 requires disclosure of the fair value of financial instruments for which it is practical to estimate such value.  We believe that the carrying amounts of our financial instruments such as cash, receivables and payables approximate the fair value of these items due to the short maturity of these instruments. This is considered a Level 1 valuation technique. The carrying value of our credit facility approximates fair value (Level 3 input). See Note 4 below for further discussion regarding the fair value measurements and hierarchy.





Investments Investments are stated at fair value and are reviewed and approved by our Board of Directors as described in the Notes to the Consolidated Schedule of Investments and Notes 3 and 4 below. Investments are recorded on a trade date basis.





Net Realized Gains or Losses and Net Unrealized Appreciation or Depreciation Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption of an investment or a financial instrument and the cost basis of the investment or financial instrument, without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the period net of recoveries and realized gains or losses from in-kind redemptions. Net unrealized appreciation or depreciation reflects the net change in the fair value of the investment portfolio and financial instruments and the reclassification of any prior period unrealized appreciation or depreciation on exited investments and financial instruments to realized gains or losses.





Cash and Cash Equivalents Cash and cash equivalents, which consist of cash and highly liquid investments with an original maturity of three months or less at the date of purchase, are carried at cost, which approximates fair value. Cash may be held in a money market fund from time to time, which is a Level 1 security. Cash and cash equivalents includes deposits at financial institutions. We deposit our cash balances in financial institutions and, at times, such balances may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. At September 30, 2019 and March 31,





24


---

Table of Contents





2019 , cash balances totaling $28.9 million and $8.8 million , respectively, exceeded FDIC insurance limits, subjecting us to risk related to the uninsured balance. All of our cash deposits are held at large established high credit quality financial institutions and management believes that the risk of loss associated with any uninsured balances is remote.





Segment Information We operate and manage our business in a singular segment. As an investment company, we invest in portfolio companies in various industries and geographic areas as discussed in Note 3.





Consolidation As permitted under Regulation S-X and ASC 946, we generally do not consolidate our investment in a portfolio company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to CSWC. Accordingly, we consolidated the results of CSWC’s wholly-owned Taxable Subsidiary and CSWC’s wholly-owned management company, CSMC. All intercompany balances have been eliminated upon consolidation.





Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements and accompanying notes.  Actual results could differ from those estimates. We have identified investment valuation and revenue recognition as our most critical accounting estimates.





Interest and Dividend Income Interest and dividend income is recorded on an accrual basis to the extent amounts are expected to be collected. Dividend income is recognized on the date dividends are declared by the portfolio company or at the point an obligation exists for the portfolio company to make a distribution. Discounts/premiums received to par on loans purchased are capitalized and accreted or amortized into income over the life of the loan using the effective interest method. In accordance with our valuation policy, accrued interest and dividend income is evaluated quarterly for collectability. When we do not expect the debtor to be able to service all of its debt or other obligations, we will generally establish a reserve against interest income receivable, thereby placing the loan or debt security on non-accrual status, and cease to recognize interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a loan or debt security’s status significantly improves regarding its ability to service debt or other obligations, it will be restored to accrual basis. As of September 30, 2019 , we had two investments on non-accrual status. As of March 31, 2019 , we had one investment on non-accrual status.





To maintain RIC tax treatment, non-cash sources of income such as accretion of interest income may need to be paid out to shareholders in the form of distributions, even though CSWC may not have collected the interest income.  For the three and six months ended September 30, 2019 , approximately 3.3% and 3.1% , respectively, of CSWC's total investment income was attributable to non-cash interest income for the accretion of discounts associated with debt investments, net of any premium reduction. For the three and six months ended September 30,  2018 , 3.0% , and 2.9% respectively, of CSWC’s total investment income was attributable to non-cash interest income for the accretion of discounts associated with debt investments, net of any premium reduction.





Payment-in-Kind Interest The Company currently holds, and expects to hold in the future, some investments in its portfolio that contain payment-in-kind (“PIK”) interest and dividend provisions. The PIK interest and dividends, computed at the contractual rate specified in each loan agreement, are added to the principal balance of the loan, rather than being paid to the Company in cash, and are recorded as interest and dividend income. Thus, the actual collection of PIK interest and dividends may be deferred until the time of debt principal repayment or disposition of the equity investment. PIK interest and dividends, which are non-cash sources of income, are included in the Company’s taxable income and therefore affect the amount the Company is required to distribute to stockholders to maintain its qualification as a RIC for U.S. federal income tax purposes, even though the Company has not yet collected the cash. Generally, when current cash interest and/or principal payments on a loan become past due, or if the Company otherwise does not expect the borrower to be able to service its debt and other obligations, the Company will place the investment on non-accrual status and will generally cease recognizing PIK interest and dividend income on that loan for financial reporting purposes until all principal and interest have been brought current through payment or due to a restructuring such that the interest and dividend income is deemed to be collectible. The Company writes off any accrued and uncollected PIK interest and dividends when it is determined that the PIK interest and dividends are no longer collectible. As of September 30, 2019 and March 31, 2019 , we have not written off any accrued and uncollected PIK interest and dividends from prior periods. For the three months ended September 30, 2019 , we had one investment for which we stopped accruing PIK interest. For the three and six months ended September 30, 2019 , approximately 1.3% and 2.0% respectively, of CSWC’s total investment income was attributable





25


---

Table of Contents





to non-cash PIK interest and dividend income. For both the three and six months ended September 30,  2018 , approximately 0.7% of CSWC’s total investment income was attributable to non-cash PIK interest and dividend income.





Debt Issuance Costs Debt issuance costs include commitment fees and other costs related to CSWC’s senior secured credit facility and its notes (as discussed further in Note 5). The costs in connection with the credit facility have been capitalized and are amortized into interest expense over the term of the credit facility. The costs in connection with the notes are a direct deduction from the related debt liability and amortized into interest expense over the term of the December 2022 Notes and October 2024 Notes (as defined below).





Deferred Offering Costs Deferred equity offering costs include registration expenses related to shelf filings, including expenses related to the launch of the "at-the-market" program (the "Equity ATM Program"). These expenses consist primarily of SEC registration fees, legal fees and accounting fees incurred. These expenses are included in prepaid expenses and other assets on the Consolidated Statements of Assets and Liabilities. Upon the completion of an equity offering or a debt offering, the deferred expenses are charged to additional paid-in capital or debt issuance costs, respectively. If no offering is completed prior to the expiration of the registration statement, the deferred costs are charged to expense.





Leases The Company is obligated under an operating lease pursuant to which it is leasing an office facility from  a third party with a remaining term of approximately two years. The operating lease is included as an operating lease right-of-use ("ROU") asset and operating lease liability in the accompanying Consolidated Statements of Assets and Liabilities. The Company does not have any financing leases.





The ROU asset represents the Company’s right to use an underlying asset for the lease term and the operating lease liability represents the Company’s obligation to make lease payments arising from such lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the remaining lease term. The Company’s leases do not provide an implicit discount rate, and as such the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of the remaining lease payments. Lease expense is recognized on a straight-line basis over the remaining lease term.





Federal Income Taxes CSWC has elected and intends to comply with the requirements of the Code necessary to qualify as a RIC.  By meeting these requirements, we will not be subject to corporate federal income taxes on ordinary income or capital gains timely distributed to shareholders. In order to qualify as a RIC, the company is required to timely distribute to its shareholders at least 90% of investment company taxable income, as defined by the Code, each year.  Investment company taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses.  Investment company taxable income generally excludes net unrealized appreciation or depreciation, as investment gains and losses are not included in investment company taxable income until they are realized.





Depending on the level of taxable income or capital gains earned in a tax year, we may choose to carry forward taxable income or capital gains in excess of current year distributions into the next year and pay a 4% U.S. federal excise tax on such income. Any such carryover taxable income or capital gains must be distributed through a dividend declared on or prior to the later of (1) the filing of the U.S. federal income tax return for the applicable fiscal year and (2) the fifteenth day of the ninth month following the close of the year in which such taxable income was generated.





In lieu of distributing our net capital gains for a year, we may decide to retain some or all of our net capital gains. We will be required to pay a 21% corporate-level federal income tax on any such retained net capital gains. We may elect to treat such retained capital gain as a deemed distribution to shareholders. Under such circumstances, shareholders will be required to include their share of such retained capital gain in income, but will receive a credit for the amount of corporate-level U.S. federal income tax paid with respect to their shares. As an investment company that qualifies as a RIC, federal income taxes payable on security gains that we elect to retain are accrued only on the last day of our tax year, December 31. Any net capital gains actually distributed to shareholders and properly reported by us as capital gain dividends are generally taxable to the shareholders as long-term capital gains. See Note 6 for further discussion.





CSMC, a wholly-owned subsidiary of CSWC, and the Taxable Subsidiary are not RICs and are required to pay taxes at the corporate rate of 21% as of September 30, 2019 . For tax purposes, CSMC and the Taxable Subsidiary have elected to be treated as taxable entities, and therefore are not consolidated for tax purposes and are taxed at normal corporate





26


---

Table of Contents





tax rates based on taxable income and, as a result of their activities, may generate income tax expense or benefit. The taxable income, or loss, of each of CSMC and the Taxable Subsidiary may differ from its book income, or loss, due to temporary book and tax timing differences and permanent differences. This income tax expense, or benefit, if any, and the related tax assets and liabilities, are reflected in our consolidated financial statements.





Management evaluates tax positions taken or expected to be taken in the course of preparing the Company’s consolidated financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions with respect to tax at the CSWC level not deemed to meet the “more-likely-than-not” threshold would be recorded as an expense in the current year. Management’s conclusions regarding tax positions will be subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof. The Company has concluded that it does not have any uncertain tax positions that meet the recognition of measurement criteria of ASC 740, Income Taxes , ("ASC  740") for the current period. Also, we account for interest and, if applicable, penalties for any uncertain tax positions as a component of income tax expense. No interest or penalties expense was recorded during the three and six months ended September 30, 2019 and 2018 .





Deferred Taxes Deferred tax assets and liabilities are recorded for losses or income at our taxable subsidiaries using statutory tax rates. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. ASC 740 requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation was enacted. See Note 6 for further discussion.





Stock-Based Compensation We account for our stock-based compensation using the fair value method, as prescribed by ASC Topic 718, Compensation – Stock Compensation . Accordingly, we recognize stock-based compensation cost on a straight-line basis for all share-based payments awards granted to employees. The fair value of stock options are determined on the date of grant using the Black-Scholes pricing model and are expensed over the requisite service period of the related stock options. For restricted stock awards, we measure the grant date fair value based upon the market price of our common stock on the date of the grant. For restricted stock awards, we amortize this fair value to share-based compensation expense over the vesting term. We recognize forfeitures as they occur. We issue new shares upon the exercise of stock options. The unvested shares of restricted stock awarded pursuant to CSWC’s equity compensation plans are participating securities and are included in the basic and diluted earnings per share calculation. On October 26, 2010, we received an exemptive order from the SEC permitting us to issue restricted stock to our executive officers and certain key employees (the “Original Order”). On August 22, 2017, we received an exemptive order that supersedes the Original Order (the “Exemptive Order”) and, in addition to the relief granted under the Original Order, allows us to withhold shares to satisfy tax withholding obligations related to the vesting of restricted stock granted pursuant to the 2010 Restricted Stock Award Plan (the “2010 Plan”) and to pay the exercise price of options to purchase shares of our common stock granted pursuant to the 2009 Stock Incentive Plan (the “2009 Plan”).





At the three and six months ended September 30, 2019 , there was no adjustment made for the dilutive effect of stock-based awards. At the three and six months ended September 30, 2018 , weighted-average basic shares were adjusted for the dilutive effect of stock-based awards of 4,739 and 4,473, respectively.





Shareholder Distributions Distributions to common shareholders are recorded on the ex-dividend date. The amount of distributions, if any, is determined by the Board of Directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are generally distributed, although the Company may decide to retain such capital gains for investment.





Presentation Presentation of certain amounts in the Consolidated Financial Statements for the prior year comparative consolidated financial statements is updated to conform to the current period presentation.





Recently Issued or Adopted Accounting Standards In February 2016, the FASB issued ASU 2016-02, Leases , which requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. In July 2018, the FASB issued ASU 2018-10, Codification Improvements





27


---

Table of Contents





to Topic 842, Leases, which affects narrow aspects of the guidance issued in the amendments in ASU 2016-02. The new guidance is effective for annual periods beginning after December 15, 2018, and interim periods therein. CSWC adopted ASU 2016-02 effective April 1, 2019. Under ASC 842, Leases , ("ASC 842"), CSWC evaluates leases to determine if the leases are considered financing or operating leases. The Company currently has one operating lease for office space for which the Company has recorded a right-of-use asset and lease liability for the operating lease obligation. Non-lease components (maintenance, property tax, insurance and parking) are not included in the lease cost. The lease expense is presented as a single lease cost that is amortized on a straight-line basis over the life of the lease.





In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which changes the fair value measurement disclosure requirements of ASC 820. The key provisions include new, eliminated and modified disclosure requirements. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods therein. Early application is permitted. CSWC is currently evaluating the impact the adoption of this new accounting standard will have on its consolidated financial statements, but the impact of the adoption is not expected to be material.





In March 2019, the SEC issued Final Rule Release No. 33-10618, FAST Act Modernization and Simplification of Regulation S-K , which amends certain SEC disclosure requirements. The amendments are intended to simplify certain disclosure requirements, improve readability and navigability of disclosure documents, and discourage repetition and disclosure of immaterial information. The amendments are effective for all filings submitted on or after May 2, 2019. The Company adopted the requisite amendments effective May 2, 2019. As it pertains to the Company for this Quarterly Report on Form 10-Q, there were no significant changes to the Company’s consolidated financial position or disclosures.











28


---




Table of Contents





3.    INVESTMENTS





The following table shows the composition of the investment portfolio, at fair value and cost (with corresponding percentage of total portfolio investments) as of September 30, 2019 and March 31, 2019 :





Percentage ofPercentage ofPercentage ofFair ValueTotal PortfolioNet AssetsCostTotal Portfolio(dollars in thousands)September 30, 2019:First lien loans1$337,64662.7%102.9%$343,71569.0%Second lien loans235,2886.510.736,2737.3Subordinated debt14,2342.64.314,4952.9Preferred equity21,3054.06.59,8292.0Common equity & warrants68,49412.720.925,8415.2I-45 SLF LLC361,90911.518.968,00013.6$538,876100.0%164.2%$498,153100.0%March 31, 2019:First lien loans1$317,54460.6%97.4%$319,27866.8%Second lien loans235,8966.811.036,0577.5Subordinated debt14,2872.74.414,4583.0Preferred equity17,9363.45.57,8941.7Common equity & warrants72,66514.022.332,3686.8I-45 SLF LLC365,74312.520.168,00014.2$524,071100.0%160.7%$478,055100.0%





|  |                                                                                                                                                                                                                                                                                                                                
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Included in first lien loans are loans structured as first lien last out loans. These loans may in certain cases be subordinated in payment priority to other senior secured lenders. As ofSeptember 30, 2019andMarch 31, 2019, the fair value of the first lien last out loans are$43.2 millionand$38.6 million, respectively.

|  |                                                                                                                                                                                                                                                                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2 | Included in second lien loans are loans structured as split lien term loans. These loans provide the Company with a first lien priority on certain assets of the obligor and a second lien priority on different assets of the obligor. As ofSeptember 30, 2019andMarch 31, 2019, the fair value of the split lien term loans are$18.0 millionand$18.3 million, respectively.

|  |                                                                                                                                                                                                                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3 | I-45 SLF LLC is a joint venture between CSWC and Main Street Capital Corporation. This entity primarily invests in syndicated senior secured loans to the UMM. The portfolio companies held by I-45 SLF LLC represent a diverse set of industry classifications, which are similar to those in which CSWC invests directly. See Note 13 for further discussion.







29


---

Table of Contents





The following tables show the composition of the investment portfolio by industry, at fair value and cost (with corresponding percentage of total portfolio investments) as of September 30, 2019 and March 31, 2019 :


Percentage ofPercentage ofPercentage ofFair ValueTotal PortfolioNet AssetsCostTotal Portfolio(dollars in thousands)September 30, 2019:Business Services$79,70814.8%24.3%$77,82415.6%I-45 SLF LLC161,90911.518.968,00013.6Healthcare Services56,48510.517.261,63712.4Industrial Products54,00810.016.55,4151.1Media, Marking & Entertainment50,7589.415.543,6438.7Software & IT Services33,4466.210.233,1846.7Healthcare Products29,6625.59.029,8276.0Food, Agriculture & Beverage25,7354.87.830,9916.2Distribution24,5294.67.424,8655.0Consumer Products and Retail23,5334.47.223,8284.8Transportation & Logistics21,9974.16.718,1463.6Consumer Services21,5164.06.621,2014.3Environmental Services13,1482.44.013,7072.8Energy Services (Midstream)9,7241.83.09,6391.9Financial Services9,6931.82.99,1031.8Commodities & Mining8,3141.52.58,4391.7Restaurants7,4831.42.37,9281.6Telecommunications4,2760.81.37,8151.6Paper & Forest Products2,9520.50.92,9610.6$538,876100.0%164.2%$498,153100.0%








30


---

Table of Contents





Percentage ofPercentage ofPercentage ofFair ValueTotal PortfolioNet AssetsCostTotal Portfolio(dollars in thousands)March 31, 2019:I-45 SLF LLC1$65,74312.5%20.2%$68,00014.2%Healthcare Services62,71912.019.262,70113.1Media, Marketing, & Entertainment59,41011.318.254,07911.3Industrial Products52,76010.116.25,4151.1Business Services52,40510.016.151,68810.8Environmental Services32,9416.310.133,8737.1Healthcare Products29,9645.79.229,8266.2Food, Agriculture & Beverage28,3525.48.730,9916.5Distribution25,6804.97.925,5585.4Consumer Products and Retail23,6184.57.223,7625.0Consumer Services22,6304.36.922,2744.7Transportation & Logistics17,8693.45.517,0743.6Energy Services (Midstream)9,7831.93.09,7472.0Financial Services9,7071.83.09,5962.0Commodities & Mining8,5111.62.68,3831.8Restaurants7,9121.52.47,9781.7Software & IT Services6,1281.21.96,2771.3Telecommunications5,0561.01.57,8761.6Paper & Forest Products2,8830.60.92,9570.6$524,071100.0%160.7%$478,055100.0%





|  |                                                                                                                                                                                                                                                                                                                                                           
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | I-45 SLF LLC is a joint venture between CSWC and Main Street Capital Corporation. This entity primarily invests in syndicated senior secured loans to the UMM. The portfolio companies in I-45 SLF LLC represent a diverse set of industry classifications, which are similar to those in which CSWC invests directly. See Note 13 for further discussion.




