10-Q 1 cnl9301910-q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

__________________________________________________

FORM 10-Q

__________________________________________________

☒	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

Commission file number: 333-222986

_________________________________________________________

CNL STRATEGIC CAPITAL, LLC

(Exact name of registrant as specified in its charter)

_________________________________________________________

Delaware		32-0503849
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

CNL Center at City Commons 450 South Orange Avenue Orlando, Florida		32801
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (407) 650-1000

______________________________________________________ 

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
N/A	N/A	N/A

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  ☒    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 filer	☐
Non-accelerated filer		☒		Smaller reporting company	☐
				Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended 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   ☒

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As of November 13, 2019, the Company had 3,716,838 Class FA shares, 605,867 Class A shares, 133,964 Class T shares, 283,423 Class D shares and 850,802 Class I shares outstanding.

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Table of Contents

INDEX

		PAGE
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):	2
	Condensed Consolidated Statements of Assets and Liabilities	2
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Statements of Changes in Net Assets	4
	Condensed Consolidated Statements of Cash Flows	6
	Condensed Consolidated Schedules of Investments	7
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45
Item 4.	Controls and Procedures	46
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	49
Exhibit Index		50
Signatures		51

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PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

CNL STRATEGIC CAPITAL, LLC

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

	September 30, 2019 (Unaudited)				December 31, 2018
Assets
Investments at fair value (amortized cost of $121,274,339 and $76,774,339 as of September 30, 2019 and December 31, 2018, respectively)	$	130,270,000			$	82,500,000
Cash	15,852,862				21,667,867
Deferred offering expenses	10,254				14,434
Net due from related parties (Note 5)	338,591				—
Prepaid expenses and other assets	156,415				70,833
Total assets	146,628,122				104,253,134
Liabilities
Accounts payable and other accrued expenses	453,839				282,856
Net due to related party (Note 5)	—				782,282
Distributions payable	531,486				358,186
Payable for shares repurchased	337,156				—
Payable for investments purchased	126,900				—
Total liabilities	1,449,381				1,423,324
Commitments and contingencies (Note 10)
Members’ Equity (Net Assets)
Preferred shares, $0.001 par value, 50,000,000 shares authorized and unissued	—				—
Class FA Common shares, $0.001 par value, 7,400,000 and 3,400,000 shares authorized, respectively; 3,617,833 and 3,266,260 shares issued, respectively; 3,599,033 and 3,266,260 shares outstanding, respectively	3,599				3,266
Class A Common shares, $0.001 par value, 94,660,000 shares authorized; 576,523 and 192,388 shares issued, respectively; 576,279 and 192,388 shares outstanding, respectively	576				192
Class T Common shares, $0.001 par value, 658,620,000 and 662,620,000 shares authorized, respectively; 96,863 and 31,452 shares issued and outstanding, respectively	97				31
Class D Common shares, $0.001 par value, 94,660,000 shares authorized; 265,162 and 122,889 shares issued and outstanding, respectively	265				123
Class I Common shares, $0.001 par value, 94,660,000 shares authorized; 812,455 and 249,526 shares issued, respectively; 807,710 and 249,526 shares outstanding, respectively	808				250
Capital in excess of par value	136,855,022				97,229,217
Distributable earnings	8,318,374				5,596,731
Total Members’ Equity	$	145,178,741			$	102,829,810
Net assets, Class FA shares	$	98,389,336			$	87,061,758
Net assets, Class A shares	15,411,926				5,086,607
Net assets, Class T shares	2,600,195				834,576
Net assets, Class D shares	7,009,236				3,222,865
Net assets, Class I shares	21,768,048				6,624,004
Total Members’ Equity	$	145,178,741			$	102,829,810

See notes to condensed consolidated financial statements.

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CNL STRATEGIC CAPITAL, LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Quarter Ended September 30, 2019				Quarter Ended September 30, 2018				Nine Months Ended September 30, 2019				Period from February 7, 2018 (Commencement of Operations) to September 30, 2018
Investment Income
Interest income	$	1,688,852			$	1,292,957			$	4,489,554			$	3,284,236
Dividend income	405,439				658,067				1,217,686				1,418,990
Total investment income	2,094,291				1,951,024				5,707,240				4,703,226
Operating Expenses
Organization and offering expenses	168,395				210,288				490,399				749,082
Base management fees	355,893				211,025				862,659				494,561
Total return incentive fees	64,005				453,874				560,665				762,609
Professional services	212,157				140,708				622,163				373,238
Pursuit costs	76,052				—				76,052				—
Director fees and expenses	56,461				51,130				167,540				133,410
General and administrative expenses	39,513				16,029				97,824				109,839
Custodian and accounting fees	36,420				32,097				160,387				96,530
Insurance expense	64,057				46,966				157,081				75,043
Distribution and shareholder servicing fees	12,761				1,781				28,578				1,833
Total operating expenses	1,085,714				1,163,898				3,223,348				2,796,145
Expense support	(264,325		)		(234,565		)		(1,090,845		)		(421,923		)
Net expenses	821,389				929,333				2,132,503				2,374,222
Net investment income	1,272,902				1,021,691				3,574,737				2,329,004
Net change in unrealized appreciation on investments	819,000				3,317,000				3,270,000				4,769,873
Net increase in net assets resulting from operations	$	2,091,902			$	4,338,691			$	6,844,737			$	7,098,877
Common shares per share information:
Net investment income	$	0.26			$	0.30			$	0.81			$	0.70
Net increase in net assets resulting from operations	$	0.42			$	1.28			$	1.54			$	2.14
Weighted average number of common shares outstanding	4,930,620				3,386,842				4,438,246				3,320,882

See notes to condensed consolidated financial statements.

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CNL STRATEGIC CAPITAL, LLC

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2019

(UNAUDITED)

	Common Shares							Capital in Excess of Par Value				Distributable Earnings				Total Net Assets
	Number of Shares			Par Value
Balance as of June 30, 2019	4,706,690			$	4,707			$	119,678,947			$	7,753,336			$	127,436,990
Net investment income	—			—				—				1,272,902				1,272,902
Net change in unrealized appreciation on investments	—			—				—				819,000				819,000
Distributions to shareholders	—			—				—				(1,526,864		)		(1,526,864		)
Issuance of common shares through the Offerings	642,173			642				17,283,850				—				17,284,492
Issuance of common shares through distribution reinvestment plan	8,584			9				229,368				—				229,377
Repurchase of common shares pursuant to share repurchase program	(12,400	)		(13		)		(337,143		)		—				(337,156		)
Balance as of September 30, 2019	5,345,047			$	5,345			$	136,855,022			$	8,318,374			$	145,178,741

	Common Shares							Capital in Excess of Par Value				Distributable Earnings				Total Net Assets
	Number of Shares			Par Value
Balance as of December 31, 2018	3,862,515			$	3,862			$	97,229,217			$	5,596,731			$	102,829,810
Net investment income	—			—				—				3,574,737				3,574,737
Net change in unrealized appreciation on investments	—			—				—				3,270,000				3,270,000
Distributions to shareholders	—			—				—				(4,123,094		)		(4,123,094		)
Issuance of common shares through the Offerings	1,487,448			1,488				39,769,837				—				39,771,325
Issuance of common shares through distribution reinvestment plan	18,873			19				501,138				—				501,157
Repurchase of common shares pursuant to share repurchase program	(23,789	)		(24		)		(645,170		)		—				(645,194		)
Balance as of September 30, 2019	5,345,047			$	5,345			$	136,855,022			$	8,318,374			$	145,178,741

See notes to condensed consolidated financial statements.

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CNL STRATEGIC CAPITAL, LLC

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

FOR THE QUARTER ENDED SEPTEMBER 30, 2018 AND FOR THE PERIOD FROM FEBRUARY 7, 2018 TO SEPTEMBER 30, 2018

(UNAUDITED)

	Common Shares							Capital in Excess of Par Value				Distributable Earnings				Total Net Assets
	Number of Shares			Par Value
Balance as of June 30, 2018	3,309,921			$	3,310			$	82,751,660			$	1,430,755			$	84,185,725
Net investment income	—			—				—				1,021,691				1,021,691
Net change in unrealized appreciation on investments	—			—				—				3,317,000				3,317,000
Distributions to shareholders	—			—				—				(1,059,027		)		(1,059,027		)
Issuance of common shares through the Offerings	209,701			209				5,442,665				—				5,442,874
Issuance of common shares through distribution reinvestment plan	1,115			1				28,895				—				28,896
Balance as of September 30, 2018	3,520,737			$	3,520			$	88,223,220			$	4,710,419			$	92,937,159

	Common Shares							Capital in Excess of Par Value				Distributable Earnings				Total Net Assets
	Number of Shares			Par Value
Balance as of February 7, 2018	8,000			$	8			$	199,992			$	—			$	200,000
Net investment income	—			—				—				2,329,004				2,329,004
Net change in unrealized appreciation on investments	—			—				—				4,769,873				4,769,873
Distributions to shareholders	—			—				—				(2,388,458		)		(2,388,458		)
Issuance of common shares through the Offerings	3,511,030			3,511				87,979,476				—				87,982,987
Issuance of common shares through distribution reinvestment plan	1,707			1				43,752				—				43,753
Balance as of September 30, 2018	3,520,737			$	3,520			$	88,223,220			$	4,710,419			$	92,937,159

See notes to condensed consolidated financial statements.

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CNL STRATEGIC CAPITAL, LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended September 30, 2019				Period from February 7, 2018 (Commencement of Operations) to September 30, 2018
Operating Activities:
Net increase in net assets resulting from operations	$	6,844,737			$	7,098,877
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:
Purchases of investments	(44,500,000		)		(74,374,339		)
Net change in unrealized appreciation on investments	(3,270,000		)		(4,769,873		)
Amortization of deferred offering expenses	17,630				624,972
Amortization of deferred financing costs	3,801				—
(Decrease) increase in net due to related parties	(1,120,873		)		487,514
Increase in payable for investments purchased	126,900				—
Increase in accounts payable and other accrued expenses	170,983				335,042
Increase in deferred offering expenses	(13,450		)		(682,964		)
Increase in prepaid expenses and other assets	(74,933		)		(111,798		)
Net cash used in operating activities	(41,815,205		)		(71,392,569		)
Financing Activities:
Proceeds from issuance of common shares	39,771,325				85,582,987
Shares repurchased	(308,038		)		—
Distributions paid, net of distributions reinvested	(3,448,637		)		(2,010,933		)
Deferred financing costs	(14,450		)		—
Net cash provided by financing activities	36,000,200				83,572,054
Net (decrease) increase in cash	(5,815,005		)		12,179,485
Cash, beginning of period	21,667,867				199,683
Cash, end of period	$	15,852,862			$	12,379,168
Supplemental disclosure of cash flow information and non-cash financing activities:
Distributions reinvested	$	501,157			$	43,753
Amounts incurred but not paid (including amounts due to related parties):
Distributions payable	$	531,486			$	333,772
Offering costs	$	44,084			$	20,618
Payable for shares repurchased	$	337,156			$	—
Non-cash contribution from an affiliate of the Sub-Manager	$	—			$	2,400,000
Non-cash purchase of investments	$	—			$	(2,400,000	)

See notes to condensed consolidated financial statements.