31


---

Table of Contents





The following tables summarize the composition of the investment portfolio by geographic region of the United States, at fair value and cost (with corresponding percentage of total portfolio investments), as of September 30, 2019 and March 31, 2019 :


Percentage ofPercentage ofPercentage ofFair ValueTotal PortfolioNet AssetsCostTotal Portfolio(dollars in thousands)September 30, 2019:Southwest$163,47730.3%49.8%$110,61422.2%Southeast111,79420.734.1116,89023.5Northeast108,65520.233.1104,99321.1I-45 SLF LLC161,90911.518.968,00013.6Midwest41,8507.812.741,6128.3West37,6917.011.542,6708.6International13,5002.54.113,3742.7$538,876100.0%164.2%$498,153100.0%March 31, 2019:Southwest$139,30626.6%42.7%$89,39918.7%Northeast125,65724.038.5122,40425.6Southeast119,28022.836.6120,88925.3I-45 SLF LLC165,74312.520.268,00014.2West38,4557.311.841,6478.7Midwest35,6306.810.935,7167.5$524,071100.0%160.7%$478,055100.0%








|  |                                                                                                                                                                                                                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | I-45 SLF LLC is a joint venture between CSWC and Main Street Capital Corporation. This entity primarily invests in syndicated senior secured loans to the UMM. The portfolio companies held by I-45 SLF LLC represent a diverse set of industry classifications, which are similar to those in which CSWC invests directly. See Note 13 for further discussion.







|   |                        
|-- | -----------------------
|4. | FAIR VALUE MEASUREMENTS




Investment Valuation Process





The valuation process is led by the finance department in conjunction with the investment team. The process includes a monthly review of each investment by our executive officers and investment teams. Recommended valuations of each portfolio security are prepared quarterly by the finance department using updated financial and other operational information collected by the investment teams. Each investment valuation is then subject to review by the executive officers and investment teams. In conjunction with the internal valuation process, we have also engaged multiple independent consulting firms specializing in financial due diligence, valuation, and business advisory services to provide third-party valuation reviews of certain investments. The third-party valuation firms provide a range of values for selected investments, which is presented to CSWC’s executive officers and Board of Directors.





CSWC also uses a standard internal investment rating system in connection with its investment oversight, portfolio management, and investment valuation procedures for its debt portfolio. This system takes into account both quantitative and qualitative factors of the portfolio company and the investments held therein.








32


---

Table of Contents





There is no single standard for determining fair value in good faith, as fair value depends upon the specific circumstances of each individual investment. While management believes our valuation methodologies are appropriate and consistent with market participants, the recorded fair values of our investments may differ significantly from fair values that would have been used had an active market for the securities existed. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. The Board of Directors has the ultimate responsibility for reviewing and approving, in good faith, the fair value of CSWC’s investments in accordance with the 1940 Act.





Fair Value Hierarchy





CSWC has established and documented processes for determining the fair values of portfolio company investments on a recurring basis in accordance with the 1940 Act and ASC 820. As required by ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore, unrealized appreciation and depreciation related to such investments categorized within the Level 3 tables below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). CSWC conducts reviews of fair value hierarchy classifications on a quarterly basis. We also use judgment and consider factors specific to the investment in determining the significance of an input to a fair value measurement.





The three levels of valuation inputs established by ASC 820 are as follows:





|  |                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------
|• | Level 1:Investments whose values are based on unadjusted quoted prices in active markets for identical assets or liabilities.

|  |                                                                                                                                                                                                                                                                         
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Level 2:Investments whose values are based on quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

|  |                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------
|• | Level 3:Investments whose values are based on unobservable inputs that are significant to the overall fair value measurement.

As of September 30, 2019 and March 31, 2019 , 100% of the CSWC investment portfolio consisted of debt and equity instruments of privately held companies for which inputs falling within the categories of Level 1 and Level 2 are generally not available. Therefore, CSWC determines the fair value of its investments (excluding investments for which fair value is measured at NAV) in good faith using Level 3 inputs, pursuant to a valuation policy and process that is established by the management of CSWC, with assistance from multiple third-party valuation advisors, which is subsequently approved by our Board of Directors.





Investment Valuation Inputs





ASC 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date excluding transaction costs. Under ASC 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset. In determining the principal market for an asset or liability under ASC 820, it is assumed that the reporting entity has access to the market as of the measurement date.





The Level 3 inputs to CSWC’s valuation process reflect our best estimate of the assumptions that would be used by market participants in pricing the investment in a transaction in the principal or most advantageous market for the asset.





The fair value determination of each portfolio investment categorized as Level 3 required one or more of the following unobservable inputs:





|  |                                                                                                                                                                                                  
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Financial information obtained from each portfolio company, including unaudited statements of operations and balance sheets for the most recent period available as compared to budgeted numbers;




33


---

Table of Contents





|  |                                                                    
|- | -------------------------------------------------------------------
|• | Current and projected financial condition of the portfolio company;

|  |                                                                                        
|- | ---------------------------------------------------------------------------------------
|• | Current and projected ability of the portfolio company to service its debt obligations;

|  |                                                                  
|- | -----------------------------------------------------------------
|• | Type and amount of collateral, if any, underlying the investment;

|  |                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------
|• | Current financial ratios (e.g., fixed charge coverage ratio, interest coverage ratio and net debt/EBITDA ratio) applicable to the investment;

|  |                                                                                                        
|- | -------------------------------------------------------------------------------------------------------
|• | Current liquidity of the investment and related financial ratios (e.g., current ratio and quick ratio);

|  |                                                                                 
|- | --------------------------------------------------------------------------------
|• | Indicative dealer quotations from brokers, banks, and other market participants;

|  |                                                   
|- | --------------------------------------------------
|• | Market yields on other securities of similar risk;

|  |                                                                
|- | ---------------------------------------------------------------
|• | Pending debt or capital restructuring of the portfolio company;

|  |                                                      
|- | -----------------------------------------------------
|• | Projected operating results of the portfolio company;

|  |                                                                     
|- | --------------------------------------------------------------------
|• | Current information regarding any offers to purchase the investment;

|  |                                                                                      
|- | -------------------------------------------------------------------------------------
|• | Current ability of the portfolio company to raise any additional financing as needed;

|  |                                                                                                                        
|- | -----------------------------------------------------------------------------------------------------------------------
|• | Changes in the economic environment which may have a material impact on the operating results of the portfolio company;

|  |                                                                                                                                 
|- | --------------------------------------------------------------------------------------------------------------------------------
|• | Internal occurrences that may have an impact (both positive and negative) on the operating performance of the portfolio company;

|  |                                          
|- | -----------------------------------------
|• | Qualitative assessment of key management;

|  |                                                                                    
|- | -----------------------------------------------------------------------------------
|• | Contractual rights, obligations or restrictions associated with the investment; and

|  |                               
|- | ------------------------------
|• | Other factors deemed relevant.

CSWC uses several different valuation approaches depending on the security type including the Market Approach, the Income Approach, the Enterprise Value Waterfall Approach, and the NAV Valuation Method.





Market Approach





Market Approach is a qualitative and quantitative analysis of the aforementioned unobservable inputs. It is a combination of the Enterprise Value Waterfall Approach and Income Approach as described in detail below. For debt investments recently originated (within a quarterly reporting period) or where the value has not departed significantly from its cost, we generally rely on our cost basis or recent transaction price to determine the fair value, unless a material event has occurred since origination.





Income Approach





In valuing debt securities, CSWC typically uses an Income Approach model, which considers some or all of the factors listed above. Under the Income Approach, CSWC develops an expectation of the yield that a hypothetical market participant would require when purchasing each debt investment (the “Required Market Yield”). The Required Market Yield is calculated in a two-step process. First, using quarterly market data we estimate the current market yield of similar debt securities. Next, based on the factors described above, we modify the current market yield for each security to produce a unique Required Market Yield for each of our investments. The resulting Required Market Yield is the significant Level 3 input to the Income Approach model. If, with respect to an investment, the unobservable inputs have not fluctuated significantly from the date the investment was made or have not fluctuated significantly from CSWC’s expectations on the date the investment was made, and there have been no significant fluctuations in the market pricing for such investments, we may conclude that the Required Market Yield for that investment is equal to the stated rate on the investment. In instances where CSWC determines that the Required Market Yield is different from the stated rate on the investment, we discount the contractual cash flows on the debt instrument using the Required Market Yield in order to estimate the fair value of the debt security.





34


---

Table of Contents








In addition, under the Income Approach, CSWC also determines the appropriateness of the use of third-party broker quotes, if any, as a significant Level 3 input in determining fair value. In determining the appropriateness of the use of third-party broker quotes, CSWC evaluates the level of actual transactions used by the broker to develop the quote, whether the quote was an indicative price or binding offer, the depth and consistency of broker quotes, the source of the broker quotes, and the correlation of changes in broker quotes with underlying performance of the portfolio company and other market indices. To the extent sufficient observable inputs are available to determine fair value, CSWC may use third-party broker quotes or other independent pricing to determine the fair value of certain debt investments.





Fair value measurements using the Income Approach model can be sensitive to significant changes in one or more of the inputs. A significant increase (decrease) in the Required Market Yield for a particular debt security may result in a lower (higher) fair value for that security. A significant increase (decrease) in a third-party broker quote for a particular debt security may result in a higher (lower) value for that security.





Enterprise Value Waterfall Approach





In valuing equity securities (including warrants), CSWC estimates fair value using an Enterprise Value Waterfall valuation model. CSWC estimates the enterprise value of a portfolio company and then allocates the enterprise value to the portfolio company’s securities in order of their relative liquidation preference. In addition, CSWC assumes that any outstanding debt or other securities that are senior to CSWC’s equity securities are required to be repaid at par. Additionally, we may estimate the fair value of non-performing debt securities using the Enterprise Value Waterfall approach as needed.





To estimate the enterprise value of the portfolio company, CSWC uses a weighted valuation model based on public comparable companies, observable transactions and discounted cash flow analyses. A main input into the valuation model is a measure of the portfolio company’s financial performance, which generally is either earnings before interest, taxes, depreciation and amortization, as adjusted (“Adjusted EBITDA”) or revenues. In addition, we consider other factors, including but not limited to (1) offers from third parties to purchase the portfolio company and (2) the implied value of recent investments in the equity securities of the portfolio company. For certain non-performing assets, we may utilize the liquidation or collateral value of the portfolio company's assets in our estimation of its enterprise value.





The significant Level 3 inputs to the Enterprise Value Waterfall model are (1) an appropriate multiple derived from the comparable public companies and transactions, (2) discount rate assumptions used in the discounted cash flow model and (3) a measure of the portfolio company’s financial performance, which generally is either Adjusted EBITDA or revenues. Inputs can be based on historical operating results, projections of future operating results or a combination thereof. The operating results of a portfolio company may be unaudited, projected or pro forma financial information and may require adjustments for certain non-recurring items. CSWC also may consult with the portfolio company’s senior management to obtain updates on the portfolio company’s performance, including information such as industry trends, new product development, loss of customers and other operational issues. Fair value measurements using the Enterprise Value Waterfall model can be sensitive to significant changes in one or more of the inputs. A significant increase (decrease) in either the multiple, Adjusted EBITDA or revenues for a particular equity security would result in a higher (lower) fair value for that security.








35


---

Table of Contents





NAV Valuation Method





Under the NAV valuation method, for an investment in an investment fund that does not have a readily determinable fair value, CSWC measures the fair value of the investment predominately based on the NAV of the investment fund as of the measurement date. However, in determining the fair value of the investment, we may consider whether adjustments to the NAV are necessary in certain circumstances, based on the analysis of any restrictions on redemption of our investment as of the measurement date, recent actual sales or redemptions of interests in the investment fund, expected future cash flows available to equity holders, or other uncertainties surrounding CSWC’s ability to realize the full NAV of its interests in the investment fund.





The following fair value hierarchy tables set forth our investment portfolio by level as of September 30, 2019 and March 31, 2019 (in thousands):





Fair Value Measurementsat September 30, 2019 UsingQuoted Prices inSignificantActive MarketsOtherSignificantfor IdenticalObservableUnobservableAssetsInputsInputsAsset CategoryTotal(Level 1)(Level 2)(Level 3)First lien loans$337,646$—$—$337,646Second lien loans35,288——35,288Subordinated debt14,234——14,234Preferred equity21,305——21,305Common equity & warrants68,494——68,494Investments measured at net asset value161,909———Total Investments$538,876$—$—$476,967





Fair Value Measurementsat March 31, 2019 UsingQuoted Prices inSignificantActive MarketsOtherSignificantfor IdenticalObservableUnobservableAssetsInputsInputsAsset CategoryTotal(Level 1)(Level 2)(Level 3)First lien loans$317,544$—$—$317,544Second lien loans35,896——35,896Subordinated debt14,287——14,287Preferred equity17,936——17,936Common equity & warrants72,665——72,665Investments measured at net asset value165,743———Total Investments$524,071$—$—$458,328





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in Consolidated Statements of Assets and Liabilities. For the investment valued at net asset value per share atSeptember 30, 2019andMarch 31, 2019, the redemption restrictions dictate that we cannot withdraw our membership interest without unanimous approval. We are permitted to sell or transfer our membership interest and must deliver written notice of such transfer to the other member no later than 60 business days prior to the sale or transfer.




36


---

Table of Contents





The tables below present the Valuation Techniques and Significant Level 3 Inputs (ranges and weighted averages) used in the valuation of CSWC’s debt and equity securities at September 30, 2019 and March 31, 2019 . The tables are not intended to be all inclusive, but instead capture the significant unobservable inputs relevant to our determination of fair value.





Fair Value atSignificantValuationSeptember 30, 2019UnobservableWeightedTypeTechnique(in thousands)InputsRangeAverageFirst lien loansIncome Approach$321,691Discount Rate6.6% - 34.5%11.9%Third Party Broker Quote63.1 - 89.777.4Market Approach15,955Exit Value102.0102.0Second lien loansIncome Approach35,288Discount Rate11.0% - 14.5%12.5%Third Party Broker Quote26.526.5Subordinated debtIncome Approach14,234Discount Rate12.8% - 13.4%13.2%Preferred equityEnterprise Value Waterfall Approach20,305EBITDA Multiple8.0x - 10.7x9.5xDiscount Rate13.6% - 20.3%15.6%Market Approach1,000CostCommon equity & warrantsEnterprise Value Waterfall Approach68,494EBITDA Multiple6.0x - 11.1x8.7xDiscount Rate13.3% - 20.3%14.8%Total Level 3 Investments$476,967











37


---

Table of Contents





Fair Value atSignificantValuationMarch 31, 2019UnobservableWeightedTypeTechnique(in thousands)InputsRangeAverageFirst lien loansIncome Approach$248,404Discount Rate9.6% - 20.5%12.1%Third Party Broker Quote65.6 - 97.590.1Market Approach69,140Cost97.0 - 99.097.7Exit Value100.0 - 102.0101.4Second lien loansIncome Approach35,896Discount Rate11.5% - 41.9%13.9%Third Party Broker Quote5555.0Subordinated debtIncome Approach14,287Discount Rate12.6% - 15.0%13.4%Preferred equityEnterprise Value Waterfall Approach17,936EBITDA Multiple7.7x - 10.2x9.5xDiscount Rate15.5% - 19.3%17.8%Common equity & warrantsEnterprise Value Waterfall Approach71,665EBITDA Multiple4.6x - 10.7x8.8xDiscount Rate13.9% - 21.0%18.4%Market Approach1,000Cost100.0100.0Total Level 3 Investments$458,328





Changes in Fair Value Levels


We monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model based valuation techniques may require the transfer of financial instruments from one fair value level to another. We recognize the transfer of financial instruments between levels at the end of each quarterly reporting period. During the three and six months ended September 30, 2019 and 2018 , we had no transfers between levels.








38


---

Table of Contents





The following tables provide a summary of changes in the fair value of investments measured using Level 3 inputs during the six months ended September 30, 2019 and 2018 (in thousands):





Fair Value 3/31/2019Realized & Unrealized Gains (Losses)Purchases of Investments1RepaymentsPIK Interest CapitalizedDivestituresConversion/Reclassification of SecurityFair Value 9/30/2019YTD Unrealized Appreciation (Depreciation) on Investments held at period endFirst lien loans$317,544$(3,765)$63,969$(40,409)$307$—$—$337,646$(3,819)Second lien loans35,896(823)79(125)261——35,288(824)Subordinated debt14,287(90)25—12——14,234(89)Preferred equity17,9361,4331,000—71(732)1,59721,3051,434Common equity & warrants72,6653,345620——(6,539)(1,597)68,4943,848Total Investments$458,328$100$65,693$(40,534)$651$(7,271)$—$476,967$550Fair Value 3/31/2018Realized & Unrealized Gains (Losses)Purchases of Investments1RepaymentsPIK Interest EarnedDivestituresConversion/Reclassification of SecurityFair Value 9/30/2018YTD Unrealized Appreciation (Depreciation) on Investments held at period endFirst lien loans$197,110$(454)$139,096$(19,140)$—$(28,804)$—$287,808$(437)Second lien loans23,22939111,406(5,000)———30,026392Subordinated debt18,7834730—23——18,88348Preferred equity38,5417,6062,657—113(24,767)—24,1506,158Common equity & warrants48,31989315,196————64,408893Total Investments$325,982$8,483$168,385$(24,140)$136$(53,571)$—$425,275$7,054





|  |                                                                                              
|- | ---------------------------------------------------------------------------------------------
|1 | Includes purchases of new investments, as well as discount accretion on existing investments.










39


---




Table of Contents





|   |           
|-- | ----------
|5. | BORROWINGS




In accordance with the 1940 Act, with certain limitations, effective April 25 2019, the Company is only allowed to borrow amounts such that its asset coverage (i.e., the ratio of assets less liabilities not represented by senior securities to senior securities such as borrowings), calculated pursuant to the 1940 Act, is at least 150% after such borrowing. The Board of Directors also approved a resolution which limits the Company’s issuance of senior securities such that the asset coverage ratio, taking into account any such issuance, would not be less than 166%, which became effective April 25, 2019. As of September 30, 2019 , the Company’s asset coverage was 231% .





The Company had the following borrowings outstanding as of September 30, 2019 and March 31, 2019 (amounts in thousands):





September 30, 2019March 31, 2019Credit Facility$108,000$141,000December 2022 Notes77,13677,136Less: Unamortized debt issuance costs and debt discount(1,572)(2,037)Total December 2022 Notes75,56475,099October 2024 Notes65,000—Less: Unamortized debt issuance costs and debt discount(1,415)—Total October 2024 Notes63,585—Total Borrowings$247,149$216,099





Credit Facility





In August 2016, CSWC entered into a senior secured credit facility (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Facility”) to provide additional liquidity to support its investment and operational activities, which included total commitments of $100 million. The Credit Facility contained an accordion feature that allowed CSWC to increase the total commitments under the Credit Facility up to $150 million from new and existing lenders on the same terms and conditions as the existing commitments. In August 2017, we increased our total commitments by $15 million through adding an additional lender using the accordion feature.





On November 16, 2017, CSWC entered into Amendment No. 1 (the “Amendment”) to its Credit Facility. Prior to the Amendment, borrowings under the Credit Facility accrued interest on a per annum basis at a rate equal to the applicable LIBOR rate plus 3.25% with no LIBOR floor. CSWC paid unused commitment fees of 0.50% to 1.50% per annum, based on utilization, on the unused lender commitments under the Credit Facility. The Amendment (1) increased the total borrowing capacity under the Credit Facility to $180 million, with commitments from a diversified group of eight lenders, (2) increased the Credit Facility’s accordion feature that allows for an increase in total commitments of up to $250 million under the Credit Facility from new and existing lenders on the same terms and conditions as the existing commitments, (3) reduced the interest rate on borrowings from LIBOR plus 3.25% down to LIBOR plus 3.00%, with a further step-down to LIBOR plus 2.75% at the time the Company’s net worth exceeds $325 million, (4) reduced unused commitment fees from a utilization-based grid of 0.50% to 1.5% down to a range of 0.50% to 1.0% per annum, and (5) extended the Credit Facility’s revolving period that ended on August 30, 2019 through November 16, 2020. Additionally, the final maturity of the Credit Facility was extended from August 30, 2020 to November 16, 2021. On April 16, 2018 and May 11, 2018, CSWC entered into Incremental Assumption Agreements, which increased the total commitments under the Credit Facility by $20 million and $10 million, respectively. The increases were executed in accordance with the accordion feature of the Credit Facility, increasing total commitments from $180 million to $210 million.





On December 21, 2018, CSWC entered into the Amended and Restated Senior Secured Revolving Credit Agreement (the "Credit Agreement"), and a related Amended and Restated Guarantee, Pledge and Security Agreement, to amend and restate its Credit Facility. The Credit Agreement (1) increased the total commitments by $60 million from $210 million to an aggregate total of $270 million, provided by a diversified group of nine lenders, (2) increased the Credit Facility's accordion feature to $350 million under the Credit Facility from new and existing lenders on the same terms and conditions





40


---

Table of Contents





as the existing commitments, (3) reduced the interest rate on borrowings from LIBOR plus 3.00% to LIBOR plus 2.50%, subject to certain conditions as outlined in the Credit Agreement, (4) reduced the minimum asset coverage with respect to senior securities representing indebtedness from 200% to 150% after the date on which such minimum asset coverage is permitted to be reduced by the Company under applicable law, and (5) extended the Credit Facility's revolving period from November 16, 2020 to December 21, 2022 and the final maturity was extended from November 16, 2021 to December 21, 2023.





The Credit Agreement modified certain covenants in the Credit Facility, including: (1) to provide for a minimum senior coverage ratio of 2-to-1 (in addition to the asset coverage ratio noted below), (2) to increase the minimum obligors’ net worth test from $160 million to $180 million, (3) to reduce the minimum consolidated interest coverage ratio from 2.50-to-1 to 2.25-to-1 as of the last day of any fiscal quarter, and (4) to provide for the fact that the Company will not declare or pay a dividend or distribution in cash or other property unless immediately prior to and after giving effect thereto the Company's asset coverage ratio exceeds 150% (and certain other conditions are satisfied). The Credit Facility also contains certain affirmative and negative covenants, including but not limited to: (1) certain reporting requirements, (2) maintaining RIC and BDC status, (3) maintaining a minimum shareholders’ equity, (4) maintaining a minimum consolidated net worth, and (5) at any time the outstanding advances exceed 90% of the borrowing base, maintaining a minimum liquidity of not less than 10% of the covered debt amount.





On May 23, 2019, CSWC entered into an Incremental Assumption Agreement, which increased the total commitments under the Credit Facility by $25 million. The increase was executed under the accordion feature of the Credit Facility and increased total commitments from $270 million to $295 million.





The Credit Facility also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, bankruptcy, and change of control, with customary cure and notice provisions. If the Company defaults on its obligations under the Credit Facility, the lenders may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests. There are no changes to the covenants or the events of default in the Credit Facility as a result of the Amendment.





The Credit Facility is secured by (1) substantially all of the present and future property and assets of the Company and the guarantors and (2) 100% of the equity interests in the Company’s wholly-owned subsidiaries. As of September 30, 2019 , substantially all of the Company’s assets were pledged as collateral for the Credit Facility.





At September 30, 2019 , CSWC had $108.0 million in borrowings outstanding under the Credit Facility. CSWC recognized interest expense related to the Credit Facility, including unused commitment fees and amortization of deferred loan costs of $2.3 million and $4.6 million , respectively, for the three and six months ended September 30, 2019 . For the three and six months ended September 30, 2018 , CSWC recognized interest expense of $1.8 million and $3.2 million, respectively.  The weighted average interest rate on the Credit Facility was 5.00% and 5.08% , respectively, for the three and six months ended September 30, 2019 . For the three and six months ended September 30, 2018 , the weighted average interest rate on the Credit Facility was 5.42% and 5.31%, respectively. Average borrowings for the three and six months ended September 30, 2019 were $156.3 million and $151.9 million , respectively. For the three and six months ended September 30, 2018 , average borrowings were $102.5 million and $80.9 million, respectively. As of September 30, 2019 , CSWC was in compliance with all financial covenants under the Credit Facility.





December 2022 Notes





In December 2017, the Company issued $57.5 million in aggregate principal amount, including the underwriters’ full exercise of their option to purchase additional principal amounts to cover over-allotments, of 5.95% Notes due 2022 (the “December 2022 Notes”). The December 2022 Notes mature on December 15, 2022 and may be redeemed in whole or in part at any time, or from time to time, at the Company’s option on or after December 15, 2019. The December 2022 Notes bear interest at a rate of 5.95% per year, payable quarterly on March 15, June 15, September 15 and December 15 of each year, beginning on March 15, 2018. The December 2022 Notes are an unsecured obligation, rank pari passu with our other outstanding and future unsecured unsubordinated indebtedness and are effectively subordinated to all of our existing and future secured indebtedness, including borrowings under our Credit Facility.








41


---

Table of Contents





On June 11, 2018, the Company entered into an "At-The-Market" ("ATM") debt distribution agreement, pursuant to which it may offer for sale, from time to time, up to $50 million in aggregate principal amount of December 2022 Notes through B. Riley FBR, Inc., acting as its sales agent (the “2022 Notes Agent”). Sales of the December 2022 Notes may be made in negotiated transactions or transactions that are deemed to be "at the market offerings" as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on The Nasdaq Global Select Market, or similar securities exchanges or sales made through a market maker other than on an exchange at prices related to prevailing market prices or at negotiated prices.





The 2022 Notes Agent receives a commission from the Company equal to up to 2% of the gross sales of any December 2022 Notes sold through the 2022 Notes Agent under the debt distribution agreement. The 2022 Notes Agent is not required to sell any specific principal amount of December 2022 Notes, but will use its commercially reasonable efforts consistent with its sales and trading practices to sell the December 2022 Notes. The December 2022 Notes trade “flat,” which means that purchasers in the secondary market will not pay, and sellers will not receive, any accrued and unpaid interest on the December 2022 Notes that is not reflected in the trading price.





During the six months ended September 30, 2019 , the Company did not sell any December 2022 Notes. The Company has no current intention of issuing additional December 2022 Notes under this ATM debt distribution agreement. Therefore, during the three months ended June 30, 2019, the Company amortized $0.2 million of the remaining debt issuance costs associated with the ATM debt distribution agreement, which is included in interest expense in the Consolidated Statement of Operations.





All issuances of December 2022 Notes rank equally in right of payment and form a single series of notes.





As of September 30, 2019 , the carrying amount of the December 2022 Notes was $75.6 million on an aggregate principal amount of $77.1 million at a weighted average effective yield of 5.93%. As of September 30, 2019 , the fair value of the December 2022 Notes was $80.5 million . The fair value is based on the closing price of the security on The Nasdaq Global Select Market, which is a Level 1 input under ASC 820. The Company recognized interest expense related to the December 2022 Notes, including amortization of deferred issuance costs of $1.3 million and $2.8 million , respectively, for the three and six months ended September 30, 2019 . For the three and six months ended September 30, 2018 , the Company recognized interest expense of $1.2 million and $2.2 million, respectively. Average borrowings for both the three and six months ended September 30, 2019 were $77.1 million . For the three and six months ended September 30, 2018 , average borrowings were $68.6 and $63.2 million, respectively.





The indenture governing the December 2022 Notes contains certain covenants including but not limited to (i) a requirement that the Company comply with the asset coverage requirement of Section 61 of the 1940 Act or any successor provisions thereto, after giving effect to any exemptive relief granted to the Company by the SEC, (ii) a requirement, subject to limited exception, that the Company will not declare any cash dividend, or declare any other cash distribution, upon a class of its capital stock, or purchase any such capital stock, unless, in every such case, at the time of the declaration of any such dividend or distribution, or at the time of any such purchase, the Company has the minimum asset coverage required pursuant to Section 61 of the 1940 Act, or any successor provision thereto, after deducting the amount of such dividend, distribution or purchase price, as the case may be, giving effect to any exemptive relief granted to the Company by the SEC and (iii) a requirement to provide financial information to the holders of the December 2022 Notes and the trustee under the indenture if the Company should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). The indenture and supplement relating to the December 2022 Notes also provides for customary events of default. As of September 30, 2019 , the Company was in compliance with all covenants of the December 2022 Notes.





October 2024 Notes





In September 2019, the Company issued $65.0 million in aggregate principal amount of 5.375% Notes due 2024 (the “Existing October 2024 Notes”). Subsequent to quarter end, on October 8, 2019, the Company issued an additional $10.0 million in aggregate principal amount of the October 2024 Notes (the "Additional October 2024 Notes" together with the Existing October 2024 Notes, the "October 2024 Notes"). The Additional October 2024 Notes are being treated as a single series with the Existing October 2024 Notes under the indenture and have the same terms as the Existing October 2024 Notes. The October 2024 Notes mature on October 1, 2024 and may be redeemed in whole or in part at any time prior





42


---

Table of Contents





to July 1, 2024, at par plus a “make-whole” premium, and thereafter at par. The October 2024 Notes bear interest at a rate of 5.375% per year, payable semi-annually on April 1 and October 1 of each year, beginning on April 1, 2020. The October 2024 Notes are the direct unsecured obligations of the Company and rank pari passu with our other outstanding and future unsecured unsubordinated indebtedness and are effectively subordinated to all of our existing and future secured indebtedness, including borrowings under our Credit Facility.





As of September 30, 2019 , the carrying amount of the October 2024 Notes was $63.6 million on an aggregate principal amount of $65.0 million at a weighted average effective yield of 5.375%. As of September 30, 2019 , the fair value of the October 2024 Notes was $65.2 million . This is a Level 3 fair value measurement under ASC 820 based on a valuation model using a discounted cash flow analysis. The Company recognized interest expense related to the October 2024 Notes, including amortization of deferred issuance costs, of $0.1 million for both the three and six months ended September 30, 2019 . Since the issuance of the October 2024 Notes, average borrowings were $65.0 million.





The indenture governing the October 2024 Notes contains certain covenants, including certain covenants requiring the Company to comply with Section 18(a)(1)(A) as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions, whether or not the Company continues to be subject to such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to the Company by the SEC, and to provide financial information to the holders of the October 2024 Notes and the trustee under the indenture if the Company is no longer subject to the reporting requirements under the Exchange Act. These covenants are subject to important limitations and exceptions that are described in the indenture and the second supplemental indenture relating to the October 2024 Notes.





In addition, holders of the Notes can require the Company to repurchase some or all of the October 2024 Notes at a purchase price equal to 100% of their principal amount, plus accrued and unpaid interest to, but not including, the repurchase date upon the occurrence of a “Change of Control Repurchase Event,” as defined in the second supplemental indenture relating to the October 2024 Notes.








|   |             
|-- | ------------
|6. | INCOME TAXES




We have elected to be treated as a RIC under Subchapter M of the Code and have a tax year end of December 31.  In order to qualify as a RIC, we must annually distribute at least 90% of our investment company taxable income, as defined by the Code, to our shareholders in a timely manner. Investment company income generally includes net short-term capital gains but excludes net long-term capital gains. A RIC is not subject to federal income tax on the portion of its ordinary income and capital gains that is distributed to its shareholders, including “deemed distributions” as discussed below. A s part of maintaining RIC tax treatment, undistributed taxable income and capital gain, which is subject to a 4% non-deductible U.S. federal excise tax, pertaining to a given fiscal year may be distributed up to 12 months subsequent to the end of that fiscal year, provided such dividends are declared on or prior to the later of (1) the filing of the U.S. federal income tax return for the applicable fiscal year and (2) the fifteenth day of the ninth month following the close of the year in which such taxable income was generated. We intend to distribute to our stockholders, after consideration and application of our ability under the Code to carry forward certain excess undistributed taxable income from one tax year into the next tax year, substantially all of our taxable income.





As of September 30, 2019 , CSWC qualified to be taxed as a RIC. We intend to meet the applicable qualifications to be taxed as a RIC in future periods. However, the Company’s ability to meet certain portfolio diversification requirements of RICs in future years may not be controllable by the Company.





The determination of the tax attributes for CSWC’s distributions is made annually, based upon its taxable income for the full year and distributions paid for the full year. Therefore, any determination made on an interim basis is forward-looking based on currently available facts, rules and assumptions and may not be representative of the actual tax attributes of distributions for a full year.





During the quarter ended March 31, 2019, CSWC declared total dividends of $8.4 million, or $0.48 per share ($0.38 per share in regular dividends and $0.10 in supplemental dividends). During the quarter ended June 30, 2019, CSWC declared total dividends of $8.6 million, or $0.49 per share ($0.39 per share in regular dividends and $0.10 in supplemental dividends). During the quarter ended September 30, 2019, CSWC declared total dividends of $9.0 million, or $0.50 per share ($0.40 per share in regular dividends and $0.10 in supplemental dividends).





43


---

Table of Contents








Ordinary dividend distributions from a RIC do not qualify for the 20% maximum tax rate on dividend income from domestic corporations and qualified foreign corporations, except to the extent that the RIC received the income in the form of qualifying dividends from domestic corporations and qualified foreign corporations. The tax attributes for distributions will generally include both ordinary income and capital gains, but may also include qualified dividends or return of capital.





The following reconciles net increase in net assets resulting from operations to estimated RIC taxable income for the six months ended September 30, 2019 and 2018 :


Six Months Ended September 30,Reconciliation of RIC Taxable Income120192018Net increase in net assets from operations$9,442$18,241Net unrealized depreciation (appreciation) on investments6,23310,835Income/gain (expense/loss) recognized for tax on pass-through entities121125(Gain) loss recognized for tax on dispositions(930)434Net operating (income) loss - management company and taxable subsidiary39533Non-deductible tax expense317393Other book/tax differences230—Estimated taxable income before deductions for distributions$15,808$30,061





|  |                                                                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | The calculation of taxable income for each period is an estimate and will not be finally determined until the Company files its tax return each year. Final taxable income may be different than this estimate.

A RIC may elect to retain all or a portion of its net capital gains by designating them as a “deemed distribution” to its shareholders and paying a federal tax on the net capital gains for the benefit of its shareholders. Shareholders then report their share of the retained capital gains on their income tax returns as if it had been received and report a tax credit for tax paid on their behalf by the RIC. Shareholders then add the amount of the “deemed distribution” net of such tax to the basis of their shares. As a result of the tax reform legislation enacted on December 22, 2017 (the "Tax Reform"), the federal tax rate for deemed distributions is 21% as of January 1, 2018. For the tax years ended December 31, 2018 and 2017, we distributed all long-term capital gains and therefore had no deemed distributions to our shareholders or federal taxes incurred related to such items. "Deemed distributions" are generally reclassified from accumulated net realized gains into additional capital after our tax year ends each December 31.





CSMC, a wholly-owned subsidiary of CSWC, is not a RIC and is required to pay taxes at the current corporate rate. For tax purposes, CSMC has elected to be treated as a taxable entity, and therefore is not consolidated for tax purposes and is taxed at normal corporate tax rates based on its taxable income and, as a result of its activities, may generate income tax expense or benefit. The taxable income, or loss, of CSMC may differ from its book income, or loss, due to temporary book and tax timing differences and permanent differences. This income tax expense, or benefit, if any, and the related tax assets and liabilities, are reflected in our consolidated financial statements. CSMC records individual cash incentive award and bonus accruals on a quarterly basis. Deferred taxes related to the changes in the restoration plan, individual cash incentive award and bonus accruals are also recorded on a quarterly basis. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. Establishing a valuation allowance of a deferred tax asset requires management to make estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows from CSMC’s operations. As of September 30, 2019 and March 31, 2019 , CSMC had a deferred tax asset of approximately $1.6 million and $1.8 million , respectively.  As of September 30, 2019 , we believe that we will be able to utilize all $1.6 million of our deferred tax assets. We will continue to assess our ability to realize our existing deferred tax assets.





Based on our assessment of our unrecognized tax benefits, management believes that all benefits will be realized and they do not contain any uncertain tax positions.








44


---

Table of Contents





In addition, we have a wholly-owned taxable subsidiary, or the Taxable Subsidiary, which holds a portion of one or more of our portfolio investments that are listed on the Consolidated Schedule of Investments. The Taxable Subsidiary is consolidated for financial reporting purposes in accordance with U.S. GAAP, so that our consolidated financial statements reflect our investments in the portfolio companies owned by the Taxable Subsidiary. The purpose of the Taxable Subsidiary is to permit us to hold certain interests in portfolio companies that are organized as limited liability companies, or LLCs (or other forms of pass-through entities) and still satisfy the RIC tax requirement that at least 90% of our gross income for U.S. federal income tax purposes must consist of qualifying investment income. Absent the Taxable Subsidiary, a proportionate amount of any gross income of a partnership or LLC (or other pass-through entity) portfolio investment would flow through directly to us. To the extent that our income did not consist of investment income, it could jeopardize our ability to qualify as a RIC and therefore cause us to incur significant amounts of corporate-level U.S. federal income taxes. Where interests in LLCs (or other pass-through entities) are owned by the Taxable Subsidiary, however, the income from those interests is taxed to the Taxable Subsidiary and does not flow through to us, thereby helping us preserve our RIC tax treatment and resultant tax advantages. The Taxable Subsidiary is not consolidated for U.S. federal income tax purposes and may generate income tax expense as a result of their ownership of the portfolio companies. The income tax expense, or benefit, and the related tax assets and liabilities, if any, are reflected in our Statement of Operations.





The income tax expense, or benefit, and the related tax assets and liabilities, generated by CSWC, CSMC and the Taxable Subsidiary, if any, are reflected in CSWC’s consolidated financial statements. For the three months ended September 30, 2019 , we recognized net income tax expense of $0.6 million , principally consisting of an expense for current U.S. federal income taxes of $0.2 million , a $0.1 million accrual for U.S. federal excise tax on our estimated undistributed taxable income and $0.3 million relating to our Taxable Subsidiary. For the six months ended September 30, 2019 , we recognized net income tax expense of $0.9 million , principally consisting of an expense for current U.S. federal income taxes of $0.3 million , a $0.3 million accrual for U.S. federal excise tax on our estimated undistributed taxable income and $0.3 million relating to our Taxable Subsidiary. For the three months ended September 30, 2018 , we recognized a net income tax expense of $0.3 million , principally consisting of a benefit for current U.S. federal income taxes of $0.1 million and a $0.2 million accrual for U.S. federal excise tax on our estimated undistributed taxable income. For the six months ended September 30, 2018 , we recognized net income tax expense of $0.6 million, principally consisting of a provision for current U.S. federal income taxes of $0.2 million and a $0.4 million accrual for excise tax on our estimated undistributed taxable income.