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CNL STRATEGIC CAPITAL, LLC

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

AS OF SEPTEMBER 30, 2019

(UNAUDITED)

Company (1)		Industry		Interest Rate		Maturity Date		Principal Amount / No. Shares				Cost				Fair Value
Senior Secured Note – First Lien–19.2%
Auriemma U.S. Roundtables		Information Services and Advisory Solutions		16.0%		8/1/2025		$	12,114,338			$	12,114,338			$	12,114,338
Polyform Products, Co.		Hobby Goods and Supplies		16.0%		8/7/2023		15,700,000				15,700,000				15,700,000
Total Senior Secured Notes – First Lien												27,814,338				27,814,338
Senior Secured Note – Second Lien–10.3%
Lawn Doctor		Commercial and Professional Services		16.0%		8/7/2023		15,000,000				15,000,000				15,000,000
Total Senior Secured Notes												$	42,814,338			$	42,814,338
Equity–60.2%
Auriemma U.S. Roundtables	(2)	Information Services and Advisory Solutions						32,386				$	32,385,662			$	32,385,662
Lawn Doctor	(2)	Commercial and Professional Services						7,746				30,475,551				39,470,000
Polyform Products, Co.	(2)	Hobby Goods and Supplies						10,820				15,598,788				15,600,000
Total Equity												$	78,460,001			$	87,455,662
TOTAL INVESTMENTS–89.7%	(3)											$	121,274,339			$	130,270,000
OTHER ASSETS IN EXCESS OF LIABILITIES–10.3%																14,908,741
NET ASSETS–100.0%																$	145,178,741

FOOTNOTES:

(1)	Security may be an obligation of one or more entities affiliated with the named company.

(2)	As of September 30, 2019, the Company owned a controlling interest in this portfolio company.

(3)	As of September 30, 2019, the aggregate gross and net unrealized appreciation for all securities in which there was an excess of value over tax cost was approximately $10.5 million. The aggregate cost of securities for federal income tax purposes was approximately $119.8 million.

See notes to condensed consolidated financial statements.

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CNL STRATEGIC CAPITAL, LLC

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

AS OF DECEMBER 31, 2018

 

Company (1)		Industry		Interest Rate		Maturity Date		Principal Amount / No. Shares				Cost				Fair Value
Senior Secured Note – First Lien–15.2%
Polyform Products, Co.		Hobby Goods and Supplies		16.0%		8/7/2023		$	15,700,000			$	15,700,000			$	15,700,000
Senior Secured Note – Second Lien–14.6%
Lawn Doctor		Commercial and Professional Services		16.0%		8/7/2023		15,000,000				15,000,000				15,000,000
Total Senior Secured Notes												$	30,700,000			$	30,700,000
Equity–50.4%
Lawn Doctor	(2)	Commercial and Professional Services						7,746				$	30,475,551			$	36,200,000
Polyform Products, Co.	(2)	Hobby Goods and Supplies						10,820				15,598,788				15,600,000
Total Equity												$	46,074,339			$	51,800,000
TOTAL INVESTMENTS–80.2%	(3)											$	76,774,339			$	82,500,000
OTHER ASSETS IN EXCESS OF LIABILITIES–19.8%																20,329,810
NET ASSETS–100.0%																$	102,829,810

FOOTNOTES:

(1)	Security may be an obligation of one or more entities affiliated with the named company.

(2)	As of December 31, 2018, the Company owned a controlling interest in this portfolio company.

(3)	As of December 31, 2018, the aggregate gross and net unrealized appreciation for all securities in which there was an excess of value over tax cost was approximately $6.6 million. The aggregate cost of securities for federal income tax purposes was approximately $75.9 million.

See notes to condensed consolidated financial statements.

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CNL STRATEGIC CAPITAL, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019

1. Principal Business and Organization

CNL Strategic Capital, LLC (the “Company”) is a limited liability company that primarily seeks to acquire and grow durable, middle-market U.S. businesses. The Company is externally managed by CNL Strategic Capital Management, LLC (the “Manager”) and sub-managed by Levine Leichtman Strategic Capital, LLC (the “Sub-Manager”). The Manager is responsible for the overall management of the Company’s activities and the Sub-Manager is responsible for the day-to-day management of the Company’s assets. Each of the Manager and the Sub-Manager are registered as an investment adviser under the Investment Advisers Act of 1940, as amended. The Company conducts and intends to continue its operations so that the Company and each of its subsidiaries do not fall within, or are excluded from the definition of an “investment company” under the Investment Company Act of 1940, as amended (the “Investment Company Act”).

The Company intends to target businesses that are highly cash flow generative with annual revenues primarily between $25 million and $250 million and whose management teams seek an ownership stake in the company. The Company’s business strategy is to acquire controlling equity interests in combination with debt positions and in doing so, provide long-term capital appreciation and current income while protecting invested capital. In addition, and to a lesser extent, the Company may acquire other debt and minority equity positions. The Company may also acquire various types of debt in the secondary market including secured and senior unsecured debt and syndicated senior secured corporate loans of U.S. and, to a lesser extent, non-U.S. corporations, partnerships, limited liability companies and other business entities. The Company may also co-invest with other vehicles managed by the Sub-Manager or their affiliates to acquire minority equity positions and debt positions in a co-investment capacity. The Company expects that these positions will comprise a minority of its total assets.

On February 7, 2018, the Company commenced operations when it met the minimum offering requirement of $80 million in Class FA limited liability company interests (the “Class FA shares” or the “Founder shares”) offered through a private offering (the “2018 Private Offering”) and issued approximately 3.3 million shares of Class FA shares for aggregate gross proceeds of approximately $81.7 million. The 2018 Private Offering was closed in February 2018.

In October 2016, the Company confidentially submitted a registration statement on Form S-1 (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) in connection with the proposed offering of shares of its limited liability company interests (the “Public Offering”). The Registration Statement for the Public Offering was declared effective by the SEC on March 7, 2018. Through its Public Offering, the Company is offering, in any combination, four classes of shares: Class A shares, Class T shares, Class D shares and Class I shares (collectively, the “Non-founder shares” and together with the Founder shares, the “Shares”).

In April and July 2019, the Company launched separate Class FA private offerings of up to $50 million each of Class FA shares (the “Class FA Private Offering” and the “Follow-On Class FA Private Offering”, respectively; collectively referred to as the “Class FA Private Offerings” and together with the Public Offering, the “Offerings”) pursuant to Rule 506(c) under Regulation D of the Securities Act of 1933, as amended (the “Securities Act”). CNL Securities Corp., an affiliate of the Manager, serves as the placement agent for each Class FA Private Offering.

The Class FA Private Offerings are offered on a best efforts basis, which means that the Placement Agent uses its best efforts but is not required to sell any specific amount of shares. The minimum offering requirement of the Class FA Private Offering was $2.0 million in Class FA shares. In June 2019, the Company met the minimum offering amount. There is no selling commission or placement agent fee for the sale of Class FA shares sold in the Class FA Private Offering. Under the Follow-On Class FA Private Offering the Company pays the Placement Agent a selling commission of up to 5.5% and placement agent fee of up to 3.0% of the sale price for each Class FA share sold in the Follow-On Class FA Private Offering.

Subject to requirements under the Securities Act and the applicable state securities laws of any jurisdiction, the Company intends to conduct each of the Class FA Private Offerings until the earlier of: (i) the date the Company has sold the maximum offering amount of each respective Class FA Private Offering or (ii) December 31, 2019.

In conjunction with the launch of the Class FA Private Offering, the Company’s board of directors reclassified 4,000,000 authorized shares of Class T shares to Class FA shares, resulting in shares authorized of 7,400,000 Class FA shares, 94,660,000 Class A shares, 658,620,000 Class T shares, 94,660,000 Class D shares and 94,660,000 Class I shares.

See Note 7. “Capital Transactions” and Note 12. “Subsequent Events” for additional information related to the Offerings.

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CNL STRATEGIC CAPITAL, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019

2. Significant Accounting Policies

Basis of Presentation

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as contained in the Financial Accounting Standards Board Accounting Standards Codification (the “Codification” or “ASC”), which requires the use of estimates, assumptions and the exercise of subjective judgment as to future uncertainties. In the opinion of management, the condensed consolidated financial statements reflect all adjustments that are of a normal recurring nature and necessary for the fair presentation of financial results as of and for the periods presented.

Although the Company is organized and intends to conduct its business in a manner so that it is not required to register as an investment company under the Investment Company Act, its financial statements are prepared using the specialized accounting principles of ASC Topic 946 to utilize investment company accounting. The Company obtains funds through the issuance of equity interests to multiple unrelated investors, and provides such investors with investment management services. Further, the Company’s business strategy is to acquire interests in middle-market U.S. businesses to provide current income and long term capital appreciation, while protecting invested capital. Overall, the Company believes that the use of investment company accounting on a fair value basis is consistent with the management of its assets on a fair value basis, and makes the Company’s financial statements more useful to investors and other financial statement users in facilitating the evaluation of an investment in the Company as compared to other investment products in the marketplace.

Principles of Consolidation

Under ASC Topic 946, “Financial Services—Investment Companies” (“ASC Topic 946”) the Company is precluded from consolidating any entity other than an investment company or an operating company which provides substantially all of its services to benefit the Company. In accordance therewith, the Company has consolidated the results of its wholly owned subsidiaries which provide services to the Company in its condensed consolidated financial statements. However, the Company has not consolidated the results of its subsidiaries in which the Company holds debt and equity investments. All intercompany account balances and transactions have been eliminated in consolidation.

Cash

Cash consists of demand deposits at commercial banks. Cash is carried at cost plus accrued interest, which approximates fair value. The Company deposits its cash with highly-rated banking corporations and, at times, cash deposits may exceed the insured limits under applicable law.

Use of Estimates

Management makes estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the financial statement in conformity with generally accepted accounting principles. Actual results could differ from those estimates.

Valuation of Investments

ASC Topic 820 clarifies that the fair value is the price in an orderly transaction between market participants to sell an asset or transfer a liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. ASC Topic 820 provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs.