Although we believe our tax returns are correct, the final determination of tax examinations could be different from what was reported on the returns. In our opinion, we have made adequate tax provisions for years subject to examination. Generally, we are currently open to audit under the statute of limitations by the Internal Revenue Service as well as state taxing authorities for the years ended December 31, 2014 through December 31, 2017.








|   |                     
|-- | --------------------
|7. | SHAREHOLDERS' EQUITY




On October 26, 2010, we received an exemptive order from the SEC permitting us to issue restricted stock to our executive officers and certain key employees, or the Original Order. On August 22, 2017, we received the Exemptive Order that supersedes the Original Order and in addition to the relief granted under the Original Order, allows us to withhold shares to satisfy tax withholding obligations related to the vesting of restricted stock granted pursuant to the 2010 Restricted Stock Award Plan, or the 2010 Plan, and to pay the exercise price of options to purchase shares of our common stock granted pursuant to the 2009 Stock Incentive Plan, or the 2009 Plan. During the three months ended September 30, 2019, the Company did not repurchase any shares in connection with the vesting of restricted stock awards. During the six months ended September 30, 2019 , the Company repurchased 2,258 shares at an aggregate cost of $49.4 thousand and a weighted average price per share of $21.87 in connection with the vesting of restricted stock awards. During the three and six months ended September 30, 2018 , the Company did not repurchase any shares in connection with the vesting of restricted stock awards.





During the year ended March 31, 2019, the Company completed an offering of 700,000 shares of the Company's common stock at a net price of $18.90 per share. The Company issued 100,000 shares of its common stock to certain institutional investors in a direct registered offering and 600,000 shares of its common stock in a "best efforts" underwritten offering. The total net proceeds of the offerings, before expenses, was approximately $13.2 million.








45


---

Table of Contents





On March 4, 2019, the Company entered into separate equity distribution agreements with certain sales agents through which it may offer to sell, from time to time, shares of its common stock having an aggregate offering price of up to $50,000,000 (the "Equity ATM Program"). During the three months ended September 30, 2019 , the Company sold 231,272 shares of its common stock under the Equity ATM Program at a weighted-average price of $21.62 per share, raising $5.0 million of gross proceeds. Net proceeds were $4.9 million after commissions to the sales agents on shares sold. During the six months ended September 30, 2019 , the Company sold 426,821 shares of its common stock under the Equity ATM Program at a weighted-average price of $21.64 per share, raising $9.2 million of gross proceeds. Net proceeds were $9.1 million after commissions to the sales agents on shares sold. Cumulative to date, the Company has sold 690,477 shares of its common stock under the Equity ATM Program at a weighted-average price of $21.57, raising $14.9 million of gross proceeds.





On August 1, 2019, after receiving the requisite shareholder approval, the Company filed an amendment to its Amended and Restated Articles of Incorporation to increase the amount of authorized shares of common stock from 25,000,000 to 40,000,000.





Share Repurchase Program





In January 2016, the Company’s Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $10 million of its outstanding common stock in the open market at certain thresholds below its NAV per share, in accordance with guidelines specified in Rules 10b5-1(c)(1)(i)(B) and 10b-18 under the Exchange Act. On March 1, 2016, the Company entered into a share repurchase agreement, which became effective immediately and shall terminate on the earliest of: (1) the date on which a total of $10 million worth of common shares have been purchased under the share repurchase program; (2) the date on which the terms set forth in the purchase instructions have been met; or (3) the date that is one trading day after the date on which insider notifies broker in writing that this share repurchase agreement shall terminate.





During both the six months ended September 30, 2019 and 2018, the Company did not repurchase any shares of the Company's common stock under the share repurchase program. As of September 30, 2019 , the Company has approximately $9.2 million available for additional repurchases under the share repurchase program.








|   |                                        
|-- | ---------------------------------------
|8. | EMPLOYEE STOCK BASED COMPENSATION PLANS




Stock Awards





Pursuant to the Capital Southwest Corporation 2010 Plan, our Board of Directors originally reserved 188,000 shares of restricted stock for issuance to certain of our employees. At our annual shareholder meetings in August 2015 and August 2018, our shareholders approved an increase of an additional 450,000 and 850,000 shares, respectively, to our 2010 Plan. A restricted stock award is an award of shares of our common stock, which generally have full voting and dividend rights but are restricted with regard to sale or transfer.  Restricted stock awards are independent of stock grants and are generally subject to forfeiture if employment terminates prior to these restrictions lapsing. Unless otherwise specified in the award agreement, these shares vest in equal annual installments over a four- to five-year period from the grant date and are expensed over the vesting period starting on the grant date.





On August 28, 2014, our Board of Directors amended the 2010 Plan, as permitted pursuant to Section 14 of the 2010 Plan (the “First Amendment to the 2010 Plan”). The First Amendment to the 2010 Plan provides that an award agreement may allow an award to remain outstanding after a spin-off or change in control of one or more wholly-owned subsidiaries of the Company. In addition, on August 28, 2014, the Board of Directors granted 127,000 shares of restricted stock under the Spin-off Compensation Plan. On August 10, 2015, the Second Amendment to the 2010 Plan increased the number of shares of Company common stock available for issuance by 450,000 shares.





On August 22, 2017, we received the Exemptive Order from the SEC that supersedes the Original Order and, in addition to the relief granted under the Original Order, allows the Company to withhold shares to satisfy tax withholding obligations related to the vesting of restricted stock granted pursuant to the 2010 Plan. The Third Amendment to the 2010 Plan, which became effective on August 22, 2017, reflects amendments relating to the Exemptive Order.








46


---

Table of Contents





On August 2, 2018, the Fourth Amendment to the 2010 Plan increased the number of shares of Company common stock available for issuance by 850,000 shares. The Fourth Amendment also includes revisions regarding change in control provisions, minimum vesting periods, incorporation of a clawback policy and other technical revisions.





The following table summarizes the restricted stock available for issuance for the six months ended September 30, 2019 :





Restricted stock available for issuance as of March 31, 2019657,627Additional restricted stock approved under the plan—Restricted stock granted during the three months ended June 30, 2019(3,000)Restricted stock forfeited during the three months ended June 30, 20193,250Restricted stock available for issuance as of September 30, 2019657,877





We expense the cost of the restricted stock awards, which is determined to equal the fair value of the restricted stock award at the date of grant on a straight-line basis over the requisite service period. For these purposes, the fair value of the restricted stock award is determined based upon the closing price of our common stock on the date of the grant.





For the three months ended September 30, 2019 and 2018 , we recognized total share based compensation expense of $0.7 million and $0.4 million , respectively, related to the restricted stock issued to our employees and officers. For the six months ended September 30, 2019 and 2018 , we recognized total share based compensation expense of $1.5 million and $0.9 million , respectively, related to the restricted stock issued to our employees and officers.





During the three months ended June 30, 2019, the Company modified restricted stock awards to accelerate vesting of the unvested awards as of the retirement date for one employee. The Company accounted for this as a modification of awards and recognized incremental compensation cost of $0.2 million. The incremental compensation cost is measured as the excess of the fair value of the modified award over the fair value of the original award immediately before its terms were modified and recognized as compensation cost on the date of modification for vested awards.





As of September 30, 2019 , the total remaining unrecognized compensation expense related to non-vested restricted stock awards was $5.3 million, which will be amortized over the weighted-average vesting period of approximately 2.3 years.





The following table summarizes the restricted stock outstanding as of September 30, 2019 :





Weighted AverageWeighted AverageFair Value PerRemaining VestingRestricted Stock AwardsNumber of SharesShare at grant dateTerm (in Years)Unvested at March 31, 2019454,027$17.332.8Granted3,00021.583.7Vested(14,125)15.591.6Forfeited(3,250)18.22—Unvested at September 30, 2019439,652$17.412.3





Stock Options





On July 20, 2009, shareholders approved the 2009 Plan, which provides for the granting of stock options to employees and officers and authorizes the issuance of common stock upon exercise of stock options for up to 560,000 shares.  All options are granted at or above market price, generally expire up to 10 years from the date of grant and are generally exercisable on or after the first anniversary of the date of grant in five annual installments.








47


---

Table of Contents





On August 28, 2014, our Board of Directors amended the 2009 Plan, as permitted pursuant to Section 18 of the 2009 Plan (the “First Amendment to the 2009 Plan”). The First Amendment to the 2009 Plan provides that an award agreement may allow an award to remain outstanding after a spin-off or change in control of one or more wholly-owned subsidiaries of the Company. In addition, on August 28, 2014, options to purchase 259,000 shares at $36.60 per share were granted under the 2009 Plan, as amended. On September 8, 2015, the Board designated the Share Distribution as a transformative transaction for purposes of the 2009 Plan and amended the award agreements granted under the 2009 Plan to provide for accelerated vesting of the awards held by a participant in the event of a termination of that participant’s service effected by the participant for good reason, by the employer without cause, or as a result of the disability or death of the participant.  A third of these options were vested on each of December 29, 2015, December 29, 2016 and December 29, 2017, respectively, subject to accelerated vesting as described above.





On August 22, 2017, we received the Exemptive Order from the SEC that supersedes the Original Order and, in addition to the relief granted under the Original Order, allows us to withhold shares of our common stock to satisfy the exercise of options to purchase shares of our common stock granted pursuant to the 2009 Plan.





At September 30, 2019 , there are no options to acquire shares of common stock outstanding. The 2009 Plan terminated on July 20, 2019, the tenth anniversary of the date that the 2009 Plan was approved by the Company's shareholders.





The following table summarizes activity in the 2009 Plan as of September 30, 2019 :


WeightedAverageAggregateExerciseIntrinsicNumber of SharesPriceValue2009 PlanBalance at March 31, 2018195,608$11.09Granted——Exercised(195,608)11.09$1,563,905Canceled/Forfeited——Balance at March 31, 2019——Granted——Exercised——Canceled/Forfeited——Balance at September 30, 2019—$—





We recognize compensation cost using the straight-line method for all share-based payments.  The fair value of stock options are determined on the date of grant using the Black-Scholes pricing model and are expensed over the requisite service period of the related stock options. Accordingly, for the three and six months ended September 30, 2019 , there was no expense recognized and for the three and six months ended September 30, 2018 , we recognized stock option compensation expense of $10.5 thousand and $21.1 thousand, respectively, related to the stock options held by our employees and officers. As of September 30, 2019 , there is no remaining unrecognized compensation cost related to non-vested stock options.





At September 30, 2019 , there are no remaining options outstanding. During the quarter ended September 30, 2018 , 5,975 options became exercisable and 50,000 options were exercised with an average exercise price of $11.53.











|   |                            
|-- | ---------------------------
|9. | OTHER EMPLOYEE COMPENSATION




We established a 401(k) plan (“401K Plan”) effective October 1, 2015.  All full-time employees are eligible to participate in the 401K Plan.  The 401K Plan permits employees to defer a portion of their total annual compensation up to the Internal Revenue Service annual maximum based on age and eligibility.  We made contributions to the 401K Plan of up to 4.5% of the Internal Revenue Service’s annual maximum eligible compensation, all of which is fully vested immediately. During the three months ended September 30, 2019 and 2018 , we made matching contributions of approximately $28.8





48


---

Table of Contents





thousand and $25.2 thousand, respectively. During the six months ended September 30, 2019 and 2018 , we made matching contributions of approximately $91.2 thousand and $87.8 thousand, respectively.








|    |                              
|--- | -----------------------------
|10. | COMMITMENTS AND CONTINGENCIES




Commitments





In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk, consisting primarily of unused commitments to extend financing to the Company’s portfolio companies. Since commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.





The balances of unused commitments to extend financing as of September 30, 2019 and March 31, 2019 were as follows (amounts in thousands):


September 30,March 31,Portfolio CompanyInvestment Type20192019Adams Publishing Group, LLCDelayed Draw Term Loan$1,338$1,731American Nuts Operations LLCTerm Loan C384438ASC Ortho Management Company, LLCRevolving Loan1,5001,500Clickbooth.com, LLCRevolving Loan2,0002,000Danforth Advisors, LLCRevolving Loan1,0001,000Dynamic Communities, LLCRevolving Loan500500Environmental Pest Service Management Company, LLCDelayed Draw Term Loan525525Fast Sandwich, LLCRevolving Loan4,1504,150ITA Holdings Group, LLCRevolving Loan1,2811,000JVMC Holdings Corp.Delayed Draw Term Loan—848Roseland Management, LLCRevolving Loan2,0002,000Zenfolio Inc.Revolving Loan2,0002,000Total unused commitments to extend financing$16,678$17,692





As of September 30, 2019 , total revolving and delayed draw loan commitments included commitments to issue letters of credit through a financial intermediary on behalf of certain portfolio companies. As of September 30, 2019 , the Company had $3.4 million in letters of credit issued and outstanding under these commitments on behalf of portfolio companies. For all of these letters of credit issued and outstanding, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. Of these letters of credit, $3.4 million expire in May 2020. As of September 30, 2019 , none of the letters of credit issued and outstanding were recorded as a liability on the Company's balance sheet as such letters of credit are considered in the valuation of the investments in the portfolio company.





Effective April 1, 2019, ASC 842 required that a lessee to evaluate its leases to determine whether they should be classified as operating or financing leases. The Company identified one operating lease for its office space. The lease commenced on October 1, 2014 and expires February 28, 2022.





As CSWC classified this lease as an operating lease prior to implementation, ASC 842 indicates that a right-of-use asset and lease liability should be recorded based on the effective date. CSWC adopted ASC 842 effective April 1, 2019 and recorded a right-of-use asset and a lease liability as of that date. After this date, the Company has recorded lease expense on a straight-line basis, consistent with the accounting treatment for lease expense prior to the adoption of ASC 842.





Total lease expense incurred for both the three and six months ended September 30, 2019 and 2018 was $58 thousand and $0.1 million, respectively. As of September 30, 2019 , the asset related to the operating lease was $0.5 million





49


---

Table of Contents





and the lease liability was $0.6 million. As of September 30, 2019 , the remaining lease term was 2.4 years and the discount rate was 4.59%.





The following table shows future minimum payments under the Company's operating lease as of September 30, 2019 (in thousands):





Year ending March 31,Rent Commitment2020$131202126620222482023—2024—Thereafter—Total$645





Contingencies





We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. To our knowledge, we have no currently pending material legal proceedings to which we are party or to which any of our assets are subject.








11.    RELATED PARTY TRANSACTIONS





As a BDC, we are obligated under the 1940 Act to make available to our portfolio companies significant managerial assistance. “Making available significant managerial assistance” refers to any arrangement whereby we provide significant guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company. We are also deemed to be providing managerial assistance to all portfolio companies that we control, either by ourselves or in conjunction with others. The nature and extent of significant managerial assistance provided by us will vary according to the particular needs of each portfolio company.





During both the three months ended September 30, 2019 and 2018 , we received management and other fees from certain of our portfolio companies totaling $0.1 million , which were recognized as Fees and other income on the Consolidated Statements of Operations. During the six months ended September 30, 2019 and 2018 , we received management and other fees from certain of our portfolio companies totaling $0.1 million and $0.2 million, respectively, which were recognized as Fees and other income on the Consolidated Statement of Operations. Additionally, as of both September 30, 2019 and March 31, 2019 , we had dividends receivable from I-45 SLF LLC of $2.5 million , which were included in dividends and interest receivables on the Consolidated Statements of Assets and Liabilities.





During the three months ended September 30, 2019, the Company purchased a $6.4 million investment from I-45 SLF LLC. The Company purchased such first lien term loan at a price consistent with the fair market value of the loan at the time of the sale.








50


---




Table of Contents





|    |                                 
|--- | --------------------------------
|12. | SUMMARY OF PER SHARE INFORMATION




The following presents a summary of per share data for the three and six months ended September 30, 2019 and 2018 (share amounts presented in thousands).


Three Months EndedSix Months EndedSeptember 30,September 30,Per Share Data:2019201820192018Investment income1$0.86$0.77$1.76$1.46Operating expenses1(0.44)(0.41)(0.91)(0.79)Income taxes1(0.04)(0.02)(0.05)(0.04)Net investment income10.380.340.800.63Net realized gain10.02—0.081.16Net unrealized (depreciation) appreciation on investments, net of tax1(0.25)0.06(0.35)(0.67)Total increase from investment operations0.150.400.531.12Accretive effect of share issuances and repurchases0.03—0.06—Dividends to shareholders(0.50)(0.44)(0.99)(1.33)Exercise of employee stock options2—(0.04)—(0.12)Share based compensation expense0.040.030.090.06Other3—0.02(0.01)0.03Decrease in net asset value(0.28)(0.03)(0.32)(0.24)Net asset valueBeginning of period18.5818.8718.6219.08End of period$18.30$18.84$18.30$18.84Ratios and Supplemental DataRatio of operating expenses to average net assets42.39%2.21%4.87%4.19%Ratio of net investment income to average net assets42.07%1.80%4.33%3.30%Portfolio turnover3.92%2.45%8.88%17.94%Total investment return4,56.44%7.23%8.41%19.58%Total return based on change in NAV4,61.18%2.17%3.60%5.71%Per share market value at the end of the period$21.80$18.98$21.80$18.98Weighted-average common shares outstanding17,77016,31917,65416,250Weighted-average fully diluted shares outstanding17,77016,32317,65416,254Common shares outstanding at end of period17,92716,34317,92716,343





|  |                                                                       
|- | ----------------------------------------------------------------------
|1 | Based on weighted average of common shares outstanding for the period.

|  |                                                                                                           
|- | ----------------------------------------------------------------------------------------------------------
|2 | Net decrease is due to the exercise of employee stock options at prices less than beginning of period NAV.

|  |                                                                                                                                                                                                                                                                                 
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3 | Includes the impact of the different share amounts as a result of calculating certain per share data based on the weighted-average basic shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date.

|  |                
|- | ---------------
|4 | Not annualized.

|  |                                                                                                                                                                                                                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|5 | Total investment return based on purchase of stock at the current market price on the first day and a sale at the current market price on the last day of each period reported on the table and assumes reinvestment of dividends at prices obtained by CSWC’s dividend reinvestment plan during the period. The return does not reflect any sales load that may be paid by an investor.

|  |                                                                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6 | Total return based on change in NAV was calculated using the sum of ending NAV plus dividends to shareholders and other non-operating changes during the period, as divided by the beginning NAV, and has not been annualized.




51


---

Table of Contents











|    |                         
|--- | ------------------------
|13. | SIGNIFICANT SUBSIDIARIES




Media Recovery, Inc.





Media Recovery, Inc., dba SpotSee Holdings, through its subsidiary, ShockWatch, provides solutions that currently enable over 3,000 customers and some 200 partners in 62 countries to detect mishandling that causes product damage and spoilage during transport and storage. The ShockWatch product portfolio includes impact, tilt, temperature, vibration, and humidity detection systems and is widely used in the energy, transportation, aerospace, defense, food, pharmaceutical, medical device, consumer goods and manufacturing sectors.





At September 30, 2019 , the value of Media Recovery, Inc. represented 9.2% of our total assets. Below is certain selected key financial data from its Balance Sheet at September 30, 2019 and March 31, 2019 and Income Statement for the three and six months ended September 30, 2019 and 2018 (amounts in thousands).





September 30, 2019March 31, 2019Current Assets$7,989$8,489Non-Current Assets23,42523,527Current Liabilities3,2143,089Non-Current Liabilities1,5601,627








Three months endedSix months endedSeptember 30, 2019September 30, 2018September 30, 2019September 30, 2018Revenue$5,865$5,488$11,989$11,139Income (loss) from continuing operations6494001,593(32)Net income6494001,593(32)














I-45 SLF LLC





In September 2015, we entered into an LLC agreement with Main Street Capital Corporation to form I-45 SLF LLC. I-45 SLF LLC began investing in UMM syndicated senior secured loans during the quarter ended December 31, 2015. The initial equity capital commitment to I-45 SLF LLC totaled $85.0 million, consisting of $68.0 million from CSWC and $17.0 million from Main Street Capital Corporation, all of which was funded as of September 30, 2019 . CSWC owns 80% of I-45 SLF LLC and has a profits interest of 75.6%, while Main Street Capital Corporation owns 20% and has a profits interest of 24.4%.  I-45 SLF LLC's Board of Managers makes all investment and operational decisions for the fund, and consists of equal representation from CSWC and Main Street Capital Corporation.





As of September 30, 2019 and March 31, 2019 , I-45 SLF LLC had total assets of $223.9 million and $246.5 million , respectively. I-45 SLF LLC had approximately $214.8 million and $237.5 million of credit investments at fair value as of September 30, 2019 and March 31, 2019 , respectively. The portfolio companies in I-45 SLF LLC are in industries similar to those in which CSWC may invest directly. As of September 30, 2019 , approximately $2.0 million of the credit investments were unsettled trades. During the three months ended September 30, 2019 , I-45 SLF declared a total dividend of $3.3 million of which $2.5 million was paid to CSWC in October 2019.





Additionally, I-45 SLF LLC closed on a $75.0 million 5-year senior secured credit facility (the “I-45 credit facility”) in November 2015. This facility includes an accordion feature which will allow I-45 SLF LLC to achieve leverage of approximately 2x debt-to-equity. Borrowings under the I-45 credit facility are secured by all of the assets of I-45 SLF LLC and bear interest at a rate equal to LIBOR plus 2.5% per annum. During the year ended March 31, 2017, I-45 SLF LLC increased debt commitments outstanding by an additional $90.0 million by adding three additional lenders to the syndicate, bringing total debt commitments to $165.0 million. In July 2017, the I-45 credit facility was amended to extend the maturity to July 2022. Additionally, the amendment reduced the interest rate on borrowings to LIBOR plus 2.4% per annum. Under the I-45 credit facility, $141.0 million has been drawn as of September 30, 2019 .





52


---




Table of Contents





Below is a summary of I-45 SLF LLC’s portfolio, followed by a listing of the individual loans in I-45 SLF LLC’s portfolio as of September 30, 2019 and March 31, 2019 (in thousands):





I-45 SLF LLC Loan Portfolio as of September 30, 2019


CurrentInvestmentMaturityInterestPortfolio CompanyIndustryTypeDateRate1PrincipalCostFair Value2AAC Holdings, Inc.Healthcare servicesFirst Lien6/30/2023L+ 6.75%(Floor 1.00%), 4.00% PIK$7,301$7,196$5,476First Lien - Priming Facility3/31/2020L+11.00%(Floor 1.00%)950945950ADS Tactical, Inc.Aerospace & defenseFirst Lien7/26/2023L+6.25%(Floor 1.00%)4,9744,9514,951Allen Media, LLCMedia, marketing & entertainmentFirst Lien8/30/2023L+6.50%(Floor 1.00%)5,4975,3705,318American Teleconferencing Services, Ltd.TelecommunicationsFirst Lien12/8/2021L+6.50% (Floor 1.00%)6,7806,5884,278ATI Investment Sub, Inc.Technology products & componentsFirst Lien6/22/2021L+7.25%(Floor 1.00%)1,5681,5511,500ATX Canada Acquisitionco Inc.Technology products & componentsFirst Lien6/11/2021L+6.00% (Floor 1.00%)4,5944,5764,341California Pizza Kitchen, Inc.RestaurantsFirst Lien8/23/2022L+6.00%(Floor 1.00%)6,7956,7716,094Signify Health, LLCHealthcare servicesFirst Lien12/23/2024L+4.50% (Floor 1.00%)5,1225,0835,116Corel Inc.Software & IT servicesFirst Lien7/2/2026L+5.00%5,0004,7504,856Geo Parent CorporationBuilding & infrastructure productsFirst Lien12/19/2025L+5.50%4,9754,9314,963Go Wireless Holdings, Inc.Consumer products & retailFirst Lien12/22/2024L+6.50%(Floor 1.00%)6,3886,3396,212The Hoover Group, Inc.Energy services (Midstream)First Lien1/28/2021L+7.25%(Floor 1.00%)6,4036,3216,019Hunter Defense Technologies, Inc.Aerospace & defenseFirst Lien3/29/2023L+7.00%(Floor 1.00%)5,9665,8735,966Imagine! Print Solutions, LLCMedia, marketing & entertainmentSecond Lien6/21/2023L+8.75% (Floor 1.00%)3,0002,9721,568InfoGroup Inc.Software & IT servicesFirst Lien4/3/2023L+5.00%(Floor 1.50%)2,9252,9082,877Integro Parent Inc.Business servicesFirst Lien10/31/2022L+5.75% (Floor 1.00%)4,8144,7354,682





53


---

Table of Contents





CurrentInvestmentMaturityInterestPortfolio CompanyIndustryTypeDateRate1PrincipalCostFair Value2Intermedia Holdings, Inc.Software & IT servicesFirst Lien7/21/2025L+6.00%(Floor 1.00%)5,8235,7915,833Isagenix International, LLCHealthcare productsFirst Lien6/14/2025L+5.75% (Floor 1.00%)2,0081,9921,551JAB Wireless, Inc.TelecommunicationsFirst Lien5/2/2023L+8.00%(Floor 1.00%)7,9007,8437,900KORE Wireless Group Inc.TelecommunicationsFirst Lien12/20/2024L+5.50%4,3034,2714,276Lab Logistics, LLC3Healthcare servicesFirst Lien9/25/2023L+6.50(Floor 1.00%)1,6031,5881,588Delayed Draw Term Loan9/25/2023L+6.50(Floor 1.00%)3,8293,7893,794Lift Brands, Inc.Consumer servicesFirst Lien4/16/2023L+7.00%(Floor 1.00%)4,9254,8804,590Lightbox Intermediate, L.P.Software & IT servicesFirst Lien5/9/2026L+5.00%2,9932,9502,963LOGIX Holdings Company, LLCTelecommunicationsFirst Lien12/23/2024L+5.75% (Floor 1.00%)5,9855,9455,985LSF9 Atlantis Holdings, LLCTelecommunicationsFirst Lien5/1/2023L+6.00%(Floor 1.00%)6,6066,5676,170Lulu's Fashion Lounge, LLCConsumer products & retailFirst Lien8/26/2022L+7.00%(Floor 1.00%)3,8643,7823,786Mills Fleet Farm Group LLCConsumer products & retailFirst Lien10/24/2024L+6.25%(Floor 1.00%)4,9634,8794,863NBG Acquisition, Inc.WholesaleFirst Lien4/26/2024L+5.50%(Floor 1.00%)2,8502,8132,561New Media Holdings II LLCMedia, marketing & entertainmentFirst Lien7/14/2022L+6.25% (Floor 1.00%)7,2757,2687,297Nomad Buyer, Inc.Healthcare servicesFirst Lien8/1/2025L+5.00%2,9702,8202,963Novetta Solutions, LLCSoftware & IT servicesFirst Lien10/17/2022L+5.00%(Floor 1.00%)4,9214,8224,831PaySimple, Inc.4Software & IT servicesFirst Lien8/23/2025L+5.50%3,1503,0883,103Peraton Corp. (fka MHVC Acquisition Corp.)Aerospace & defenseFirst Lien4/29/2024L+5.25%(Floor 1.00%)6,3626,3406,314Pet Supermarket, Inc.Consumer products & retailFirst Lien7/5/2022L+5.50%(Floor 1.00%)4,8354,8134,738PT Network, LLCHealthcare servicesFirst Lien11/30/2021L+5.50%, (Floor 1.00%), 2.00% PIK4,3734,3734,285





54


---

Table of Contents





CurrentInvestmentMaturityInterestPortfolio CompanyIndustryTypeDateRate1PrincipalCostFair Value2Tacala, LLCConsumer products & retailSecond Lien1/30/2026L+7.00%5,5005,4865,482Teleguam Holdings , LLCTelecommunicationsSecond Lien7/25/2024L+8.50% (Floor 1.00%)2,0001,9722,013Terra Millennium CorporationIndustrial productsFirst Lien10/31/2022L+6.75% (Floor 1.00%)6,9756,9366,914TestEquity, LLCCapital equipmentFirst Lien4/28/2022L+5.50%(Floor 1.00%)4,7994,7744,641TGP Holdings III LLCDurable consumer goodsSecond Lien9/25/2025L+8.50% (Floor 1.00%)2,5002,4722,350Time Manufacturing AcquisitionCapital equipmentFirst Lien2/3/2023L+5.00% (Floor 1.00%)4,8734,8464,891UniTek Global Services, Inc.TelecommunicationsFirst Lien8/26/2024L+5.50%  (Floor 1.00%)2,9722,9492,972U.S. TelePacific Corp.TelecommunicationsFirst Lien5/2/2023L+5.00% (Floor 1.00%)5,2005,1515,073VIP Cinema Holdings, Inc.Hotel, gaming & leisureFirst Lien3/1/2023L+6.00% (Floor 1.00%)4,3754,3623,445Wireless Vision Holdings, LLC5TelecommunicationsFirst Lien9/29/2022L+8.50% (Floor 1.00%)7,5727,4807,572YS Garments, LLCConsumer products & retailFirst Lien8/9/2024L+6.00% (Floor 1.00%)4,8754,8354,851Total Investments$223,737$214,762





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Represents the interest rate as ofSeptember 30, 2019. All interest rates are payable in cash, unless otherwise noted. The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“P”) which reset daily, monthly, quarterly, or semiannually. For each the Company has provided the spread over LIBOR or Prime in effect atSeptember 30, 2019. Certain investments are subject to a LIBOR or Prime interest rate floor.

|  |                                                                                                                                                                                                                                                                                                                        
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2 | Represents the fair value determined utilizing a similar process as the Company in accordance with ASC 820. However, the determination of such fair value is determined by the Board of Managers of I-45 SLF LLC. It is not included in the Company’s Board of Directors’ valuation process described elsewhere herein.

|  |                                                                                                              
|- | -------------------------------------------------------------------------------------------------------------
|3 | The investment has approximately $0.5 million in an unfunded delayed draw commitment as ofSeptember 30, 2019.

|  |                                                                                                              
|- | -------------------------------------------------------------------------------------------------------------
|4 | The investment has approximately $1.0 million in an unfunded delayed draw commitment as ofSeptember 30, 2019.

|  |                                                                                                                      
|- | ---------------------------------------------------------------------------------------------------------------------
|5 | The investment is structured as a first lien last out term loan and may earn interest in addition to the stated rate.










55


---




Table of Contents





I-45 SLF LLC Loan Portfolio as of March 31, 2019


CurrentInvestmentMaturityInterestPortfolio CompanyIndustryTypeDateRate1PrincipalCostFair Value2AAC Holdings, Inc.Healthcare servicesFirst Lien6/30/2023L+ 6.75%(Floor 1.00%),4.00% PIK$7,375$7,253$6,822First Lien3/31/2020L+11.00% (Floor 1.00%)950940959Allen Media, LLCMedia, marketing & entertainmentFirst Lien8/30/2023L+6.50% (Floor 1.00%)5,6435,4965,481American Scaffold Holdings, Inc.Aerospace & defenseFirst Lien3/31/2022L+6.50%(Floor 1.00%)2,6252,6052,612American Teleconferencing Services, Ltd.TelecommunicationsFirst Lien12/8/2021L+6.50%(Floor 1.00%)6,8816,6414,516ATI Investment Sub, Inc.Technology products & componentsFirst Lien6/22/2021L+7.25%(Floor 1.00%)1,8181,7951,691ATX Canada Acquisitionco Inc.Technology products & componentsFirst Lien6/11/2021L+6.00%(Floor 1.00%)4,6894,6664,454California Pizza Kitchen, Inc.RestaurantsFirst Lien8/23/2022L+6.00%(Floor 1.00%)6,8306,8026,616Chloe Ox Parent, LLC (Censeo Health)Healthcare servicesFirst Lien12/23/2024L+4.50%(Floor 1.00%)5,1485,1055,148CMN.com, LLCConsumer servicesFirst Lien11/3/2021L+6.00%(Floor 1.00%)9,4319,3479,431Digital River, Inc.Software & IT servicesFirst Lien2/12/2021L+6.50%(Floor 1.00%)8,0037,9987,803Geo Parent CorporationBuilding & infrastructure productsFirst Lien12/19/2025L+5.50%5,0004,9524,988Go Wireless Holdings, Inc.Consumer products & retailFirst Lien12/31/2024L+6.50%(Floor 1.00%)6,5636,5086,439Hunter Defense Technologies, Inc.Aerospace & defenseFirst Lien3/29/2023L+7.00%(Floor 1.00%)6,2566,1496,256iEnergizer LimitedBusiness servicesFirst Lien5/1/2019L+6.00%(Floor 1.25%)7,3077,3007,307Imagine! Print Solutions, LLCMedia, marketing & entertainmentSecond Lien6/21/2023L+8.75%(Floor 1.00%)3,0002,9682,700InfoGroup Inc.Software & IT servicesFirst Lien4/3/2023L+5.00%(Floor 1.50%)2,9402,9202,892Integro Parent Inc.Business servicesFirst Lien10/28/2022L+5.75%(Floor 1.00%)4,8394,7464,839





56


---

Table of Contents





CurrentInvestmentMaturityInterestPortfolio CompanyIndustryTypeDateRate1PrincipalCostFair Value2Intermedia Holdings, Inc.Software & IT servicesFirst Lien7/21/2025L+6.00%(Floor 1.00%)3,8473,8133,857Isagenix International, LLCHealthcare productsFirst Lien6/16/2025L+5.75% (Floor 1.00%)2,0632,0441,851JAB Wireless, Inc.TelecommunicationsFirst Lien5/2/2023L+8.00% (Floor 1.00%)7,9207,8557,920KORE Wireless Group Inc.TelecommunicationsFirst Lien12/20/2024L+5.50%3,3253,2933,308Lift Brands, Inc.Consumer servicesFirst Lien4/16/2023L+7.00% (Floor 1.00%)4,9504,8984,742LOGIX Holdings Company, LLCTelecommunicationsFirst Lien12/23/2024L+5.75% (Floor 1.00%)6,0175,9736,062LSF9 Atlantis Holdings, LLCTelecommunicationsFirst Lien5/1/2023L+6.00% (Floor 1.00%)6,6946,6486,246Lulu's Fashion Lounge, LLCConsumer products & retailFirst Lien8/26/2022L+7.00% (Floor 1.00%)4,0343,9403,913Mills Fleet Farm Group LLCConsumer products & retailFirst Lien10/24/2024L+6.25%(Floor 1.00%)4,9884,8954,988NBG Acquisition, Inc.WholesaleFirst Lien4/26/2024L+5.50% (Floor 1.00%)2,8882,8462,844New Era Technology, Inc.3Software & IT servicesFirst Lien6/22/2023L+6.50% (Floor 1.00%)4,4074,3364,349Delayed Draw Term Loan6/22/2023L+6.50% (Floor 1.00%)221222218New Media Holdings II LLCMedia, marketing & entertainmentFirst Lien7/14/2022L+6.25% (Floor 1.00%)9,3129,2989,277Nomad Buyer, Inc.Healthcare servicesFirst Lien8/1/2025L+5.00%2,9852,8212,907Novetta Solutions, LLCSoftware & IT servicesFirst Lien10/17/2022L+5.00% (Floor 1.00%)4,9474,8304,857Peraton Corp. (fka MHVC Acquisition Corp.)Aerospace & defenseFirst Lien4/29/2024L+5.25% (Floor 1.00%)6,3946,3706,171Pet Supermarket, Inc.Consumer products & retailFirst Lien7/5/2022L+5.50% (Floor 1.00%)4,8604,8334,763PT Network, LLCHealthcare servicesFirst Lien11/30/2021L+5.50% (Floor 1.00%)4,3694,3694,125STL Parent Corp. (American Railcar)Transportation & logisticsFirst Lien12/5/2022L+7.00%3,9753,8463,856





57


---

Table of Contents





CurrentInvestmentMaturityInterestPortfolio CompanyIndustryTypeDateRate1PrincipalCostFair Value2Tacala, LLCConsumer products & retailSecond Lien1/30/2026L+7.00%3,0002,9872,995Teleguam Holdings , LLCTelecommunicationsSecond Lien7/25/2024L+8.50% (Floor 1.00%)2,0001,9702,013Terra Millennium CorporationIndustrial productsFirst Lien10/31/2022L+6.75% (Floor 1.00%)7,5267,4787,488TestEquity, LLCCapital equipmentFirst Lien4/28/2022L+5.50% (Floor 1.00%)4,8044,7744,766TGP Holdings III LLCDurable consumer goodsSecond Lien9/25/2025L+8.50% (Floor 1.00%)2,5002,4702,400The Hoover Group, Inc.Energy services (midstream)First Lien1/28/2021L+7.25% (Floor 1.00%)6,4376,3366,243Time Manufacturing AcquisitionCapital equipmentFirst Lien2/3/2023L+5.00% (Floor 1.00%)4,9104,8794,928Turning Point Brands, Inc.Consumer products & retailSecond Lien3/7/2024L+7.00%3,0002,9733,030UniTek Global Services, Inc.TelecommunicationsFirst Lien8/20/2024L+5.50%(Floor 1.00%)2,9852,9602,958U.S. TelePacific Corp.TelecommunicationsFirst Lien5/2/2023L+5.00% (Floor 1.00%)6,8446,7776,661VIP Cinema Holdings, Inc.Hotel, gaming & leisureFirst Lien3/1/2023L+6.00% (Floor 1.00%)4,5004,4854,208Wireless Vision Holdings, LLC4TelecommunicationsFirst Lien9/29/2022L+8.50% (Floor 1.00%), 1.00% PIK7,8657,7537,779YS Garments, LLCConsumer products & retailFirst Lien8/9/2024L+6.00% (Floor 1.00%)4,9384,8934,870Total Investments$242,061$237,547





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Represents the interest rate as ofMarch 31, 2019. All interest rates are payable in cash, unless otherwise noted. The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“Prime”) which reset daily, monthly, quarterly, or semiannually.  For each the Company has provided the spread over LIBOR or Prime in effect atMarch 31, 2019.  Certain investments are subject to a LIBOR or Prime interest rate floor.

|  |                                                                                                                                                                                                                                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2 | Represents the fair value determined utilizing a similar process as the Company in accordance with ASC 820. However, the determination of such fair value is determined by the Board of Managers of the Joint Venture. It is not included in the Company’s Board of Directors’ valuation process described elsewhere herein.

|  |                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------
|3 | The investment has approximately $0.3 million in an unfunded delayed draw commitment as ofMarch 31, 2019.

|  |                                                                                                                      
|- | ---------------------------------------------------------------------------------------------------------------------
|4 | The investment is structured as a first lien last out term loan and may earn interest in addition to the stated rate.