In addition, ASC Topic 820 provides a framework for measuring fair value and establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels of valuation hierarchy established by ASC Topic 820 are defined as follows:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market is defined as a market in which transactions for the asset or liability occur with sufficient pricing information on an ongoing basis. Publicly listed equity and debt securities and listed derivatives that are traded on major securities exchanges and publicly traded equity options are generally valued using Level 1 inputs. If a price for an asset cannot be determined based upon this established process, it shall then be valued as a Level 2 or Level 3 asset.

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Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include the following: (i) quoted prices for similar assets in active markets; (ii) quoted prices for identical or similar assets in markets that are not active; (iii) inputs that are derived principally from or corroborated by observable market data by correlation or other means; and (iv) inputs other than quoted prices that are observable for the assets. Fixed income and derivative assets, where there is an observable secondary trading market and through which pricing inputs are available through pricing services or broker quotes, are generally valued using Level 2 inputs. If a price for an asset cannot be determined based upon this established process, it shall then be valued as a Level 3 asset.

Level 3 – Unobservable inputs for the asset or liability being valued. Unobservable inputs will be used to measure fair value to the extent that observable inputs are not available and such inputs will be based on the best information available in the circumstances, which under certain circumstances might include the Manager’s or the Sub-Manager’s own data. Level 3 inputs may include, but are not limited to, capitalization and discount rates and earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples. The information may also include pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. Certain assets may be valued based upon estimated value of underlying collateral and include adjustments deemed necessary for estimates of costs to obtain control and liquidate available collateral. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence. Debt and equity investments in private companies or assets valued using the market or income approach are generally valued using Level 3 inputs.

In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls will be determined based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each asset.

The Company’s board of directors is responsible for determining in good faith the fair value of the Company’s investments in accordance with the valuation policy and procedures approved by the board of directors, based on, among other factors, the input of the Manager, the Sub-Manager, its audit committee, and the independent third-party valuation firm. The determination of the fair value of the Company’s assets requires judgment, especially with respect to assets for which market prices are not available. For most of the Company’s assets, market prices will not be available. Due to the inherent uncertainty of determining the fair value of assets that do not have a readily available market value, the fair value of the assets may differ significantly from the values that would have been used had a readily available market value existed for such assets, and the differences could be material. Because the calculation of the Company’s net asset value is based, in part, on the fair value of its assets, the Company’s calculation of net asset value is subjective and could be adversely affected if the determinations regarding the fair value of its assets were materially higher than the values that the Company ultimately realizes upon the disposal of such assets. Furthermore, through the valuation process, the Company’s board of directors may determine that the fair value of the Company’s assets differs materially from the values that were provided by the independent valuation firm.

The Company may also look to private merger and acquisition statistics, public trading multiples adjusted for illiquidity and other factors, valuations implied by third-party investments in the businesses or industry practices in determining fair value. The Company may also consider the size and scope of a business and its specific strengths and weaknesses, as well as any other factors it deems relevant in assessing the value.

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation on Investments

The Company will measure realized gains or losses as the difference between the net proceeds from the sale, repayment, or disposal of an asset and the adjusted cost basis of the asset, without regard to unrealized appreciation or depreciation previously recognized. Net change in unrealized appreciation or depreciation will reflect the change in asset values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

Income Recognition

Interest Income – Interest income is recorded on an accrual basis to the extent that the Company expects to collect such amounts. The Company does not accrue as a receivable interest on loans and debt securities for accounting purposes if it has reason to doubt its ability to collect such interest.

The Company places loans on non-accrual status when principal and interest are past due 90 days or more or when there is a reasonable doubt that the Company will collect principal or interest. Accrued interest is generally reversed when a loan is placed on non-accrual. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending

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upon management’s judgment. Non-accrual loans are generally restored to accrual status when past due principal and interest amounts are paid and, in management’s judgment, are likely to remain current. To date, the Company has not experienced any past due payments on any of its loans.

Dividend Income – Dividend income is recorded on the record date for privately issued securities, but excludes any portion of distributions that are treated as a return of capital. Each distribution received from an equity investment is evaluated to determine if the distribution should be recorded as dividend income or a return of capital. Generally, the Company will not record distributions from equity investments as dividend income unless there is sufficient current or accumulated earnings prior to the distribution. Distributions that are classified as a return of capital are recorded as a reduction in the cost basis of the investment. To date, all distributions have been classified as dividend income.

Paid in Capital

The Company records the proceeds from the sale of its common shares on a net basis to (i) capital stock and (ii) paid in capital in excess of par value, excluding upfront selling commissions and placement agent/dealer manager fees.

Share Repurchases

Under the Company’s share repurchase plan, a shareholder’s shares are deemed to have been redeemed as of the repurchase date, which will generally be the last business day of the month of a calendar quarter. Shares redeemed are retired and not available for reissue. See Note 7. “Capital Transactions” for additional information.

Organization and Offering Expenses

Organization expenses are expensed on the Company’s statements of operations as incurred. Offering expenses, which consist of amounts incurred for items such as legal, accounting, regulatory and printing work incurred related to the Offerings, are capitalized on the Company’s statements of assets and liabilities as deferred offering expenses and expensed to the Company’s statements of operations over the lesser of the offering period or 12 months; however, the end of the deferral period will not exceed 12 months from the date the offering expense is incurred by the Manager and the Sub-Manager.

Distribution and Shareholder Servicing Fees

Under the Public Offering, the Company pays distribution and shareholder servicing fees with respect to its Class T and Class D shares, as described further below in Note 5. “Related Party Transactions.” The Company records the distribution and shareholder servicing fees, which accrue daily, in its statements of operations as they are incurred.

Deferred Financing Costs

Financing costs, including upfront fees, commitment fees and legal fees related to the Line of Credit (as defined and further described in Note 8. “Borrowings”) will be deferred and amortized over the life of the related financing instrument using the effective yield method. The amortization of deferred financing costs is included in general and administrative expense in the condensed statements of operations.

Allocation of Profit and Loss

Class-specific expenses, including base management fees, total return incentive fees, organization and offering expenses, distribution and shareholder servicing fees, expense support and certain transfer agent fees, are allocated to each share class of common shares in accordance with how such fees are attributable to the particular share classes, as determined by the Company’s board of directors, the Company’s governing agreements and, in certain cases, expenses which are specifically identifiable to a specific share class.

Income and expenses which are not class-specific are allocated monthly pro rata among the share classes based on shares outstanding as of the end of the month.

Earnings per Share and Net Investment Income per Share

Earnings per share and net investment income per share are calculated for each share class of common shares based upon the weighted average number of common shares outstanding during the reporting period.

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Distributions

In March 2018, the Company’s board of directors began to declare cash distributions to shareholders based on weekly record dates and such distributions were paid on a monthly basis one month in arrears. Effective with distributions declared for January 2019, the Company’s board of directors began to declare distributions based on monthly record dates and such distributions are expected to be paid on a monthly basis one month in arrears. Distributions are made on all classes of the Company’s shares at the same time.

The Company has adopted a distribution reinvestment plan that provides for reinvestment of distributions on behalf of shareholders. Non-founder shareholders participating in the distribution reinvestment plan will have their cash distribution automatically reinvested in additional shares having the same class designation as the class of shares to which such distributions are attributable at a price per share equivalent to the then current public offering price, net of up-front selling commissions and dealer manager fees. Cash distributions paid on Founder shares participating in the distribution reinvestment plan are reinvested in additional shares of Class A shares.

Income Taxes

Under U.S. GAAP, the Company is subject to the provisions of ASC 740, “Income Taxes.” The Company follows the authoritative guidance on accounting for uncertainty in income taxes and concluded it has no material uncertain tax positions to be recognized at this time. If applicable, the Company will recognize interest and penalties related to unrecognized tax benefits as income tax expense in the statements of operations. 

The Company has and expects to continue to operate so that it will qualify to be treated for U.S. federal income tax purposes as a partnership, and not as an association or a publicly traded partnership taxable as a corporation. Generally, the Company will not be taxable as a corporation if 90% or more of its gross income for each taxable year consists of “qualifying income” (generally, interest (other than interest generated from a financial business), dividends, real property rents, gain from the sale of assets that produce qualifying income and certain other items) and the Company is not required to register under the Investment Company Act (the “qualifying income exception”). As a partnership, the individual shareholders are responsible for their proportionate share of the Company’s taxable income.

The Company has analyzed its tax positions taken on its income tax returns for all open tax years (tax years ended December 31, 2018 and 2017), and has concluded that no provision for income tax is required in the Company’s financial statements. During the nine months ended September 30, 2019 and the period from February 7, 2018 (commencement of operations) to September 30, 2018, the Company did not incur any interest or penalties.

Reclassifications

Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform to the current period presentation with no effect on previously reported net assets.

3. Investments

In June 2019, the Company, through its indirect wholly-owned subsidiary, Roundtable Acquisition, LLC (the “Buyer”), entered into a Stock Contribution and Purchase Agreement (the “Purchase Agreement”) with Michael Auriemma, an individual (“Seller”), to acquire a controlling interest in Auriemma U.S. Roundtables (“Roundtables”), a subscription-based information services and data analytics company for the consumer finance industry. In August 2019, the Company completed the acquisition pursuant to the Purchase Agreement. As of September 30, 2019, the Company owned approximately 80.8% of the outstanding equity in Roundtables on an undiluted basis. The cost basis of the Company’s investments in Roundtables was approximately $32.4 million of a common equity investment and $12.1 million of a debt investment as of September 30, 2019. Under the Purchase Agreement, the Seller has the opportunity to earn up to an additional $2.0 million based on the achievement by Roundtables of certain performance metrics. As of September 30, 2019, the criteria for earning the additional purchase price consideration had not been met and management determined that it was not probable that the metrics would be met; therefore an earn-out obligation was not accrued as of September 30, 2019. The final purchase price is subject to this and other post-closing adjustments. The Company made an additional debt investment in Roundtables in November 2019. See Note 12, “Subsequent Events” for additional information.

In February 2018, the Company acquired a controlling equity interest in Lawn Doctor, Inc. (“Lawn Doctor”) from an affiliate of the Sub-Manager, through an investment consisting of common equity and a debt investment in the form of a second lien secured

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note to Lawn Doctor. As of September 30, 2019 and December 31, 2018, the Company owned approximately 62.5% and 62.9%, respectively, of the outstanding equity in Lawn Doctor on an undiluted basis. The cost basis of the Company’s investments in Lawn Doctor was approximately $30.5 million of a common equity investment and $15.0 million of a debt investment as of September 30, 2019.

In February 2018, the Company acquired a controlling equity interest in Polyform Holdings, Inc. (“Polyform”) from an affiliate of the Sub-Manager, through an investment consisting of common equity and a debt investment in the form of a first lien secured note to Polyform. As of September 30, 2019 and December 31, 2018, the Company owned approximately 87.1% of the outstanding equity in Polyform on an undiluted basis. The cost basis of the Company’s investments in Polyform was approximately $15.6 million of a common equity investment and $15.7 million of a debt investment as of September 30, 2019.

Collectively, all of the Company’s debt investments accrue interest at a per annum rate of 16.0% and have weighted average remaining years to maturity of 4.4 years. The note purchase agreements contain customary covenants and events of default. As of September 30, 2019, all of the Company’s portfolio companies were in compliance with the Company’s debt covenants.

As of September 30, 2019 and December 31, 2018, the Company’s investment portfolio is summarized as follows:

	As of September 30, 2019
Asset Category	Cost				Fair Value				Fair Value Percentage of Investment Portfolio			Fair Value Percentage of Net Assets
Senior debt
Senior secured debt - first lien	$	27,814,338			$	27,814,338			21.4	%		19.2	%
Senior secured debt - second lien	15,000,000				15,000,000				11.5			10.3
Total senior debt	42,814,338				42,814,338				32.9			29.5
Equity	78,460,001				87,455,662				67.1			60.2
Total investments	$	121,274,339			$	130,270,000			100.0	%		89.7	%

	As of December 31, 2018
Asset Category	Cost				Fair Value				Fair Value Percentage of Investment Portfolio			Fair Value Percentage of Net Assets
Senior debt
Senior secured debt - first lien	$	15,700,000			$	15,700,000			19.0	%		15.2	%
Senior secured debt - second lien	15,000,000				15,000,000				18.2			14.6
Total senior debt	30,700,000				30,700,000				37.2			29.8
Equity	46,074,339				51,800,000				62.8			50.4
Total investments	$	76,774,339			$	82,500,000			100.0	%		80.2	%

As of September 30, 2019 and December 31, 2018, none of the Company’s debt investments were on non-accrual status.

The industry and geographic dispersion of the Company’s investment portfolio as a percentage of total fair value of the Company’s investments as of September 30, 2019 and December 31, 2018 were as follows:

Industry	September 30, 2019			December 31, 2018
Hobby Goods and Supplies	24.0	%		37.9	%
Commercial and Professional Services	41.8			62.1
Information Services and Advisory Solutions	34.2			—
Total	100.0	%		100.0	%

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Geographic Dispersion(1)	September 30, 2019			December 31, 2018
United States	100.0	%		100.0	%
Total	100.0	%		100.0	%

 FOOTNOTE:

(1)	The geographic dispersion is determined by the portfolio company’s country of domicile or the jurisdiction of the security’s issuer.

All investment positions held at September 30, 2019 and December 31, 2018 were denominated in U.S. dollars.

Summarized Operating Data

The following tables present unaudited summarized operating data for the Company’s portfolio companies for the quarter ended September 30, 2019 and 2018, the nine months ended September 30, 2019, and the period from February 7, 2018 (commencement of operations) through September 30, 2018, and summarized balance sheet data as of September 30, 2019 (unaudited) and December 31, 2018:

Lawn Doctor

Summarized Operating Data (Unaudited)

	Quarter Ended September 30, 2019				Quarter Ended September 30, 2018				Nine Months Ended September 30, 2019				For the Period from February 7, 2018 (1) to September 30, 2018
Revenues	$	5,949,180			$	3,533,131			$	19,373,892			$	11,484,909
Expenses	(5,864,011		)		(3,938,707		)		(19,140,246		)		(10,850,054		)
Income (loss) before taxes	85,169				(405,576		)		233,646				634,855
Income tax (expense) benefit	(10,795		)		122,186				1,740				75,919
Consolidated net income (loss)	74,374				(283,390		)		235,386				710,774
Net loss attributable to non-controlling interest	75,297				24,589				140,100				47,027
Net income (loss) attributable to Lawn Doctor	$	149,671			$	(258,801	)		$	375,486			$	757,801

Summarized Balance Sheet Data

	As of September 30, 2019 (Unaudited)				As of December 31, 2018
Current assets	$	7,023,388			$	6,347,092
Non-current assets	$	94,632,872			$	94,024,715
Current liabilities	$	4,106,631			$	4,342,064
Non-current liabilities	$	52,738,234			$	50,312,347
Non-controlling interest	$	(86,360	)		$	(40,952	)
Stockholders’ equity	$	44,897,755			$	45,758,348

Polyform

Summarized Operating Data (Unaudited)

	Quarter Ended September 30, 2019				Quarter Ended September 30, 2018				Nine Months Ended September 30, 2019				For the Period from February 7, 2018 (1) to September 30, 2018
Revenues	$	3,809,425			$	3,442,541			$	12,030,714			$	9,924,989
Expenses	(4,136,275		)		(3,756,836		)		(12,627,630		)		(11,067,360		)
Loss before income taxes	(326,850		)		(314,295		)		(596,916		)		(1,142,371		)
Income tax benefit	93,000				90,000				169,000				236,000
Net loss	$	(233,850	)		$	(224,295	)		$	(427,916	)		$	(906,371	)

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Summarized Balance Sheet Data

	As of September 30, 2019 (Unaudited)				As of December 31, 2018
Current assets	$	5,714,797			$	5,481,783
Non-current assets	$	31,807,789			$	29,977,677
Current liabilities	$	1,357,071			$	963,823
Non-current liabilities	$	21,138,596			$	18,530,624
Stockholders’ equity	$	15,026,919			$	15,965,013

Roundtables

Summarized Operating Data (Unaudited)

	For the Period from August 1, 2019 (2) to September 30, 2019
Revenues	$	1,892,772
Expenses	(2,492,653		)
Loss before income taxes	(599,881		)
Income tax expense	(85,028		)
Net loss	$	(684,909	)

Summarized Balance Sheet Data (Unaudited)

	As of September 30, 2019
Current assets	$	2,455,277
Non-current assets	$	55,600,404
Current liabilities	$	3,578,010
Non-current liabilities	$	15,062,580
Stockholders’ equity	$	39,415,091

 FOOTNOTES:

(1)	February 7, 2018 is the date the Company acquired Lawn Doctor and Polyform.

(2)	August 1, 2019 is the date the Company acquired Roundtables.

4. Fair Value of Financial Instruments

The Company’s investments were categorized in the fair value hierarchy described in Note 2. “Significant Accounting Policies,” as follows as of September 30, 2019 and December 31, 2018:

	As of September 30, 2019																As of December 31, 2018
Description	Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3				Total
Senior Debt	$	—			$	—			$	42,814,338			$	42,814,338			$	—			$	—			$	30,700,000			$	30,700,000
Equity	—				—				87,455,662				87,455,662				—				—				51,800,000				51,800,000
Total investments	$	—			$	—			$	130,270,000			$	130,270,000			$	—			$	—			$	82,500,000			$	82,500,000

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The ranges of unobservable inputs used in the fair value measurement of the Company’s Level 3 investments as of September 30, 2019 and December 31, 2018 were as follows:

September 30, 2019

Asset Group

Fair Value

Valuation Techniques

Unobservable Inputs

Range (Weighted Average)(1)

Impact to Valuation from an Increase in Input (2)

Senior Debt

$

30,700,000

Discounted Cash Flow Market Comparables Transaction Method

Discount Rate EBITDA Multiple EBITDA Multiple

10.0% - 13.8% (11.1%) 7.7x – 12.4x (11.1x) 8.0x – 12.0x (10.9x)

Decrease Increase Increase

12,114,338

Transaction Precedent

Transaction Price

N/A

N/A

Equity

55,070,000

Discounted Cash Flow Market Comparables Transaction Method

Discount Rate EBITDA Multiple EBITDA Multiple

10.0% - 13.8% (11.1%) 7.7x – 12.4x (11.1x) 8.0x – 12.0x (10.9x)

Decrease Increase Increase

32,385,662

Transaction Precedent

Transaction Price

N/A

N/A

Total

$

130,270,000

December 31, 2018

Asset Group

Fair Value

Valuation Techniques

Unobservable Inputs

Range (Weighted Average)(1)

Impact to Valuation from an Increase in Input (2)

Senior Debt

$

30,700,000

Discounted Cash Flow Market Comparables Transaction Method

Discount Rate EBITDA Multiple EBITDA Multiple

10.5% - 13.5% (11.4%) 7.9x – 12.2x (10.9x) 8.0x – 12.0x (10.8x)

Decrease Increase Increase

Equity

51,800,000

Discounted Cash Flow Market Comparables Transaction Method

Discount Rate EBITDA Multiple EBITDA Multiple

10.5% - 13.5% (11.4%) 7.9x – 12.2x (10.9x) 8.0x – 12.0x (10.8x)

Decrease Increase Increase

Total

$

82,500,000

FOOTNOTES:

(1)	Discount rates are relative to the enterprise value of the portfolio companies and are not the market yields on the associated debt investments. Unobservable inputs were weighted by the relative fair value of the investments.

(2)	This column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the input would have the opposite effect. Significant changes in these inputs in isolation could result in significantly higher or lower fair value measurements.

The preceding tables include the significant unobservable inputs as they relate to the Company’s determination of fair values for its investments categorized within Level 3 as of September 30, 2019 and December 31, 2018. In addition to the techniques and inputs noted in the table above, according to the Company’s valuation policy, the Company may also use other valuation techniques and methodologies when determining the fair value estimates for the Company’s investments. Any significant increases or decreases in the unobservable inputs would result in significant increases or decreases in the fair value of the Company’s investments.

Investments that do not have a readily available market value are valued utilizing a market approach, an income approach (i.e. discounted cash flow approach), a transaction approach, or a combination of such approaches, as appropriate. The market approach uses prices, including third party indicative broker quotes, and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The transaction approach uses pricing indications derived from recent precedent merger and acquisition transactions involving comparable target companies. The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) that are discounted based on a required or expected discount rate to derive a present value amount range. The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors the Company may take into account to determine the fair value of its investments include, as relevant: available current market data, including an assessment of the credit quality of the security’s issuer, relevant and applicable market trading and transaction comparables, applicable market yields and multiples, illiquidity discounts, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, data derived from merger and acquisition activities for comparable companies, and enterprise values, among other factors.

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The following tables provide reconciliation of investments for which Level 3 inputs were used in determining fair value for the nine months ended September 30, 2019 and for the period from February 7, 2018 (commencement of operations) through September 30, 2018:

	Nine Months Ended September 30, 2019
	Senior Debt				Equity				Total
Fair value balance as of January 1, 2019	$	30,700,000			$	51,800,000			$	82,500,000
Additions	12,114,338				32,385,662				44,500,000
Net change in unrealized appreciation (1)	—				3,270,000				3,270,000
Fair value balance as of September 30, 2019	$	42,814,338			$	87,455,662			$	130,270,000
Change in net unrealized appreciation in investments held as of September 30, 2019 (1)	$	—			$	3,270,000			$	3,270,000

	Period from February 7, 2018 (Commencement of Operations) to September 30, 2018
	Senior Debt				Equity				Total
Fair value balance as of February 7, 2018	$	—			$	—			$	—
Additions	30,700,000				46,074,339				76,774,339
Net change in unrealized appreciation (1)	—				4,769,873				4,769,873
Fair value balance as of September 30, 2018	$	30,700,000			$	50,844,212			$	81,544,212
Change in net unrealized appreciation in investments held as of September 30, 2018 (1)	$	—			$	4,769,873			$	4,769,873

 FOOTNOTE:

(1)	Included in net change in unrealized appreciation on investments in the consolidated statements of operations.