58


---




Table of Contents





Below is certain summarized financial information for I-45 SLF LLC as of September 30, 2019 and March 31, 2019 and for the three and six months ended September 30, 2019 and 2018 (amounts in thousands):





September 30, 2019March 31, 2019Selected Balance Sheet Information:Investments, at fair value (cost $223,737 and $242,061)$214,762$237,547Cash and cash equivalents6,9446,406Due from broker——Deferred financing costs and other assets1,3671,615Interest receivable857979Total assets$223,930$246,547Senior credit facility payable$141,000$160,000Payable for unsettled transactions1,995940Other liabilities3,4843,606Total liabilities$146,479$164,546Members’ equity77,45182,001Total liabilities and members' equity$223,930$246,547





Three Months EndedSix Months EndedSeptember 30, 2019September 30, 2018September 30, 2019September 30, 2018Selected Statement of Operations Information:Total revenues$5,284$5,150$10,926$10,021Total expenses(2,082)(2,069)(4,322)(4,130)Net investment income3,2023,0816,6045,891Net unrealized depreciation(3,491)(433)(4,462)(1267)Net realized gains23674361271Net increase in members’ equity resulting from operations$(53)$2,722$2,503$4,895











59


---




Table of Contents





|    |                  
|--- | -----------------
|14. | SUBSEQUENT EVENTS




On October 23, 2019, the Company's Board of Directors declared a total dividend of $0.50 per share, comprised of a regular dividend of $0.40 and a supplemental dividend of $0.10, for the quarter ended December 31, 2019. The record date for the dividend is December 20, 2019. The payment date for the dividend is December 31, 2019.








60


---




Table of Contents





CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES


Consolidated Schedule of Investments in and Advances to Affiliates (Unaudited)


Six Months Ended September 30, 2019


(amounts in thousands)





Portfolio CompanyType of Investment (1)Amount of Interest or Dividends Credited in Income (2)Fair Value at March 31, 2019Gross Additions (3)Gross Reductions (4)Amount of Realized Gain/(Loss) (5)Amount of Unrealized Gain/(Loss)Fair Value at September 30, 2019Control InvestmentsI-45 SLF LLC80% LLC equity interest$5,332$65,743$—$—$—$(3,834)$61,909Prism Spectrum Holdings, LLCFirst Lien26513,4617(13,461)226(233)—96,498.32 Class A units—6,539—(6,539)———Media Recovery, Inc.800,000 shares of Series A convertible preferred stock3507,795———1847,9794,000,002 shares of common stock1,75044,965———1,06446,029Total Control Investments$7,697$138,503$7$(20,000)$226$(2,819)$115,917Affiliate InvestmentsChandler Signs, LLCSenior subordinated debt (12.00% cash)$299$4,480$20$—$—$69$4,5691,500,000 units of Class A-1 common stock81,937———7772,714Dynamic Communities, LLCRevolving Loan2——————First Lien59110,97220(140)—(19)10,8332,000,000 Preferred units112,849————2,849ITA Holdings Group, LLCRevolving Loan1452,0001,206(1,481)—(2)1,723First Lien - Term Loan4807,4751,496(666)101688,483First Lien - Term B Loan2893,829738(333)61334,373First Lien - PIK Note A1532,00595——782,178First Lien - PIK Note B4793——486Warrants—1,557———1,3522,909





61


---

Table of Contents





Portfolio CompanyType of Investment (1)Amount of Interest or Dividends Credited in Income (2)Fair Value at March 31, 2019Gross Additions (3)Gross Reductions (4)Amount of Realized Gain/(Loss) (5)Amount of Unrealized Gain/(Loss)Fair Value at September 30, 20199.25% Class A membership interest—923———1,3222,245Roseland Management, LLCRevolving Loan9—4——(4)—First Lien51710,47415(52)—(16)10,42110,000 Class A Units—1,487———3021,789SIMR, LLCFirst Lien67611,40321(335)1(545)10,5455,724,000 Class B Common Units—5,724———(2,402)3,322Zenfolio Inc.Revolving Loan7—2——(2)—First Lien87913,1651,042——(190)14,017190 shares of common stock—546————546Total Affiliate Investments$4,070$80,905$4,662$(3,007)$17$1,025$83,602Total Control & Affiliate Investments$11,767$219,408$4,669$(23,007)$243$(1,794)$199,519





|    |                                                                                                 
|--- | ------------------------------------------------------------------------------------------------
|(1) | The principal amount and ownership detail as shown in the Consolidated Schedules of Investments.

|    |                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Represents the total amount of interest or dividends credited to income for the portion of the year an investment was included in the Control or Affiliate categories, respectively.

|    |                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on investments, accrued PIK interest, and accretion of OID. Gross additions also include movement of an existing portfolio company into this category and out of a different category.

|    |                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Gross reductions include decreases in the cost basis of investments resulting from principal repayments or sales and the exchange of one or more existing securities for one or more new securities. Gross reductions also include movement of an existing portfolio company out of this category and into a different category.

|    |                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | The schedule does not reflect realized gains or losses on escrow receivables for investments which were previously exited and were not held during the period presented. Gains and losses on escrow receivables are classified in the Consolidated Statements of Operations according to the control classification at the time the investment was exited.







62


---




Table of Contents





|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations




The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.





The information contained herein may contain “forward-looking statements” based on our current expectations, assumptions and estimates about us and our industry.  These forward-looking statements involve risks and uncertainties.  Words such as “may,” “predict,” “will,” “continue,” “likely,” “would,” “could,” “should,” “expect,” “anticipate,” “potential,” “estimate,” “indicate,” “seek,” “believe,” “target,” “intend,” “plan,” or “project” and other similar expressions identify forward-looking statements.  In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements that are subject to risks, uncertainties and assumptions.  Our actual results could differ materially from those we express in the forward-looking statements as a result of several factors more fully described in “Risk Factors” and elsewhere in our Form 10-K for the fiscal year ended March 31, 2019 and in this Form 10-Q.  The forward-looking statements made in this Form 10-Q relate only to events as of the date on which the statements are made.  You should read the following discussion in conjunction with the consolidated financial statements and related footnotes and other financial information included in our Form 10-K for the fiscal year ended March 31, 2019 .  We undertake no obligation to update publicly any forward-looking statements for any reason, whether as a result of new information, future events or otherwise, except as required by law.








OVERVIEW





We are an internally managed closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the 1940 Act. We specialize in providing customized debt and equity financing to LMM companies and debt capital to UMM companies in a broad range of investment segments located primarily in the United States.  Our investment objective is to produce attractive risk-adjusted returns by generating current income from our debt investments and capital appreciation from our equity and equity related investments.  Our investment strategy is to partner with business owners, management teams and financial sponsors to provide flexible financing solutions to fund growth, changes of control, or other corporate events. We invest primarily in senior debt securities, secured by security interests in portfolio company assets, and in secured and unsecured subordinated debt securities. We also invest in equity interests in our portfolio companies alongside our debt securities.





We focus on investing in companies with histories of generating revenues and positive cash flow, established market positions and proven management teams with strong operating discipline. We target senior debt, subordinated debt, and equity investments in LMM companies, as well as first and second lien syndicated loans in UMM companies.  Our target LMM companies typically have annual EBITDA between $3.0 million and $15.0 million, and our LMM investments generally range in size from $5.0 million to $25.0 million. Our UMM investments generally include syndicated first and second lien loans in companies with EBITDA generally greater than $50.0 million, and our UMM investments typically range in size from $5.0 million to $15.0 million.





We seek to fill the financing gap for LMM companies, which, historically, have had more limited access to financing from commercial banks and other traditional sources. The underserved nature of the LMM creates the opportunity for us to meet the financing needs of LMM companies while also negotiating favorable transaction terms and equity participations. Our ability to invest across a LMM company’s capital structure, from secured loans to equity securities, allows us to offer portfolio companies a comprehensive suite of financing options. Providing customized financing solutions is important to LMM companies. We generally seek to partner directly with financial sponsors, entrepreneurs, management teams and business owners in making our investments. Our LMM debt investments typically include senior loans with a first lien on the assets of the portfolio company, as well as subordinated debt which may either be secured or unsecured subordinated loans. Our LMM debt investments typically have a term of between five and seven years from the original investment date. We also often seek to invest in the equity securities of our LMM portfolio companies.





Our investments in UMM companies primarily consist of direct investments in or secondary purchases of interest bearing debt securities in privately held companies that are generally larger in size than the LMM companies included in our portfolio. Our UMM debt investments are generally secured by either a first or second priority lien on the assets of the portfolio company and typically have an expected duration of between three and seven years from the original investment date.





63


---

Table of Contents








Because we are internally managed, we do not pay any external investment advisory fees, but instead directly incur the operating costs associated with employing investment and portfolio management professionals. We believe that our internally managed structure provides us with a beneficial operating expense structure when compared to other publicly traded and privately held investment firms which are externally managed, and our internally managed structure allows us the opportunity to leverage our non-interest operating expenses as we grow our investment portfolio. For the six months ended September 30, 2019 and 2018 , the ratio of our annualized second quarter operating expenses, excluding interest expense, as a percentage of our quarterly average total assets was 2.87% and 3.05%, respectively.








CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES





The preparation of our consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods covered by the consolidated financial statements. We have identified investment valuation and revenue recognition as our most critical accounting estimates. On an on-going basis, we evaluate our estimates, including those related to the matters below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.





Valuation of Investments





The most significant determination inherent in the preparation of our consolidated financial statements is the valuation of our investment portfolio and the related amounts of unrealized appreciation and depreciation. As of September 30, 2019 and March 31, 2019 , our investment portfolio at fair value represented approximately 92.1% and 95.0%, respectively, of our total assets. We are required to report our investments at fair value. We follow the provisions of Accounting Standards Codification, or ASC 820, Fair Value Measurements and Disclosures ("ASC 820").  ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements. ASC 820 requires us to assume that the portfolio investment is to be sold in the principal market to independent market participants, which may be a hypothetical market.  See Note 4 — “Fair Value Measurements” in the notes to consolidated financial statements for a detailed discussion of our investment portfolio valuation process and procedures.





Due to the inherent uncertainty in the valuation process, our determination of fair value for our investment portfolio may differ materially from the values that would have been determined had a ready market for the securities actually existed. In addition, changes in the market environment, portfolio company performance, and other events may occur over the lives of the investments that may cause the gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned. We determine fair value of each individual investment and record changes in fair value as unrealized appreciation or depreciation.





Our Board of Directors is responsible for determining, in good faith, the fair value of our investments and our valuation procedures, consistent with the 1940 Act requirements. Our Board of Directors believes that our investment portfolio as of September 30, 2019 and March 31, 2019 reflects the fair value as of those dates based on the markets in which we operate and other conditions in existence on those reporting dates.





Revenue Recognition





Interest and Dividend Income





Interest and dividend income is recorded on an accrual basis to the extent amounts are expected to be collected.  Dividend income is recognized on the date dividends are declared by the portfolio company or at the point an obligation exists for the portfolio company to make a distribution. Discounts/premiums received to par on loans purchased are capitalized and accreted or amortized into income over the life of the loan using the effective interest method. In accordance with our valuation policy, accrued interest and dividend income is evaluated quarterly for collectability. When we do not expect the debtor to be able to service all of its debt or other obligations, we will generally establish a reserve against interest





64


---

Table of Contents





income receivable, thereby placing the loan or debt security on non-accrual status, and cease to recognize interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due.  If a loan or debt security’s status significantly improves regarding its ability to service debt or other obligations, it will be restored to accrual basis. As of September 30, 2019 , we had two investments on non-accrual status, which comprised of approximately 2.6% of our total investment portfolio's fair value and approximately 3.6% of its cost. As of March 31, 2019 , we had one investment on non-accrual status, which comprised of approximately 1.6% of our total investment portfolio's fair value and approximately 1.9% of its cost.





Recently Issued Accounting Standards





In February 2016, the FASB issued ASU 2016-02, Leases , which requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which affects narrow aspects of the guidance issued in the amendments in ASU 2016-02. The new guidance is effective for annual periods beginning after December 15, 2018, and interim periods therein. CSWC adopted ASU 2016-02 effective April 1, 2019. Under ASC 842, CSWC evaluates leases to determine if the leases are considered financing or operating leases. The Company currently has one operating lease for office space for which the Company has recorded a right-of-use asset and lease liability for the operating lease obligation. Non-lease components (maintenance, property tax, insurance and parking) are not included in the lease cost. The lease expense is presented as a single lease cost that is amortized on a straight-line basis over the life of the lease.





In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which changes the fair value measurement disclosure requirements of ASC 820. The key provisions include new, eliminated and modified disclosure requirements. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods therein. Early application is permitted. CSWC is currently evaluating the impact the adoption of this new accounting standard will have on its consolidated financial statements, but the impact of the adoption is not expected to be material.





In March 2019, the SEC issued Final Rule Release No. 33-10618, FAST Act Modernization and Simplification of Regulation S-K , which amends certain SEC disclosure requirements. The amendments are intended to simplify certain disclosure requirements, improve readability and navigability of disclosure documents, and discourage repetition and disclosure of immaterial information. The amendments are effective for all filings submitted on or after May 2, 2019. The Company adopted the requisite amendments effective May 2, 2019. As it pertains to the Company for this Form 10-Q, there were no significant changes to the Company’s consolidated financial position or disclosures.








INVESTMENT PORTFOLIO COMPOSITION





Our LMM investments consist of secured debt, subordinated debt, equity warrants and direct equity investments in privately held, LMM companies based in the United States. Our LMM portfolio companies generally have annual EBITDA between $3.0 million and $15.0 million, and our LMM investments typically range in size from $5.0 million to $25.0 million. The LMM debt investments are typically secured by either a first or second priority lien on the assets of the portfolio company, generally bear interest at floating rates, and generally have a term of between five and seven years from the original investment date.





Our UMM investments consist of direct investments in or secondary purchases of interest-bearing debt securities in privately held companies based in the United States that are generally larger in size than the LMM companies included in our portfolio with EBITDA generally greater than $50.0 million. Our UMM investments typically range in size from $5.0 million to $15.0 million. Our UMM debt investments are generally secured by ether a first or second priority lien on the assets of the portfolio company and typically have a term of between three and seven years from the original investment date.








65


---

Table of Contents





The total value of our investment portfolio was $538.9 million as of September 30, 2019 , as compared to $524.1 million as of March 31, 2019 . As of September 30, 2019 , we had investments in 39 portfolio companies with an aggregate cost of $498.2 million . As of March 31, 2019 , we had investments in 37 portfolio companies with an aggregate cost of $478.1 million.





As of September 30, 2019 and March 31, 2019 , approximately $367.3 million , or 94.9% , and $348.2 million, or 94.7%, respectively, of our debt investment portfolio (at fair value) bore interest at floating rates, of which 88.8% and 87.8%, respectively, were subject to contractual minimum interest rates. As of September 30, 2019 and March 31, 2019 , approximately $19.9 million , or 5.1% , and $19.5 million, or 5.3%, respectively, of our debt investment portfolio (at fair value) bore interest at fixed rates.





The following tables provide a summary of our investments in LMM and UMM companies as of September 30, 2019 and March 31, 2019 (excluding our investment in I-45 SLF LLC):





As of September 30, 2019LMM (a)UMM(dollars in thousands)Number of portfolio companies2711Fair value$384,180$92,787Cost$328,833$101,320% of portfolio at cost - debt89.2%100.0%% of portfolio at cost - equity10.8%0.0%% of debt investments at cost secured by first lien78.2%85.4%Weighted average annual effective yield (b)12.0%8.4%Weighted average EBITDA (c)$8,230$68,785Weighted average leverage through CSWC security (d)3.5x3.7x





|    |                                                                                           
|--- | ------------------------------------------------------------------------------------------
|(a) | AtSeptember 30, 2019, we had equity ownership in approximately70.4%of our LMM investments.

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | The weighted-average annual effective yields were computed using the effective interest rates during the quarter for all debt investments at cost as ofSeptember 30, 2019, including accretion of original issue discount but excluding fees payable upon repayment of the debt instruments. As ofSeptember 30, 2019, there were two investments on non-accrual status. Weighted-average annual effective yield is not a return to shareholders and is higher than what an investor in shares in our common stock will realize on its investment because it does not reflect our expenses or any sales load paid by an investor.

|    |                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(c) | Weighted average EBITDA metric is calculated using investment cost basis weighting. For the quarter ended September 30, 2019, one portfolio company is excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful.

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(d) | Includes CSWC debt investments only. Calculated as the amount of each portfolio company’s debt (including CSWC’s position and debt senior or pari passu to CSWC’s position, but excluding debt subordinated to CSWC’s position) in the capital structure divided by each portfolio company’s adjusted EBITDA. Weighted average leverage is calculated using investment cost basis weighting. Management uses this metric as a guide to evaluate relative risk of its position in each portfolio debt investment. For the quarter ended September 30, 2019, one portfolio company is excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful.







66


---

Table of Contents





As of March 31, 2019LMM (a)UMM(dollars in thousands)Number of portfolio companies2610Fair value$377,792$80,536Cost$325,343$84,712% of portfolio at cost - debt87.5%100.0%% of portfolio at cost - equity12.5%—% of debt investments at cost secured by first lien76.6%82.6%Weighted average annual effective yield (b)12.2%9.7%Weighted average EBITDA (c)$9,200$66,531Weighted average leverage through CSWC security (d)3.3x4.8x





|    |                                                                                         
|--- | ----------------------------------------------------------------------------------------
|(a) | AtMarch 31, 2019, we had equity ownership in approximately 73.1% of our LMM investments.

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | The weighted-average annual effective yields were computed using the effective interest rates during the quarter for all debt investments at cost as ofMarch 31, 2019, including accretion of original issue discount but excluding fees payable upon repayment of the debt instruments. As ofMarch 31, 2019, there was one investment on non-accrual status. Weighted-average annual effective yield is not a return to shareholders and is higher than what an investor in shares in our common stock will realize on its investment because it does not reflect our expenses or any sales load paid by an investor.

|    |                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(c) | Weighted average EBITDA metric is calculated using investment cost basis weighting. For the quarter ended September 30, 2019, one portfolio company is excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful.

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(d) | Includes CSWC debt investments only. Calculated as the amount of each portfolio company’s debt (including CSWC’s position and debt senior or pari passu to CSWC’s position, but excluding debt subordinated to CSWC’s position) in the capital structure divided by each portfolio company’s adjusted EBITDA. Weighted average leverage is calculated using investment cost basis weighting. Management uses this metric as a guide to evaluate relative risk of its position in each portfolio debt investment.




Portfolio Asset Quality





We utilize an internally developed investment rating system to rate the performance and monitor the expected level of returns for each debt investment in our portfolio. The investment rating system takes into account both quantitative and qualitative factors of the portfolio company and the investments held therein, including each investment's expected level of returns and the collectability of our debt investments, comparisons to competitors and other industry participants and the portfolio company's future outlook. The ratings are not intended to reflect the performance or expected level of returns of our equity investments.





|  |                                                                                                                                                                                                           
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Investment Rating 1 represents the least amount of risk in our portfolio. The investment is performing materially above underwriting expectations and the trends and risk factors are generally favorable.

|  |                                                                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Investment Rating 2 indicates the investment is performing as expected at the time of underwriting and the trends and risk factors are generally favorable to neutral.

|  |                                                                                                                                                                                                                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Investment Rating 3 involves an investment performing below underwriting expectations and the trends and risk factors are generally neutral to negative. The portfolio company or investment may be out of compliance with financial covenants and interest payments may be impaired, however principal payments are generally not past due.

|  |                                                                                                                                                                                                                                                                                                        
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Investment Rating 4 indicates that the investment is performing materially below underwriting expectations, the trends and risk factors are generally negative and the risk of the investment has increased substantially. Interest and principal payments on our investment are likely to be impaired.







67


---

Table of Contents





The following table shows the distribution of our debt portfolio investments on the 1 to 4 investment rating scale at fair value as of September 30, 2019 and March 31, 2019 :





As of September 30, 2019Investment RatingDebt Investments at Fair ValuePercentage of Debt Portfolio(dollars in thousands)1$51,37913.3%2308,20879.6320,6235.346,9581.8Total$387,168100.0%





As of March 31, 2019Investment RatingDebt Investments at Fair ValuePercentage of Debt Portfolio(dollars in thousands)1$61,89716.8%2284,04177.3321,7895.94——Total$367,727100.0%





Interest and dividend income is recorded on an accrual basis to the extent amounts are expected to be collected.  When we do not expect the debtor to be able to service all of its debt or other obligations, we will generally establish a reserve against interest income receivable, thereby placing the loan or debt security on non-accrual status, and cease to recognize interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due.





As of September 30, 2019 , we had two debt investments on non-accrual status, which comprised of approximately 2.6% of our total investment portfolio's fair value and approximately 3.6% of its cost. As of March 31, 2019 , we had one investment on non-accrual status, which comprised of approximately 1.6% of our total investment portfolio's fair value and approximately 1.9% of its cost.





Investment Activity





During the six months ended September 30, 2019 , we made new debt investments in three portfolio companies totaling $46.1 million, follow-on debt investments in five portfolio companies totaling $17.0 million, and an equity investment in one existing and one new portfolio company totaling $1.6 million. We received contractual principal repayments totaling approximately $13.6 million and full prepayments of approximately $27.5 million from two portfolio companies. In addition, we received proceeds from sales of investments totaling $7.3 million.





During the six months ended September 30, 2018 , we made new debt investments in nine portfolio companies totaling $128.3 million, follow-on debt investments in six portfolio companies totaling $21.5 million, and equity investments in three existing and five new portfolio company totaling $17.9 million. We received contractual principal repayments totaling approximately $5.8 million and full prepayments of approximately $18.3 million from three portfolio companies. In addition, we received proceeds from sales and return of capital of investments totaling $53.6 million and recognized realized gains on those sales totaling $18.7 million.








68


---

Table of Contents





Total portfolio investment activity for the six months ended September 30, 2019 and 2018 was as follows (dollars in thousands):





Six months ended September 30, 2019First Lien LoansSecond Lien LoansSubordinated DebtPreferred & Common EquityI-45 SLF, LLCTotalFair value, beginning of period$317,544$35,896$14,287$90,601$65,743$524,071New investments63,105——1,620—64,725Proceeds from sales of investments———(7,271)—(7,271)Principal repayments received(40,409)(125)———(40,534)PIK interest earned3072611271—651Accretion of loan discounts8647925——968Realized gain570——988—1,558Unrealized gain (loss)(4,335)(823)(90)3,790(3,834)(5,292)Fair value, end of period$337,646$35,288$14,234$89,799$61,909$538,876Weighted average yield on debt investments at end of period11.02%Weighted average yield on total investments at end of period11.10%





Six months ended September 30, 2018First Lien LoansSecond Lien LoansSubordinated DebtPreferred & Common EquityI-45 SLF, LLCTotalFair value, beginning of period$197,110$23,229$18,783$86,860$67,113$393,095New investments138,48511,359—17,853—167,697Proceeds from sales of investments(28,805)——(24,767)—(53,572)Principal repayments received(19,138)(5,000)———(24,138)PIK interest earned——23113—136Accretion of loan discounts6104730——687Realized gain27431—18,608—18,913Unrealized gain (loss)(728)36047(10,109)(787)(11,217)Fair value, end of period$287,808$30,026$18,883$88,558$66,326$491,601Weighted average yield on debt investments at end of period11.61%Weighted average yield on total investments at end of period11.02%








69


---




Table of Contents





RESULTS OF OPERATIONS





The composite measure of our financial performance in the Consolidated Statements of Operations is captioned “Net increase in net assets from operations” and consists of three elements.  The first is “Net investment income,” which is the difference between income from interest, dividends and fees and our combined operating and interest expenses, net of applicable income taxes.  The second element is “Net realized gain on investments before income tax,” which is the difference between the proceeds received from the disposition of portfolio securities and their stated cost.  The third element is the “Net unrealized (depreciation) appreciation on investments, net of tax,” which is the net change in the market or fair value of our investment portfolio, compared with stated cost.  It should be noted that the “Net realized gain on investments before income tax” and “Net unrealized (depreciation) appreciation on investments, net of tax” are directly related in that when an appreciated portfolio security is sold to realize a gain, a corresponding decrease in net unrealized appreciation occurs by transferring the gain associated with the transaction from being “unrealized” to being “realized.”  Conversely, when a loss is realized on a depreciated portfolio security, an increase in net unrealized appreciation occurs.





Comparison of three months ended September 30, 2019 and September 30, 2018





Three Months EndedSeptember 30,Net Change20192018Amount%(in thousands)Total investment income$15,218$12,595$2,62320.8%Interest expense(3,716)(3,109)(607)19.5%Other operating expenses(4,121)(3,684)(437)11.9%Income before taxes7,3815,8021,57927.2%Income tax expense566256310121.1%Net investment income6,8155,5461,26922.9%Net realized gain on investments before income tax28394189201.1%Net unrealized (depreciation) appreciation on investments, net of tax(4,369)948(5,317)(560.9)%Net increase in net assets from operations$2,729$6,588$(3,859)(58.6)%





Investment Income





Total investment income consisted of interest income, management fees, dividend income and other income for each applicable period. For the three months ended September 30, 2019 , we reported investment income of $15.2 million, a $2.6 million , or 20.8% , increase as compared to the three months ended September 30, 2018 . The increase was primarily due to a $2.0 million, or 21.7%, increase in interest income from our debt investments, which was a result of a 17.9% increase in the cost basis of our debt investments from $334.7 million to $394.5 million year over year.





Operating Expenses





Due to the nature of our business, the majority of our operating expenses are related to interest and fees on our borrowings, employee compensation (including both cash and share-based compensation) and general and administrative expenses.





Interest and Fees on our Borrowings





For the three months ended September 30, 2019 , our total interest expense was $3.7 million , an increase of $0.6 million as compared to the total interest expense of $3.1 million for the three months ended September 30, 2018 . The increase was primarily attributable to an increase of $53.8 million in average borrowings on our Credit Facility and an increase of $8.5 million in average borrowings related to the December 2022 Notes outstanding during the three months ended September 30, 2019 as compared to the three months ended September 30, 2018 . This increase was offset by a decrease in





70


---

Table of Contents





the weighted average interest rate on our Credit Facility from 5.42% to 5.00% during the three months ended September 30, 2018 and during the three months ended September 30, 2019 , respectively.





Salaries, General and Administrative Expenses





For the three months ended September 30, 2019 , our total employee compensation expense (including both cash and share-based compensation) remained flat at $2.4 million , as compared to the total employee compensation expense of for the three months ended September 30, 2018 . For the three months ended September 30, 2019 , our total general and administrative expense was $1.7 million , an increase of $0.5 million or 39.5% , as compared to the total general and administrative expense of $1.2 million for the three months ended September 30, 2018 . The increase was primarily due to the write off of deferred offering costs of approximately $0.5 million related to our previous registration statement on Form N-2 during the quarter ended September 30, 2019.





Net Investment Income





For the three months ended September 30, 2019 , income before taxes increased by $1.6 million , or 27.2% . Net investment income increased from the prior year period by $1.3 million , or 22.9% , to $6.8 million as a result of a $2.6 million increase in total investment income, offset by a $0.3 million  increase in income tax expense and a $0.6 million increase in interest expense.





Increase in Net Assets from Operations





During the three months ended September 30, 2019 , we recognized realized gains totaling $0.3 million , which consisted of gains on the full repayment of one non-control/non-affiliate investment and partial repayments on two non-control/non-affiliate investments and one affiliate investment.





In addition, during the three months ended September 30, 2019 , we recorded net unrealized depreciation on investments totaling $4.4 million , consisting primarily of net unrealized depreciation on our current portfolio of $3.6 million, the reversal of $0.3 million of net unrealized appreciation recognized in prior periods due to realized gains noted above, and net unrealized depreciation related to deferred tax associated with the Taxable Subsidiary of $0.5 million. Net unrealized depreciation on our current portfolio included unrealized gains on Vistar Media Inc. of $1.7 million, ITA Holdings Group, LLC of $1.7 million and Chandler Signs, LLC of $0.6 million, offset by unrealized losses on I-45 SLF LLC of $2.9 million, SIMR, LLC of $2.5 million and AAC Holdings, Inc. of $1.4 million. These unrealized gains and losses were due to changes in fair value based on the overall EBITDA performance and cash flows of each investment.





During the three months ended September 30, 2018 , we recognized realized gains totaling $0.1 million , which consisted of gains on the full repayment of one non-control/non-affiliate investments and the sale of one affiliate investment.





In addition, during the three months ended September 30, 2018 , we recorded net unrealized depreciation on investments totaling $0.9 million , consisting of net unrealized appreciation on our current portfolio of $0.9 million. Net unrealized appreciation on our current portfolio included unrealized gains on Vistar Media Inc. of $0.6 million, Deepwater Corrosion Services of $0.5 million and Alliance Sports Group, L.P. of $0.5 million, offset by unrealized losses on ITA Holdings Group, LLC of $0.7 million. These unrealized gains and losses were due to changes in fair value based on the overall EBITDA performance and cash flows of each investment.








71


---

Table of Contents





Comparison of six months ended September 30, 2019 and September 30, 2018





Six Months EndedSeptember 30,Net Change20192018Amount%(in thousands)Total investment income$31,017$23,702$7,31530.9%Interest expense(7,522)(5,482)(2,040)37.2%Other operating expenses(8,430)(7,422)(1,008)13.6%Income before taxes15,06510,7984,26739.5%Income tax expense89063525540.2%Net investment income14,17510,1634,01239.5%Net realized gain on investments before income tax1,50018,913(17,413)(92.1)%Net unrealized (depreciation) appreciation on investments, net of tax(6,233)(10,835)4,602(42.5)%Net increase in net assets from operations$9,442$18,241$(8,799)(48.2)%





Investment Income





Total investment income consisted of interest income, management fees, dividend income and other income for each applicable period. For the six months ended September 30, 2019 , we reported investment income of $31.0 million , a $7.3 million , or 30.9% , increase as compared to the six months ended September 30, 2018 . The increase was primarily due to a $5.7 million, or 33.8%, increase in interest income from our debt investments, which resulted from a 17.9% increase in the cost basis of our debt investments from $334.7 million to $394.5 million year over year.





Operating Expenses





Due to the nature of our business, the majority of our operating expenses are related to interest and fees on our borrowings, employee compensation (including both cash and share-based compensation) and general and administrative expenses.





Interest and Fees on our Borrowings





For the six months ended September 30, 2019 , our total interest expense was $7.5 million , an increase of $2.0 million as compared to the total interest expense of $5.5 million for the six months ended September 30, 2018 . The increase was primarily attributable to an increase of $71.0 million in average borrowings on our Credit Facility and an increase of $13.9 million in average borrowings related to the December 2022 Notes outstanding during the six months ended September 30, 2019 as compared to the six months ended September 30, 2018 . The increase also included the amortization of $0.2 million of the remaining debt issuance costs associated with the ATM debt distribution agreement. This increase was offset by a decrease in the weighted average interest rate on our Credit Facility from 5.31% to 5.08% during the six months ended September 30, 2018 and during the six months ended September 30, 2019 , respectively.





Salaries, General and Administrative Expenses





For the six months ended September 30, 2019 , our total employee compensation expense (including both cash and share-based compensation) was $5.3 million , an increase of $0.5 million or 8.7% , as compared to the total employee compensation expense of $4.8 million for the six months ended September 30, 2018 . The increase was primarily due to the incremental compensation costs related to the restricted stock award modification and an increase in headcount. For the six months ended September 30, 2019 , our total general and administrative expense was $3.2 million , an increase of $0.6 million or 22.6% , as compared to the total general and administrative expense of $2.6 million for the six months ended September 30, 2018 . The increase was primarily due to the write off of deferred offering costs of approximately $0.5 million related to our previous registration statement on Form N-2 during the quarter ended September 30, 2019.





72


---

Table of Contents





.





Net Investment Income





For the six months ended September 30, 2019 , income before taxes increased by $4.3 million , or 39.5% . Net investment income increased from the prior year period by $4.0 million , or 39.5% , to $14.2 million as a result of a $7.3 million increase in total investment income, offset by a $0.3 million  increase in income tax expense and a $2.0 million increase in interest expense.





Increase in Net Assets from Operations





During the six months ended September 30, 2019 , we recognized realized gains totaling $1.5 million , which consisted of gains on the full repayment of one non-control/non-affiliate and one control investment and partial repayments on nine non-control/non-affiliate investments and two affiliate investments.





In addition, during the six months ended September 30, 2019 , we recorded net unrealized depreciation on investments totaling $6.2 million , consisting primarily of net unrealized depreciation on our current portfolio of $3.6 million, the reversal of $2.0 million of net unrealized appreciation recognized in prior periods due to realized gains noted above, and net unrealized depreciation related to deferred tax associated with the Taxable Subsidiary of $0.6 million. Net unrealized depreciation on our current portfolio included unrealized gains on ITA Holdings Group, LLC of $3.1 million, Vistar Media Inc. of $3.4 million and Media Recovery, Inc. of $1.2 million, offset by unrealized losses on I-45 SLF LLC of $3.8 million, SIMR, LLC of $2.9 million and AAC Holdings, Inc. of $1.6 million. These unrealized gains and losses were due to changes in fair value based on the overall EBITDA performance and cash flows of each investment.





During the six months ended September 30, 2018 , we recognized realized gains totaling $18.9 million , which consisted of gains on the partial repayments of four non-control/non-affiliate investments, full repayments of three non-control/non-affiliate investments and the sale of one control and one affiliate investment.





In addition, during the six months ended September 30, 2018 , we recorded net unrealized depreciation on investments totaling $10.8 million , consisting of net unrealized appreciation on our current portfolio of $6.3 million, the reversal of $17.5 million of net unrealized appreciation recognized in prior periods due to realized gains noted above, and net unrealized appreciation related to deferred tax associated with the Taxable Subsidiary of $0.4 million. Net unrealized appreciation on our current portfolio included unrealized gains on Deepwater Corrosion Services, Inc. of $5.2 million and Media Recovery, Inc. of $1.7 million, offset by unrealized losses on ITA Holdings Group, LLC of $0.7 million. These unrealized gains and losses were due to changes in fair value based on the overall EBITDA performance and cash flows of each investment.











FINANCIAL LIQUIDITY AND CAPITAL RESOURCES





Management believes that the Company’s cash and cash equivalents, cash available from investments, and commitments under the Credit Facility are adequate to meet its needs for the next twelve months.





Cash Flows





For the six months ended September 30, 2019 , we experienced a net increase in cash and cash equivalents in the amount of $20.1 million . During that period, our operating activities used $1.4 million in cash, consisting primarily of new portfolio investments of $64.7 million , partially offset by $40.0 million from sales and repayments received from debt investments in portfolio companies and $7.3 million from sales and return of capital of equity investments in portfolio companies. In addition, our financing activities increased cash by $21.5 million , consisting primarily of proceeds from the October 2024 Notes of $63.7 million, as well as the Equity ATM Program of $8.9 million, partially offset by net repayments on our Credit Facility of $33.0 million and cash dividends paid in the amount of $17.6 million . At September 30, 2019 , the Company had cash and cash equivalents of approximately $30.0 million .








73


---

Table of Contents





For the six months ended September 30, 2018 , we experienced a net increase in cash and cash equivalents in the amount of $2.3 million . During that period, our operating activities used $78.1 million in cash, consisting primarily of new portfolio investments of $167.7 million , partially offset by $52.6 million of sales and repayments received from debt investments in portfolio companies and $24.9 million from sales and return of capital of equity investments in portfolio companies. In addition, our financing activities increased cash by $80.4 million , consisting primarily of proceeds from net borrowings under the Credit Facility of $87.0 million and proceeds from the December 2022 Notes of $18.1 million, partially offset by cash dividends paid in the amount of $26.2 million . At September 30, 2018 , the Company had cash and cash equivalents of approximately $10.2 million .





Financing Transactions





In accordance with the 1940 Act, with certain limitations, effective April 25, 2019, the Company is only allowed to borrow amounts such that its asset coverage (i.e., the ratio of assets less liabilities not represented by senior securities to senior securities such as borrowings), calculated pursuant to the 1940 Act, is at least 150% after such borrowing. The Board of Directors also approved a resolution which limits the Company’s issuance of senior securities such that the asset coverage ratio, taking into account any such issuance, would not be less than 166%, which became effective April 25, 2019. As of September 30, 2019 , the Company’s asset coverage was 231% .





Credit Facility





In August 2016, CSWC entered into a senior secured credit facility (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Facility”) to provide additional liquidity to support its investment and operational activities, which included total commitments of $100 million. The Credit Facility contained an accordion feature that allowed CSWC to increase the total commitments under the Credit Facility up to $150 million from new and existing lenders on the same terms and conditions as the existing commitments. In August 2017, we increased our total commitments by $15 million through adding an additional lender using the accordion feature.





On November 16, 2017, CSWC entered into Amendment No. 1 (the “Amendment”) to its Credit Facility. Prior to the Amendment, borrowings under the Credit Facility accrued interest on a per annum basis at a rate equal to the applicable LIBOR rate plus 3.25% with no LIBOR floor. CSWC paid unused commitment fees of 0.50% to 1.50% per annum, based on utilization, on the unused lender commitments under the Credit Facility. The Amendment (1) increased the total borrowing capacity under the Credit Facility to $180 million, with commitments from a diversified group of eight lenders, (2) increased the Credit Facility’s accordion feature that allows for an increase in total commitments of up to $250 million under the Credit Facility from new and existing lenders on the same terms and conditions as the existing commitments, (3) reduced the interest rate on borrowings from LIBOR plus 3.25% down to LIBOR plus 3.00%, with a further step-down to LIBOR plus 2.75% at the time the Company’s net worth exceeds $325 million, (4) reduced unused commitment fees from a utilization-based grid of 0.50% to 1.5% down to a range of 0.50% to 1.0% per annum, and (5) extended the Credit Facility’s revolving period that ended on August 30, 2019 through November 16, 2020. Additionally, the final maturity of the Credit Facility was extended from August 30, 2020 to November 16, 2021.   On April 16, 2018 and May 11, 2018, CSWC entered into Incremental Assumption Agreements, which increased the total commitments under the Credit Facility by $20 million and $10 million, respectively. The increases were executed in accordance with the accordion feature of the Credit Facility, increasing total commitments from $180 million to $210 million.