5. Related Party Transactions

On February 7, 2018, the Company commenced operations when it met the minimum offering requirement of $80.0 million in Class FA shares under its 2018 Private Offering and issued approximately 3.3 million shares of Class FA shares for aggregate gross proceeds of approximately $81.7 million. The $81.7 million in gross proceeds received included a cash capital contribution of $2.4 million from the Manager in exchange for 96,000 Class FA shares and a cash capital contribution of $9.5 million from CNL Strategic Capital Investment, LLC, which is indirectly controlled by James M. Seneff, Jr., the chairman of the Company, in exchange for 380,000 Class FA shares. The $81.7 million also included 96,000 Class FA shares received in exchange for $2.4 million of non-cash consideration in the form of equity interests in Lawn Doctor received from an affiliate of the Sub-Manager pursuant to an exchange agreement. The $81.7 million in gross proceeds also included a cash capital contribution of approximately $0.4 million in exchange for 15,000 Class FA shares, from other individuals affiliated with the Manager.

The Manager and Sub-Manager, along with certain affiliates of the Manager or Sub-Manager, will receive fees and compensation in connection with the Company’s Public Offering and Follow-On Class FA Private Offering, as well as the acquisition, management and sale of the assets of the Company, as follows:

Placement Agent/Dealer Manager

Commissions — Under the Public Offering, the Company pays CNL Securities Corp. (the “Managing Dealer” in connection with the Public Offering and the “Placement Agent” in connection with the Class FA Private Offerings), an affiliate of the Manager, a selling commission up to 6.00% of the sale price for each Class A share and 3.00% of the sale price for each Class T share sold in the Public Offering (excluding sales pursuant to the Company’s distribution reinvestment plan). Under the Follow-On Class FA Private Offering, the Company pays the Placement Agent a selling commission of up to 5.50% of the sale price for each Class FA share sold in the Follow-On Class FA Private Offering. There is no selling commission for the sale of Class FA shares in the Class FA Private Offering. The Managing Dealer may reallow all or a portion of the selling commissions to participating broker-dealers.

Placement Agent/Dealer Manager Fee — Under the Public Offering, the Company pays the Managing Dealer a dealer manager fee of 2.50% of the price of each Class A share and 1.75% of the price of each Class T share sold in the Public Offering (excluding sales pursuant to the Company’s distribution reinvestment plan). Under the Follow-On Class FA Private Offering, the Company

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pays the Placement Agent a placement agent fee of 3.00% of the price of each Class FA share sold in the Follow-On Class FA Private Offering. There is no placement agent fee for the sale of Class FA shares sold in the Class FA Private Offering. The Managing Dealer may reallow all or a portion of such placement agent / dealer manager fees to participating broker-dealers.

Distribution and Shareholder Servicing Fee — Under the Public Offering, the Company pays the Managing Dealer a distribution and shareholder servicing fee, subject to certain limits, with respect to its Class T and Class D shares (excluding Class T shares and Class D shares sold through the distribution reinvestment plan and those received as share distributions) in an annual amount equal to 1.00% and 0.50%, respectively, of its current net asset value per share, as disclosed in its periodic or current reports, payable on a monthly basis. The distribution and shareholder servicing fee accrues daily and is paid monthly in arrears. The Managing Dealer may reallow all or a portion of the distribution and shareholder servicing fee to the broker-dealer who sold the Class T or Class D shares or, if applicable, to a servicing broker-dealer of the Class T or Class D shares or a fund supermarket platform featuring Class D shares, so long as the broker-dealer or financial intermediary has entered into a contractual agreement with the Managing Dealer that provides for such reallowance. The distribution and shareholder servicing fee is an ongoing fee that is allocated among all Class T and Class D shares, respectively, and is not paid at the time of purchase.

Manager and/or Sub-Manager

Organization and Offering Costs — Under the Offerings, the Company reimburses the Manager and the Sub-Manager, along with their respective affiliates, for the organization and offering costs (other than selling commissions and placement agent / dealer manager fees) they have incurred on the Company’s behalf only to the extent that such expenses do not exceed (A) 1.0% of the cumulative gross proceeds from the 2018 Private Offering and Class FA Private Offerings, and (B) 1.5% of the cumulative gross proceeds from the Public Offering. The Company incurred an obligation to reimburse the Manager and Sub-Manager for approximately $0.2 million and $0.1 million in organization and offering costs based on actual amounts raised through the Offerings during the quarters ended September 30, 2019 and 2018, respectively, and approximately $0.5 million and $0.8 million during the nine months ended September 30, 2019 and the period from February 7, 2018 (commencement of operations) through September 30, 2018, respectively. The Manager and the Sub-Manager have incurred additional organization and offering costs of approximately $5.6 million on behalf of the Company in connection with the Offerings (exceeding the respective limitations) as of September 30, 2019. These costs will be recognized by the Company in future periods as the Company receives future offering proceeds from its Public Offering and Class FA Private Offerings to the extent such costs are within the 1.5% and 1.0% limitations, respectively.

Base Management Fee to Manager and Sub-Manager — The Company pays each of the Manager and the Sub-Manager 50% of the total base management fee for their services under the Management Agreement and the Sub-Management Agreement, subject to any reduction or deferral of any such fees pursuant to the terms of the Expense Support and Conditional Reimbursement Agreement described below. The Company incurred base management fees for the quarter ended September 30, 2019 and 2018 of approximately $0.4 million and $0.2 million, respectively. The Company incurred base management fees of approximately $0.9 million and $0.5 million during the nine months ended September 30, 2019 and the period from February 7, 2018 (commencement of operations) through September 30, 2018, respectively.

The base management fee is calculated for each share class at an annual rate of (i) for the Non-founder shares of a particular class, 2% of the product of (x) the Company’s average gross assets and (y) the ratio of Non-founder share Average Adjusted Capital (as defined below), for a particular class to total Average Adjusted Capital and (ii) for the Founder shares, 1% of the product of (x) the Company’s average gross assets and (y) the ratio of outstanding Founder share Average Adjusted Capital to total Average Adjusted Capital, in each case excluding cash, and will be payable monthly in arrears. The management fee for a certain month is calculated based on the average value of the Company’s gross assets at the end of that month and the immediately preceding calendar month. The determination of gross assets reflects changes in the fair market value of the Company’s assets, which does not necessarily equal their notional value, reflecting both realized and unrealized capital appreciation or depreciation. Average Adjusted Capital of an applicable class is computed on the daily Adjusted Capital for such class for the actual number of days in such applicable month. The base management fee may be reduced or deferred by the Manager and the Sub-Manager under the Management Agreement and the Expense Support and Conditional Reimbursement Agreement described below. For purposes of this calculation, “Average Adjusted Capital” for an applicable class is computed on the daily Adjusted Capital for such class for the actual number of days in such applicable quarter. “Adjusted Capital” is defined as cumulative proceeds generated from sales of our shares of a particular share class (including proceeds from the sale of shares pursuant to the distribution reinvestment plan, if any), net of sales load (upfront selling commissions and dealer manager fees), if any, reduced for the full amounts paid for share repurchases pursuant to any share repurchase program, if any, for such class.

Total Return Incentive Fee on Income to the Manager and Sub-Manager — The Company also pays each of the Manager and the Sub-Manager 50% of the total return incentive fee for their services under the Management Agreement and the Sub-Management

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Agreement. The Company recorded total return incentive fees of approximately $0.1 million and $0.5 million for the quarter ended September 30, 2019 and 2018, respectively, and approximately $0.6 million and $0.8 million for the nine months ended September 30, 2019 and for the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively.

The total return incentive fee is based on the Total Return to Shareholders (as defined below) for each share class in any calendar year, payable annually in arrears. The Company accrues (but does not pay) the total return incentive fee on a quarterly basis, to the extent that it is earned, and performs a final reconciliation and makes required payments at completion of each calendar year. The total return incentive fee may be reduced or deferred by the Manager and the Sub-Manager under the Management Agreement and the Expense Support and Conditional Reimbursement Agreement described below. For purposes of this calculation, “Total Return to Shareholders” for any calendar quarter is calculated for each share class as the change in the net asset value for such share class plus total distributions for such share class calculated based on the Average Adjusted Capital for such class as of such calendar quarter end. The terms “Total Return to Non-founder Shareholders” and “Total Return to Founder Shareholders” means the Total Return to Shareholders specifically attributable to each particular share class of Non-founder shares or Founder shares, as applicable.

The total return incentive fee for each share class is calculated as follows:

•	No total return incentive fee will be payable in any calendar year in which the annual Total Return to Shareholders of a particular share class does not exceed 7% (the “Annual Preferred Return”).

•

As it relates to the Non-founder shares, all of the Total Return to Shareholders with respect to each particular share class of Non-founder shares, if any, that exceeds the annual preferred return, but is less than or equal to 8.75%, or the “Non-founder breakpoint,” in any calendar year, will be payable to the Manager (“Non-founder Catch Up”). The Non-Founder Catch Up is intended to provide an incentive fee of 20% of the Total Return to Non-founder Shareholders of a particular share class once the Total Return to Non-founder Shareholders of a particular class exceeds 8.75% in any calendar year.

•

As it relates to Founder shares, all of the Total Return to Founder Shareholders, if any, that exceeds the annual preferred return, but is less than or equal to 7.777%, or the “founder breakpoint,” in any calendar year, will be payable to the Manager (“Founder Catch Up”). The Founder Catch Up is intended to provide an incentive fee of 10% of the Total Return to Founder Shareholders once the Total Return to Founder Shareholders exceeds 7.777% in any calendar year.

•

For any quarter in which the Total Return to Shareholders of a particular share class exceeds the relevant breakpoint, the total return incentive fee of a particular share class shall equal, for Non-founder shares, 20% of the Total Return to Non-founder Shareholders of a particular class, and for Founder shares, 10% of the Total Return to Founder Shareholders, in each case because the annual preferred and relevant catch ups will have been achieved.

•

For purposes of calculating the Total Return to Shareholders, the change in the Company’s net asset value is subject to a High Water Mark. The “High Water Mark” is equal to the highest year-end net asset value, for each share class of the Company since inception, adjusted for any special distributions resulting from the sale of the Company’s assets, provided such adjustment is approved by the Company’s board of directors. If, as of each calendar year end, the Company’s net asset value for the applicable share class is (A) above the High Water Mark, then, for such calendar year, the Total Return to Shareholders calculation will include the increase in the Company’s net asset value for such share class in excess of the High Water Mark, and (B) if the Company’s net asset value for the applicable share class is below the High Water Mark, for such calendar year, (i) any increase in the Company’s per share net asset value will be disregarded in the calculation of Total Return to Shareholders for such share class while (ii) any decrease in the Company’s per share net asset value will be included the calculation of Total Return to Shareholders for such share class. For the year ended December 31, 2018, the High Water Mark was $24.75 for all share classes. For the year ending December 31, 2019, the High Water Marks will be $26.65 for Class FA shares, $26.44 for Class A shares, $26.54 for Class T shares, $26.23 for Class D shares and $26.55 for Class I shares.

For purposes of this calculation, “Average Adjusted Capital” for an applicable class is computed on the daily Adjusted Capital for such class for the actual number of days in such applicable quarter. The annual preferred return of 7% and the relevant breakpoints of 8.75% and 7.777%, respectively, are also adjusted for the actual number of days in each calendar year, measured as of each calendar quarter end.

Reimbursement to Manager and Sub-Manager for Operating Expenses — The Company reimburses the Manager and the Sub-Manager and their respective affiliates for certain operating costs and expenses of third parties incurred in connection with their provision of services to the Company, including fees, costs, expenses, liabilities and obligations relating to the Company’s activities, acquisitions, dispositions, financings and business, subject to the terms of the Company’s limited liability company agreement,

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the Management Agreement, the Sub-Management Agreement and the Expense Support and Conditional Reimbursement Agreement (as defined below). The Company does not reimburse the Manager and Sub-Manager for administrative services performed by the Manager or Sub-Manager for the benefit of the Company.

Expense Support and Conditional Reimbursement Agreement — The Company entered into an expense support and conditional reimbursement agreement with the Manager and the Sub-Manager (the “Expense Support and Conditional Reimbursement Agreement”), which became effective on February 7, 2018, pursuant to which each of the Manager and the Sub-Manager agrees to reduce the payment of base management fees, total return incentive fees and the reimbursements of reimbursable expenses due to the Manager and the Sub-Manager under the Management Agreement and the Sub-Management Agreement, as applicable, to the extent that the Company’s annual regular cash distributions exceed its annual net income (with certain adjustments). The amount of such expense support is equal to the annual (calendar year) excess, if any, of (a) the distributions (as defined in the Expense Support and Conditional Reimbursement Agreement) declared and paid (net of the Company’s distribution reinvestment plan) to shareholders minus (b) the available operating funds, as defined in the Expense Support and Conditional Reimbursement Agreement (the “Expense Support”). The Company recorded expense support due from the Manager and Sub-Manager of approximately $0.3 million and $0.2 million during the quarter ended September 30, 2019 and 2018, respectively, and approximately $1.1 million and $0.4 million during the nine months ended September 30, 2019 and for the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively. Expense support is paid by the Manager and Sub-Manager annually in arrears.

The Expense Support amount is borne equally by the Manager and the Sub-Manager and is calculated as of the last business day of the calendar year. Beginning on February 7, 2018 and continuing until the Expense Support and Conditional Reimbursement Agreement is terminated, the Manager and Sub-Manager shall equally conditionally reduce the payment of fees and reimbursements of reimbursable expenses in an amount equal to the conditional waiver amount (as defined in and subject to limitations described in the Expense Support and Conditional Reimbursement Agreement). The term of the Expense Support and Conditional Reimbursement Agreement has the same initial term and renewal terms as the Management Agreement or the Sub-Management Agreement, as applicable, to the Manager or the Sub-Manager.

If, on the last business day of the calendar year, the annual (calendar year) year-to-date available operating funds exceeds the sum of the annual (calendar year) year-to-date distributions paid per share class (the “Excess Operating Funds”), the Company uses such Excess Operating Funds to pay the Manager and the Sub-Manager all or a portion of the outstanding unreimbursed Expense Support amounts for each share class, as applicable, subject to certain conditions (the “Conditional Reimbursements”) as described further in the Expense Support and Conditional Reimbursement Agreement. The Company’s obligation to make Conditional Reimbursements shall automatically terminate and be of no further effect three years following the date which the Expense Support amount was provided and to which such Conditional Reimbursement relates, as described further in the Expense Support and Conditional Reimbursement Agreement.

As of September 30, 2019, the amount of expense support related to the period from February 7, 2018 (commencement of operations) to December 31, 2018 collected from the Manager and Sub-Manager was approximately $0.4 million. The Company’s obligation to reimburse the Manager and Sub-Manager for expense support collected for the period from February 7, 2018 (commencement of operations) to December 31, 2018 will expire on December 31, 2021. As of September 30, 2019, management believes that reimbursement payments by the Company to the Manager and Sub-Manager are not probable under the terms of the Expense Support and Conditional Reimbursement Agreement.

Distributions

Individuals and entities affiliated with the Manager and Sub-Manager received distributions from the Company of approximately $0.2 million during each of the quarters ended September 30, 2019 and 2018, and approximately $0.6 million and $0.4 million, during the nine months ended September 30, 2019 and during the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively.

Related party fees and expenses incurred for the quarter ended September 30, 2019 and 2018, the nine months ended September 30, 2019, and the period from February 7, 2018 (commencement of operations) through September 30, 2018 are summarized below:

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Related Party		Source Agreement & Description		Quarter Ended September 30, 2019				Quarter Ended September 30, 2018				Nine Months Ended September 30, 2019				Period from February 7, 2018 (Commencement of Operations) to September 30, 2018
Managing Dealer /Placement Agent		Managing Dealer / Placement Agent Agreements:      Commissions		$	175,748			$	25,125			$	595,330			$	29,475
		Dealer Manager / Placement Agent Fees		100,707				14,500				312,910				16,538
		Distribution and shareholder servicing fees		12,761				1,781				28,578				1,833
Manager and Sub-Manager		Management Agreement and Sub-Management Agreement:      Organization and offering reimbursement (1)(2)		173,507				82,238				486,219				807,391
		Base management fees (1)		355,893				211,025				862,659				494,561
		Total return incentive fees (1)		64,005				453,874				560,665				762,609
Manager and Sub-Manager		Expense Support and Conditional Reimbursement Agreement: Expense support		(264,325		)		(234,565		)		(1,090,845		)		(421,923		)
Manager		Administrative Services Agreement: Reimbursement of third-party operating expenses (1)		43,809				70,171				98,759				113,722
Sub-Manager		Sub-Management Agreement: Reimbursement of third-party pursuit costs(3)		76,052				—				76,052				—

 FOOTNOTE:

(1)	Expenses subject to Expense Support.

(2)	Organization reimbursements are expensed on the Company’s statements of operations as incurred. Offering reimbursements are capitalized on the Company’s statements of assets and liabilities as deferred offering expenses and expensed to the Company’s statements of operations over the lesser of the offering period or 12 months.

(3)	Includes reimbursement of third-party fees incurred for investments that did not close, including fees and expenses associated with performing the due diligence reviews.

The following table presents amounts due from (to) related parties as of September 30, 2019 and December 31, 2018:

	September 30, 2019				December 31, 2018
Due from related parties:
Expense Support	$	1,090,845			$	389,774
Total due from related parties	1,090,845				389,774
Due to related parties:
Organization and offering expenses	(44,084		)		(66,894		)
Base management fees	(142,270		)		(78,967		)
Total return incentive fee	(560,665		)		(1,015,228		)
Reimbursement of third-party operating expenses	(631		)		(9,101		)
Distribution and shareholder servicing fees	(4,604		)		(1,866		)
Total due to related parties	(752,254		)		(1,172,056		)
Net due from (to) related parties	$	338,591			$	(782,282	)

Other Related Party Transactions

Prior to the Company’s acquisition of Lawn Doctor and Polyform as described in Note 3. “Investments,” Lawn Doctor and Polyform were majority owned by an affiliate of the Sub-Manager.

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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019

6. Distributions

The following table reflects the total distributions declared during the nine months ended September 30, 2019 and the period from February 7, 2018 (commencement of operations) through September 30, 2018:

		Nine Months Ended September 30, 2019												Period from February 7, 2018 (Commencement of Operations) to September 30, 2018
Distribution Period		Distributions Declared (1)				Distributions Reinvested (2)				Cash Distributions Net of Distributions Reinvested				Distributions Declared (3)				Distributions Reinvested (4)				Cash Distributions Net of Distributions Reinvested
First Quarter(5)		$	1,235,971			$	121,011			$	1,114,960			$	302,841			$	2,299			$	300,542
Second Quarter(6)		1,360,259				192,894				1,167,365				1,026,590				19,767				1,006,823
Third Quarter(7)		1,526,864				253,162				1,273,702				1,059,027				35,556				1,023,471
		$	4,123,094			$	567,067			$	3,556,027			$	2,388,458			$	57,622			$	2,330,836

FOOTNOTES:

(1)	During 2019, the Company’s board of directors declared distributions per share on a monthly basis. See Note 11. “Financial Highlights” for distributions declared by share class. Distributions declared per share for each share class were as follows:

Record Date Period		Class FA				Class A				Class T				Class D				Class I
January 1, 2019 - September 30, 2019 (9 record dates)		$	0.104167			$	0.104167			$	0.083333			$	0.093750			$	0.104167

(2)	Includes distributions reinvested in October 2019 of $92,699 related to distributions declared based on record dates in September 2019 and excludes distributions reinvested in January 2019 of $26,789 related to distributions declared based on record dates in December 2018.

(3)	During 2018, the Company’s board of directors declared distributions per share on a weekly basis. See Note 11. “Financial Highlights” for distributions declared by share class. Distributions declared per share for each share class were as follows:

Record Date Period		Class FA				Class A				Class T				Class D				Class I
March 7, 2018		$	0.020604			$	0.020604			$	0.016484			$	0.018544			$	0.020604
March 13, 2018 - September 28, 2018 (29 record dates)		0.024038				0.024038				0.019231				0.021635				0.024038

(4)	Includes distributions reinvested in October 2018 of $13,868 related to distributions declared based on record dates in September 2018.

(5)	Distributions declared for the record dates in March 2019 and 2018 were paid in April 2019 and 2018, respectively.

(6)	Distributions declared for the record dates in June 2019 and 2018 were paid in July 2019 and 2018, respectively.

(7)	Distributions declared for the record dates in September 2019 and 2018 were paid in October 2019 and 2018, respectively.