On December 21, 2018, CSWC entered into the Amended and Restated Senior Secured Revolving Credit Agreement (the "Credit Agreement"), and a related Amended and Restated Guarantee, Pledge and Security Agreement, to amend and restate its Credit Facility. The Credit Agreement (1) increased the total commitments by $60 million from $210 million to an aggregate total of $270 million, provided by a diversified group of nine lenders, (2) increased the Credit Facility's accordion feature to $350 million under the Credit Facility from new and existing lenders on the same terms and conditions as the existing commitments, (3) reduced the interest rate on borrowings from LIBOR plus 3.00% to LIBOR plus 2.50%, subject to certain conditions as outlined in the Credit Agreement, (4) reduced the minimum asset coverage with respect to senior securities representing indebtedness from 200% to 150% after the date on which such minimum asset coverage is permitted to be reduced by the Company under applicable law, and (5) extended the Credit Facility's revolving period from November 16, 2020 to December 21, 2022 and the final maturity was extended from November 16, 2021 to December 21, 2023.








74


---

Table of Contents





The Credit Agreement modified certain covenants in the Credit Facility, including: (1) to provide for a minimum senior coverage ratio of 2-to-1 (in addition to the asset coverage ratio noted below), (2) to increase the minimum obligors’ net worth test from $160 million to $180 million, (3) to reduce the minimum consolidated interest coverage ratio from 2.50-to-1 to 2.25-to-1 as of the last day of any fiscal quarter, and (4) to provide for the fact that the Company will not declare or pay a dividend or distribution in cash or other property unless immediately prior to and after giving effect thereto the Company's asset coverage ratio exceeds 150% (and certain other conditions are satisfied). The Credit Facility also contains certain affirmative and negative covenants, including but not limited to: (1) certain reporting requirements, (2) maintaining RIC and BDC status, (3) maintaining a minimum shareholders’ equity, (4) maintaining a minimum consolidated net worth, and (5) at any time the outstanding advances exceed 90% of the borrowing base, maintaining a minimum liquidity of not less than 10% of the covered debt amount.





On May 23, 2019, CSWC entered into an Incremental Assumption Agreement, which increased the total commitments under the Credit Facility, by $25 million. The increase was executed under the accordion feature of the Credit Facility and increased total commitments from $270 million to $295 million.





The Credit Facility also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, bankruptcy, and change of control, with customary cure and notice provisions. If the Company defaults on its obligations under the Credit Facility, the lenders may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests. There are no changes to the covenants or the events of default in the Credit Facility as a result of the Amendment.





The Credit Facility is secured by (1) substantially all of the present and future property and assets of the Company and the guarantors and (2) 100% of the equity interests in the Company’s wholly-owned subsidiaries. As of September 30, 2019 , substantially all of the Company’s assets were pledged as collateral for the Credit Facility.





At September 30, 2019 , CSWC had $108.0 million in borrowings outstanding under the Credit Facility. CSWC recognized interest expense related to the Credit Facility, including unused commitment fees and amortization of deferred loan costs of $2.3 million and $4.6 million , respectively, for the three and six months ended September 30, 2019 . For the three and six months ended September 30, 2018 , CSWC recognized interest expense of $1.8 million and $3.2 million, respectively.  The weighted average interest rate on the Credit Facility was 5.00% and 5.08% , respectively, for the three and six months ended September 30, 2019 . For the three and six months ended September 30, 2018 , the weighted average interest rate on the Credit Facility was 5.42% and 5.31%, respectively. Average borrowings for the three and six months ended September 30, 2019 were $156.3 million and $151.9 million , respectively. For the three and six months ended September 30, 2018 , average borrowings were $102.5 million and $80.9 million, respectively. As of September 30, 2019 , CSWC was in compliance with all financial covenants under the Credit Facility.





December 2022 Notes





In December 2017, the Company issued $57.5 million in aggregate principal amount, including the underwriters’ full exercise of their option to purchase additional principal amounts to cover over-allotments, of 5.95% Notes due 2022 (the “December 2022 Notes”). The December 2022 Notes mature on December 15, 2022 and may be redeemed in whole or in part at any time, or from time to time, at the Company’s option on or after December 15, 2019. The December 2022 Notes bear interest at a rate of 5.95% per year, payable quarterly on March 15, June 15, September 15 and December 15 of each year, beginning on March 15, 2018. The December 2022 Notes are an unsecured obligation, rank pari passu with our other outstanding and future unsecured unsubordinated indebtedness and are effectively subordinated to all of our existing and future secured indebtedness, including borrowings under our Credit Facility.





On June 11, 2018, the Company entered into an "At-The-Market" ("ATM") debt distribution agreement, pursuant to which it may offer for sale, from time to time, up to $50 million in aggregate principal amount of December 2022 Notes through B. Riley FBR, Inc., acting as its sales agent (the “2022 Notes Agent”). Sales of the December 2022 Notes may be made in negotiated transactions or transactions that are deemed to be "at the market offerings" as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on The Nasdaq Global Select Market, or similar securities exchanges or sales made through a market maker other than on an exchange at prices related to prevailing market prices or at negotiated prices.








75


---

Table of Contents





The 2022 Notes Agent receives a commission from the Company equal to up to 2% of the gross sales of any December 2022 Notes sold through the 2022 Notes Agent under the debt distribution agreement. The 2022 Notes Agent is not required to sell any specific principal amount of December 2022 Notes, but will use its commercially reasonable efforts consistent with its sales and trading practices to sell the December 2022 Notes. The December 2022 Notes trade “flat,” which means that purchasers in the secondary market will not pay, and sellers will not receive, any accrued and unpaid interest on the December 2022 Notes that is not reflected in the trading price.





During the six months ended September 30, 2019 , the Company did not sell any December 2022 Notes. The Company has no current intention of issuing additional December 2022 Notes under this ATM debt distribution agreement. Therefore, during the three months ended June 30, 2019, the Company amortized $0.2 million of the remaining debt issuance costs associated with the ATM debt distribution agreement, which is included in interest expense in the Consolidated Statement of Operations.





All issuances of December 2022 Notes rank equally in right of payment and form a single series of notes.





As of September 30, 2019 , the carrying amount of the December 2022 Notes was $75.6 million on an aggregate principal amount of $77.1 million at a weighted average effective yield of 5.93%. As of September 30, 2019 , the fair value of the December 2022 Notes was $80.5 million . The fair value is based on the closing price of the security on The Nasdaq Global Select Market, which is a Level 1 input under ASC 820. The Company recognized interest expense related to the December 2022 Notes, including amortization of deferred issuance costs of $1.3 million and $2.8 million , respectively, for the three and six months ended September 30, 2019 . For the three and six months ended September 30, 2018 , the Company recognized interest expense of $1.2 million and $2.2 million, respectively. Average borrowings for both the three and six months ended September 30, 2019 were $77.1 million . For the three and six months ended September 30, 2018 , average borrowings were $68.6 and $63.2 million, respectively.





The indenture governing the December 2022 Notes contains certain covenants including but not limited to (i) a requirement that the Company comply with the asset coverage requirement of Section 61 of the 1940 Act or any successor provisions thereto, after giving effect to any exemptive relief granted to the Company by the SEC, (ii) a requirement, subject to limited exception, that the Company will not declare any cash dividend, or declare any other cash distribution, upon a class of its capital stock, or purchase any such capital stock, unless, in every such case, at the time of the declaration of any such dividend or distribution, or at the time of any such purchase, the Company has the minimum asset coverage required pursuant to Section 61 of the 1940 Act, or any successor provision thereto, after deducting the amount of such dividend, distribution or purchase price, as the case may be, giving effect to any exemptive relief granted to the Company by the SEC and (iii) a requirement to provide financial information to the holders of the December 2022 Notes and the trustee under the indenture if the Company should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). The indenture and supplement relating to the December 2022 Notes also provides for customary events of default. As of September 30, 2019 , the Company was in compliance with all covenants of the December 2022 Notes.





October 2024 Notes





In September 2019, the Company issued $65.0 million in aggregate principal amount of 5.375% Notes due 2024 (the “Existing October 2024 Notes”). Subsequent to quarter end, on October 8, 2019, the Company issued an additional $10.0 million in aggregate principal amount of the October 2024 Notes (the "Additional October 2024 Notes" together with the Existing October 2024 Notes, the "October 2024 Notes"). The Additional October 2024 Notes are being treated as a single series with the Existing October 2024 Notes under the indenture and have the same terms as the Existing October 2024 Notes. The October 2024 Notes mature on October 1, 2024 and may be redeemed in whole or in part at any time prior to July 1, 2024, at par plus a “make-whole” premium, and thereafter at par. The October 2024 Notes bear interest at a rate of 5.375% per year, payable semi-annually on April 1 and October 1 of each year, beginning on April 1, 2020. The October 2024 Notes are the direct unsecured obligations of the Company and rank pari passu with our other outstanding and future unsecured unsubordinated indebtedness and are effectively subordinated to all of our existing and future secured indebtedness, including borrowings under our Credit Facility.





As of September 30, 2019 , the carrying amount of the October 2024 Notes was $63.6 million on an aggregate principal amount of $65.0 million at a weighted average effective yield of 5.375%. As of September 30, 2019 , the fair value





76


---

Table of Contents





of the October 2024 Notes was $65.2 million . This is a Level 3 fair value measurement under ASC 820 based on a valuation model using a discounted cash flow analysis. The Company recognized interest expense related to the October 2024 Notes, including amortization of deferred issuance costs, of $0.1 million for both the three and six months ended September 30, 2019 . Average borrowings for the three and six months ended September 30, 2019 were $2.8 million and $1.4 million, respectively.





The indenture governing the October 2024 Notes contains certain covenants, including certain covenants requiring the Company to comply with Section 18(a)(1)(A) as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions, whether or not the Company continues to be subject to such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to the Company by the SEC, and to provide financial information to the holders of the October 2024 Notes and the trustee under the indenture if the Company is no longer subject to the reporting requirements under the Exchange Act. These covenants are subject to important limitations and exceptions that are described in the indenture and the second supplemental indenture relating to the October 2024 Notes.





In addition, holders of the Notes can require the Company to repurchase some or all of the October 2024 Notes at a purchase price equal to 100% of their principal amount, plus accrued and unpaid interest to, but not including, the repurchase date upon the occurrence of a “Change of Control Repurchase Event,” as defined in the second supplemental indenture relating to the October 2024 Notes.





Equity Capital Activities





In January 2016, our board of directors approved a share repurchase program authorizing us to repurchase up to $10 million in the aggregate of our outstanding common stock in the open market at certain thresholds below our net asset value per share, in accordance with Rules 10b-18 under the Exchange Act. During the six months ended September 30, 2019 , the Company did not repurchase any shares of the Company's common stock under the share repurchase program. Cumulative to date, we have repurchased a total of 46,363 shares of our common stock in the open market under the stock repurchase program, at an average price of $16.67, including commissions paid, leaving approximately $9.2 million available for additional repurchases under the program.





On March 4, 2019, the Company entered into separate equity distribution agreements with certain sales agents pursuant to which we may offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $50,000,000 (the "Equity ATM Program"). During the three months ended September 30, 2019 , the Company sold 231,272 shares of its common stock under the Equity ATM Program at a weighted-average price of $21.62 per share, raising $5.0 million of gross proceeds. Net proceeds were $4.9 million after commissions to the sales agents on shares sold. During the six months ended September 30, 2019 , the Company sold 426,821 shares of its common stock under the Equity ATM Program at a weighted-average price of $21.64 per share, raising $9.2 million of gross proceeds. Net proceeds were $9.1 million after commissions to the sales agents on shares sold. Cumulative to date, the Company has sold 690,477 shares of its common stock under the Equity ATM Program at a weighted-average price of $21.57, raising $14.9 million of gross proceeds.





On August 1, 2019, after receiving the requisite shareholder approval, the Company filed an amendment to its Amended and Restated Articles of Incorporation to increase the amount of authorized shares of common stock from 25,000,000 to 40,000,000.





We anticipate that we will continue to fund our investment activities through existing cash and cash equivalents,  cash flows generated through our ongoing operating activities, utilization of available borrowings under our Credit Facility and future issuances of debt and equity on terms we believe are favorable to the Company and our shareholders. Our primary uses of funds will be investments in portfolio companies and operating expenses.





In order to satisfy the Internal Revenue Code requirements applicable to a RIC, we intend to distribute to our stockholders, after consideration and application of our ability under the Internal Revenue Code to carry forward certain excess undistributed taxable income from one tax year into the next tax year, substantially all of our taxable income.








77


---




Table of Contents





CONTRACTUAL OBLIGATIONS





As shown below, we had the following contractual obligations as of September 30, 2019 .





Payments Due By Period(in thousands)TotalLess than1-3 Years3-5 YearsMore ThanContractual Obligations1 Year5 YearsOperating lease obligations$645$261$384$—$—Credit Facility (1)131,1305,49010,950114,690—December 2022 Notes (2)92,0784,6669,30778,105—October 2024 Notes (2)82,7701,8157,0857,09466,776$306,623$12,232$27,726$199,889$66,776





|    |                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amounts include interest payments calculated at an average rate of5.00%of outstanding credit facility borrowings, which were$108.0 millionas ofSeptember 30, 2019.

|    |                            
|--- | ---------------------------
|(2) | Includes interest payments.







OFF-BALANCE SHEET ARRANGEMENTS





We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and fund equity capital and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet.





At September 30, 2019  and  March 31, 2019 , we had a total of approximately  $16.7 million  and  $17.7 million , respectively, in currently unfunded commitments (as discussed in Note 10 to the Consolidated Financial Statements). Included within the total unfunded commitments as of  September 30, 2019  were commitments to issue  letters of credit through a financial intermediary on behalf of certain portfolio companies. As of September 30, 2019 , we had $3.4 million in letters of credit issued and outstanding under these commitments on behalf of the portfolio companies. For the letters of credit issued and outstanding, we would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations.  Of these letters of credit, $3.4 million expire in May 2020. As of September 30, 2019 , none of the letters of credit issued and outstanding were recorded as a liability on the Company's balance sheet as such letters of credit are considered in the valuation of the investments in the portfolio company.





The Company believes its assets will provide adequate coverage to satisfy these commitments. As of September 30, 2019 , the Company had cash and cash equivalents of $30.0 million and $183.6 million in available borrowings under the Credit Facility.








|        |                                                           
|------- | ----------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures about Market Risk




We are subject to market risk. Market risk includes risk that arise from changes in interest rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The prices of securities held by us may decline in response to certain events, including those directly involving the companies in which we invest; conditions affecting the general economy; overall market changes; legislative reform; local, regional, national or global political, social or economic instability; and interest rate fluctuations.





Interest Rate Risk





We are subject to interest rate risk. Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in re-pricing internals between our assets and





78


---

Table of Contents





liabilities and the effect that interest rates may have on our cash flows. Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest earning assets and our interest expense incurred in connection with our interest-bearing liabilities. Changes in interest rates can also affect, among other things, our ability to acquire and originate loans and securities and the value of our investment portfolio. Our net investment income is affected by fluctuations in various interest rates including LIBOR and prime rates. However, the interest rates on our December 2022 and October 2024 Notes are fixed for the life of such debt. Our risk management systems and procedures are designed to identify and analyze our risk, to set appropriate policies and limits and to continually monitor these risks. We regularly measure exposure to interest rate risk and determine whether or not any hedging transactions are necessary to mitigate exposure to changes in interest rates. As of September 30, 2019 , we were not a party to any hedging arrangements.





As of September 30, 2019 , approximately 94.9% of our debt investment portfolio (at fair value) bore interest at floating rates, 88.8% of which were subject to contractual minimum interest rates. A hypothetical 100 basis point increase in interest rates could increase our net investment income by a maximum of $3.2 million , or $0.18 per share, on an annual basis. A hypothetical 100 basis point decrease in interest rates could decrease our net investment income by a maximum of $2.4 million , or $0.13 per share, on an annual basis. Our Credit Facility bears interest on a per annum basis equal to the applicable LIBOR rate plus 2.50%. We pay unused commitment fees of 0.50% to 1.00% per annum, based on utilization.





Although we believe that the foregoing analysis is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets in our portfolio. It also does not adjust for other business developments, including future borrowings that could affect the net increase in net assets resulting from operations, or net income. It also does not assume any repayments from borrowers. Accordingly, no assurances can be given that actual results would not differ materially from the statement above.





Because we currently borrow, and plan to borrow in the future, money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a significant change in interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income if there is not a corresponding increase in interest income generated by our investment portfolio.











79


---




Table of Contents





|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures




As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 of the Securities Exchange Act of 1934). Based upon this evaluation, management, including our President and Chief Executive Officer and our Chief Financial Officer, concluded that our current disclosure controls and procedures are effective as of September 30, 2019 .





During the three months ended September 30, 2019 , there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.








80


---




Table of Contents





PART II. – OTHER INFORMATION








|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings




We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. We have no currently pending material legal proceedings to which we are party or to which any of our assets is subject.








|         |             
|-------- | ------------
|Item 1A. | Risk Factors




Investing in our common stock involves a number of significant risks. There have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019 that we filed with the SEC on June 4, 2019.








|        |                                                             
|------- | ------------------------------------------------------------
|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.




Sales of Unregistered Securities





None.





Issuer Purchases of Equity Securities





On January 25, 2016, our Board of Directors approved a share repurchase program authorizing us to repurchase up to $10 million of our outstanding common stock in the open market at certain thresholds below our net asset value per share, in accordance with guidelines specified in Rules 10b5-1(c)(1)(i)(B) and 10b-18 under the Securities Exchange Act of 1934. On March 1, 2016, we entered into a share repurchase agreement, which became effective immediately and shall terminate on the earliest of: (1) the date on which a total of $10 million worth of common shares have been purchased under the share repurchase program; (2) the date on which the terms set forth in the purchase instructions have been met; or (3) the date that is one trading day after the date on which insider notifies broker in writing that this share repurchase agreement shall terminate. During the six months ended September 30, 2019 , the Company did not repurchase any shares under the share repurchase program. As of September 30, 2019 , the Company has approximately $9.2 million available for additional repurchases under the share repurchase program.








|        |                                 
|------- | --------------------------------
|Item 3. | Defaults Upon Senior Securities.




None.








|        |                         
|------- | ------------------------
|Item 4. | Mine Safety Disclosures.




None.








|        |                   
|------- | ------------------
|Item 5. | Other Information.




None.








81


---




Table of Contents





Item 6.          Exhibits





Exhibit No.Description31.1*Certification of President and Chief Executive Officer required by Rule 13a-14(a) of the Exchange Act.31.2*Certification of Chief Financial Officer required by Rule 13a-14(a) of the Exchange Act.32.1*^Certification of President and Chief Executive Officer required by Rule 13a-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code.32.2*^Certification of Chief Financial Officer required by Rule 13a-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code.





*    Filed herewith.


|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|^ | The certifications, attached as Exhibits 32.1 and 32.2 accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, shall not be deemed “filed” by the registrant for purposes of Section 18 of the Exchange Act, and are not to be incorporated by reference into any of the registrant’s filings under the Securities Act or the Exchange Act, whether made before or after the date of this Quarterly Report, irrespective of any general incorporation language contained in any such filing.







82


---




Table of Contents





SIGNATURES





Pursuant to the requirements the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





CAPITAL SOUTHWEST CORPORATIONNovember 5, 2019By:/s/ Bowen S. DiehlDateBowen S. DiehlPresident and Chief Executive OfficerNovember 5, 2019By:/s/ Michael S. SarnerDateMichael S. SarnerChief Financial Officer, Secretary and Treasurer











83