The sources of declared distributions on a GAAP basis were as follows:

	Nine Months Ended September 30, 2019							Period from February 7, 2018 (Commencement of Operations) to September 30, 2018
	Amount				% of Cash Distributions Declared			Amount				% of Cash Distributions Declared
Net investment income(1)	$	3,574,737			86.7	%		$	2,329,005			97.5	%
Distributions in excess of net investment income(2)	548,357				13.3	%		59,453				2.5	%
Total distributions declared	$	4,123,094			100.0	%		$	2,388,458			100.0	%

FOOTNOTES:

(1)	Net investment income includes expense support from the Manager and Sub-Manager of $1,090,845 and $421,923 for the nine months ended September 30, 2019 and for the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively. See Note 5. “Related Party Transactions” for additional information.

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(2)	Consists of distributions made from offering proceeds for the periods presented.

In September 2019, the Company’s board of directors declared a monthly cash distribution on the outstanding shares of all classes of common shares of record on October 30, 2019 of $0.104167 per share for Class FA shares, $0.104167 per share for Class A shares, $0.083333 per share for Class T shares, $0.093750 per share for Class D shares and $0.104167 per share for Class I shares.

 

7. Capital Transactions

2018 Private Offering

On February 7, 2018, the Company commenced operations when it met the minimum offering requirement of $80.0 million in Class FA shares under its 2018 Private Offering and issued approximately 3.3 million shares of Class FA shares for aggregate gross proceeds of approximately $81.7 million. The Company did not incur any selling commissions or placement agent fees from the sale of the approximately 3.3 million Class FA shares sold under the terms of the 2018 Private Offering. See Note 5. “Related Party Transactions” for additional information on Class FA shares issued to the Manager, Sub-Manager and their affiliates.

Public Offering

The Registration Statement became effective on March 7, 2018, and the Company began offering up to $1,000,000,000 of shares, on a best efforts basis, which means that CNL Securities Corp., as the Managing Dealer of the Public Offering, uses its best effort but is not required to sell any specific amount of shares. The Company is offering, in any combination, four classes of shares in the Public Offering: Class A shares, Class T shares, Class D shares and Class I shares. The initial minimum permitted purchase amount is $5,000 in shares. There are differing selling fees and commissions for each share class. The Company also pays distribution and shareholder servicing fees, subject to certain limits, on the Class T and Class D shares sold in the Public Offering (excluding sales pursuant to the Company’s distribution reinvestment plan). The Public Offering price, selling commissions and dealer manager fees per share class are determined monthly as approved by the Company’s board of directors. As of September 30, 2019, the Public Offering price was $29.11 per Class A share, $28.07 per Class T share, $26.27 per Class D share and $26.83 per Class I share. See Note 12. “Subsequent Events” for information on changes to the Public Offering price, selling commissions and dealer manager fees by share class.

The Company is also offering, in any combination, up to $100,000,000 of Class A shares, Class T shares, Class D shares and Class I shares to be issued pursuant to its distribution reinvestment plan. See Note 12. “Subsequent Events” for additional information related to the Public Offering.

Class FA Private Offerings

In April and July 2019, the Company began offering up to $50 million each of Class FA shares under the Class FA Private Offering and Follow-On Class FA Private Offering, respectively, on a best efforts basis, which means that CNL Securities Corp., as the Placement Agent of the Class FA Private Offerings, uses its best effort but is not required to sell any specific amount of shares. There is no selling commission or placement agent fee for the sale of Class FA shares under the Class FA Private Offering. Under the Follow-On Class FA Private Offering the Company pays the Placement Agent a selling commission of up to 5.5% and placement agent fee of up to 3.0% of the sale price for each Class FA share sold in the Follow-On Class FA Private Offering.

Subject to requirements under the Securities Act and the applicable state securities laws of any jurisdiction, the Company intends to conduct each of the Class FA Private Offerings until the earlier of: (i) the date the Company has sold the maximum offering amount of each of the Class FA Private Offerings or (ii) December 31, 2019.

As of September 30, 2019, the purchase price for each Class FA share in the Class FA Private Offering and the Follow-On Class FA Private Offering was $27.19 and $29.72, respectively. See Note 12. “Subsequent Events” for information on changes to the Class FA share price, selling commissions and placement agent fees.

The following table summarizes the total shares issued and proceeds received by share class in connection with the Offerings, excluding shares repurchased through the Share Repurchase Program described further below, for the nine months ended September 30, 2019 and for the period from February 7, 2018 (commencement of operations) to September 30, 2018:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019

		Nine Months Ended September 30, 2019
		Proceeds from Class FA Private Offerings and Public Offering															Distributions Reinvested(1)							Total
Share Class		Shares Issued			Gross Proceeds				Up-front Selling Commissions and Placement Agent/ Dealer Manager Fees (2)(3)				Net Proceeds to Company				Shares			Proceeds to Company				Shares			Net Proceeds to Company				Average Net Proceeds per Share
Class FA		351,573			$	9,582,100			$	(25,675	)		$	9,556,425			—			$	—			351,573			$	9,556,425			$	27.18
Class A		375,740			10,770,595				(796,265		)		9,974,330				8,395			223,030				384,135			10,197,360				26.55
Class T		64,927			1,816,850				(86,300		)		1,730,550				484			12,908				65,411			1,743,458				26.65
Class D		137,940			3,634,000				—				3,634,000				4,333			113,863				142,273			3,747,863				26.34
Class I		557,268			14,876,020				—				14,876,020				5,661			151,356				562,929			15,027,376				26.69
		1,487,448			$	40,679,565			$	(908,240	)		$	39,771,325			18,873			$	501,157			1,506,321			$	40,272,482			$	26.74

		Period from February 7, 2018 (Commencement of Operations) to September 30, 2018
		Proceeds from 2018 Private Offering and Public Offering															Distributions Reinvested(4)							Total
Share Class		Shares Issued			Gross Proceeds				Up-front Selling Commissions and Dealer Manager Fees (2)(3)				Net Proceeds to Company				Shares			Proceeds to Company				Shares			Net Proceeds to Company				Average Net Proceeds per Share
Class FA		3,258,260			$	81,456,500			$	—			$	81,456,500			—			$	—			3,258,260			$	81,456,500			$	25.00
Class A		11,500			320,000				(20,125		)		299,875				1,356			34,698				12,856			334,573				26.02
Class T		20,032			545,000				(25,888		)		519,112				1			17				20,033			519,129				25.91
Class D		81,143			2,095,000				—				2,095,000				203			5,265				81,346			2,100,265				25.82
Class I		140,095			3,612,500				—				3,612,500				147			3,773				140,242			3,616,273				25.79
		3,511,030			$	88,029,000			$	(46,013	)		$	87,982,987			1,707			$	43,753			3,512,737			$	88,026,740			25.06

FOOTNOTES:

(1)	Amounts exclude distributions reinvested in October 2019 related to the payment of distributions declared in September 2019 and include distributions reinvested in January 2019 related to the payment of distributions declared in December 2018.

(2)

The Company incurs selling commissions and placement agent fees on the sale of Class FA shares sold in the Follow-On Class FA Private Offering. The Company also incurs selling commissions and dealer manager fees on the sale of Class A and Class T shares sold through the Public Offering. See Note 5. “Related Party Transactions” for additional information regarding up-front selling commissions and dealer manager/placement agent fees.

(3)	The Company did not incur any selling commissions or placement agent fees from the sale of the approximately 0.3 million and 3.3 million Class FA shares sold under the terms of the Class FA Private Offering and 2018 Private Offering, respectively.

(4)	Amounts exclude distributions reinvested in October 2018 related to the payment of distributions declared in September 2018.

Share Repurchase Program

On March 29, 2019, the Company’s board of directors approved and adopted a share repurchase program (the “Share Repurchase Program”). The total amount of aggregate repurchases of Class A, Class FA, Class T, Class D and Class I shares will be limited to up to 2.5% of the aggregate net asset value per calendar quarter (based on the aggregate net asset value as of the last date of the month immediately prior to the repurchase date) and up to 10% of the aggregate net asset value per year (based on the average aggregate net asset value as of the end of each of the Company’s trailing four quarters). Unless the Company’s board of directors determines otherwise, the Company will limit the number of shares to be repurchased during any calendar quarter to the number

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CNL STRATEGIC CAPITAL, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019

of shares the Company can repurchase with the proceeds received from the sale of shares under its distribution reinvestment plan in the previous quarter. Notwithstanding the foregoing, at the sole discretion of the Company’s board of directors, the Company may also use other sources, including, but not limited to, offering proceeds and borrowings to repurchase shares. 

During the nine months ended September 30, 2019, the Company received requests for the repurchase of approximately $0.6 million of the Company’s common shares, which exceeded proceeds received from its distribution reinvestment plan in the previous quarter by approximately $0.4 million. The Company’s board of directors approved the use of other sources to satisfy repurchase requests received in excess of proceeds received from the distribution reinvestment plan. The following table summarizes the shares repurchased during the nine months ended September 30, 2019:

	Shares Repurchased			Total Consideration				Price Paid per Share
Class FA shares	6,400			$	173,824			$	27.16
Class A shares	244			6,534				26.75
Class I shares	4,745			127,680				26.91
June 28, 2019 Total	11,389			308,038				27.05
Class FA shares	12,400			337,156				27.19
September 30, 2019 Total	12,400			$	337,156			$	27.19

As of September 30, 2019, the Company had a payable for shares repurchased of approximately $0.3 million. There were no share repurchases during the period from February 7, 2018 (commencement of operations) to September 30, 2018.

8. Borrowings

In June 2019, the Company, through a wholly-owned subsidiary, entered into a loan agreement and related promissory note (the “Loan Agreement”) with Seaside National Bank & Trust for a $20.0 million line of credit (the “Line of Credit”). The Line of Credit has a maturity date of 364 days from the effective date of the Loan Agreement plus one 12-month extension. The Company is required to pay a fee of 0.4% of each borrowing with a maximum fee of $80,000 over the 364 day period. Under the Loan Agreement, the Company is required to pay interest on the borrowed amount at a rate of 30-day LIBOR plus an applicable spread of 2.75%. Interest payments are due monthly in arrears. The Company may prepay, without penalty, all of any part of the borrowings under the Loan Agreement at any time and such borrowings are required to be repaid within 180 days of the borrowing date. Under the Loan Agreement, the Company is required to comply with reporting requirements and other customary requirements for similar credit facilities. In connection with the Loan Agreement, in June 2019, the Company entered into an assignment and pledge of deposit account agreement (“Deposit Agreement”) in favor of the lender under the Line of Credit. Under the Deposit Agreement, the Company is required to contribute proceeds from its Offerings to pay down the outstanding debt to the extent there are any borrowings outstanding under the Loan Agreement above the minimum cash balance.

The Company had not borrowed any amounts under the Line of Credit as of September 30, 2019.

9. Concentrations of Risk

As of September 30, 2019 and for the nine months ended September 30, 2019, the Company had the following portfolio companies that individually accounted for 10% or more of the Company’s aggregate total assets or investment income:

Portfolio Company		Percentage of Total Investment Income		Percentage of Total Assets
Lawn Doctor		41.8%		37.1%
Polyform		44.8%		21.3%
Roundtables		5.8%		30.3%

The portfolio companies are required to make monthly interest payments on their debt, with the debt principal due upon maturity. Failure of any of these portfolio companies to pay contractual interest payments could have a material adverse effect on the Company’s results of operations and cash flows from operations which would impact its ability to make distributions to shareholders.

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CNL STRATEGIC CAPITAL, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019

10. Commitment & Contingencies

See Note 5. “Related Party Transactions” for information on contingent amounts due to the Manager and Sub-Manager for the reimbursement of organization and offering costs under the Public Offering.

As of September 30, 2019, the Company had a contingent commitment related to the Purchase Agreement discussed in Note 3. “Investments.” Under the Purchase Agreement, the Seller has the opportunity to earn up to an additional $2.0 million (“contingent consideration”) based on the achievement by Roundtables of certain performance metrics. As of the date of acquisition and through September 30, 2019, management determined that the performance metrics for the Seller to earn the contingent consideration were unlikely of being achieved; therefore an earn-out obligation was not accrued as of the date of acquisition and there was no impact to the fair value of the investment as of September 30, 2019.

From time to time, the Company and officers or directors of the Company may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its businesses. As of September 30, 2019, the Company was not involved in any legal proceedings.

11. Financial Highlights

The following are schedules of financial highlights of the Company attributed to each class of shares for the nine months ended September 30, 2019 and the period from February 7, 2018 (commencement of operations) through September 30, 2018.    

	Nine Months Ended September 30, 2019
	Class FA  Shares				Class A Shares				Class T Shares				Class D Shares				Class I Shares
OPERATING PERFORMANCE PER SHARE
Net Asset Value, Beginning of Period	$	26.65			$	26.44			$	26.54			$	26.23			$	26.55
Net investment income (loss), before expense support(1)	0.65				0.31				0.08				0.31				0.27
Expense support(1)(2)	0.26				0.17				0.21				—				0.31
Net investment income(1)	0.91				0.48				0.29				0.31				0.58
Net realized and unrealized gains(1)(3)	0.72				0.76				0.76				0.73				0.76
Net increase resulting from investment operations	1.63				1.24				1.05				1.04				1.34
Distributions to shareholders(4)	(0.94		)		(0.94		)		(0.75		)		(0.84		)		(0.94		)
Net decrease resulting from distributions to shareholders	(0.94		)		(0.94		)		(0.75		)		(0.84		)		(0.94		)
Net Asset Value, End of Period	$	27.34			$	26.74			$	26.84			$	26.43			$	26.95
Net assets, end of period	$	98,389,336			$	15,411,926			$	2,600,195			$	7,009,236			$	21,768,048
Average net assets(5)	$	89,502,526			$	10,252,025			$	1,609,822			$	4,516,138			$	13,289,172
Shares outstanding, end of period	3,599,033				576,279				96,863				265,162				807,710
Distributions declared	$	3,113,490			$	358,624			$	44,932			$	144,113			$	461,935
Total investment return based on net asset value(6)	6.12		%		4.76		%		4.01		%		4.04		%		5.13		%
Total investment return based on net asset value after total return incentive fee(6)	6.12		%		4.76		%		4.01		%		4.04		%		5.13		%

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CNL STRATEGIC CAPITAL, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019

	Nine Months Ended September 30, 2019
	Class FA  Shares				Class A Shares				Class T Shares				Class D Shares				Class I Shares
RATIOS/SUPPLEMENTAL DATA (not annualized):
Ratios to average net assets:(5)(7)
Total operating expenses before total return incentive fee and expense support	1.62		%		4.04		%		4.92		%		3.99		%		4.08		%
Total operating expenses before expense support	2.22		%		4.04		%		4.92		%		3.99		%		4.24		%
Total operating expenses after expense support	1.26		%		3.42		%		4.17		%		3.99		%		3.08		%
Net investment income before total return incentive fee(9)	3.99		%		1.79		%		1.07		%		1.17		%		2.32		%
Net investment income after total return incentive fee	3.39		%		1.79		%		1.07		%		1.17		%		2.16		%

	Period February 7, 2018 (8) through September 30, 2018
	Class FA  Shares				Class A Shares				Class T Shares				Class D Shares				Class I Shares
OPERATING PERFORMANCE PER SHARE(10)
Net Asset Value, Beginning of Period(11)	$	25.00			$	25.00			$	25.16			$	25.26			$	25.00
Net investment income before expense support(1)	0.60				(1.07		)		(0.53		)		(0.33		)		(0.32		)
Expense support(1)(2)	0.11				1.47				0.80				0.30				0.82
Net investment income(1)	0.71				0.40				0.27				(0.03		)		0.50
Net realized and unrealized gains(1)(3)	1.42				1.48				1.28				1.27				1.42
Net increase resulting from investment operations	2.13				1.88				1.55				1.24				1.92
Distributions to shareholders(4)	(0.72		)		(0.60		)		(0.35		)		(0.30		)		(0.58		)
Net decrease resulting from distributions to shareholders	(0.72		)		(0.60		)		(0.35		)		(0.30		)		(0.58		)
Net Asset Value, End of Period	$	26.41			$	26.28			$	26.36			$	26.20			$	26.34
Net assets, end of period	$	86,246,002			$	337,819			$	528,019			$	2,131,602			$	3,693,717
Average net assets(5)	$	83,117,106			$	52,416			$	181,592			$	914,136			$	1,237,181
Shares outstanding, end of period	3,266,260				12,856				20,033				81,346				140,242
Distributions declared	$	2,344,214			$	1,351			$	2,601			$	11,133			$	29,159
Total investment return based on net asset value(6)(12)	9.06		%		7.62		%		6.23		%		4.94		%		7.76		%
Total investment return based on net asset value after total return incentive fee(6)	8.62		%		7.62		%		6.23		%		4.94		%		7.76		%
RATIOS/SUPPLEMENTAL DATA (not annualized):
Ratios to average net assets:(5)(7)
Total operating expenses before total return incentive fee and expense support	2.28		%		13.40		%		6.36		%		4.72		%		6.21		%
Total operating expenses before expense support	3.16		%		15.16		%		7.63		%		5.65		%		7.93		%
Total operating expenses after expense support	2.72		%		9.47		%		4.57		%		4.49		%		4.78		%
Net investment income before total return incentive fee(9)	3.21		%		1.52		%		1.02		%		(0.11		)%		1.93		%
Net investment income	2.77		%		1.52		%		1.02		%		(0.11		)%		1.93		%

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CNL STRATEGIC CAPITAL, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019

FOOTNOTES:

(1)	The per share amounts presented are based on weighted average shares outstanding.

(2)	Expense support is accrued throughout the year and is subject to a final calculation as of the last business day of the calendar year.

(3)

The amount shown at this caption is the balancing figure derived from the other figures in the schedule. The amount shown at this caption for a share outstanding throughout the period may not agree with the change in the aggregate gains and losses in portfolio investments for the period because of the timing of sales and repurchases of the Company’s shares in relation to fluctuating fair values for the portfolio investments.

(4)	The per share data for distributions is the actual amount of distributions paid or payable per common share outstanding during the entire period; distributions per share are rounded to the nearest $0.01.

(5)	The computation of average net assets during the period is based on net assets measured at each month end, adjusted for capital contributions or withdrawals during the month.

(6)

Total investment return is calculated for each share class as the change in the net asset value for such share class during the period and assuming all distributions are reinvested. Amounts are not annualized and are not representative of total return as calculated for purposes of the total return incentive fee described in Note 5. “Related Party Transactions.” Since there is no public market for the Company’s shares, terminal market value per share is assumed to be equal to net asset value per share on the last day of the period presented. The Company’s performance changes over time and currently may be different than that shown above. Past performance is no guarantee of future results. Investment performance is presented without regard to sales load that may be incurred by shareholders in the purchase of the Company’s shares.

(7)	Actual results may not be indicative of future results. Additionally, an individual investor’s ratios may vary from the ratios presented for a share class as a whole.

(8)	The Company commenced operations on February 7, 2018.

(9)

Amounts represent net investment income before total return incentive fee and related expense support as a percentage of average net assets. For the nine months ended September 30, 2019, all of the total return incentive fees were covered by expense support. For the period February 7, 2018 through September 30, 2018, all of the total return incentive fees for the Class A, Class T, Class D and Class I shares were covered by expense support and approximately 50% of the total return incentive fees for Class FA shares were covered by expense support.

(10)	Operating performance per share for the period from February 7, 2018 to September 30, 2018 was previously calculated based on the first investor for each share class. This presentation has been updated to conform to the current year presentation based on weighted average shares outstanding during the period.

(11)

The net asset value as of the beginning of the period is based on the price of shares sold, net of any sales load, to the initial investor of each respective share class. All Class FA shares sold in the 2018 Private Offering were sold at the same per share amount. The first investors for Class A, Class T, Class D and Class I shares purchased their shares in April 2018, May 2018, June 2018 and April 2018, respectively.

12. Subsequent Events

Distributions

In October 2019, the Company’s board of directors declared a monthly cash distribution on the outstanding shares of all classes of common shares of record on November 28, 2019 of $0.104167 per share for Class FA shares, $0.104167 per share for Class A shares, $0.083333 per share for Class T shares, $0.093750 per share for Class D shares, and $0.104167 per share for Class I shares.

Offerings

In October 2019, the Company’s board of directors approved new per share offering prices for each share class in the Public Offering and Class FA Private Offerings. The new offering prices are effective as of October 28, 2019. The following table provides the new offering prices and applicable upfront selling commissions and placement agent / dealer manager fees for each share class available in the Public Offering and Class FA Private Offerings:

	Class FA		Class A				Class T				Class D				Class I
Effective October 28, 2019:
Offering Price, Per Share	(1) (2)		$	29.22			$	28.18			$	26.43			$	26.95
Selling Commissions, Per Share	(2)		1.75				0.85				—				—
Placement Agent / Dealer Manager Fees, Per Share	(2)		0.73				0.49				—				—

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CNL STRATEGIC CAPITAL, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019

FOOTNOTES:

(1)	The offering price per Class FA share in the Class FA Private Offering is $27.34. Shares sold in the Class FA Private Offering are not subject to selling commissions or placement agent fees.

(2)	The offering price per Class FA share in the Follow-On Class FA Private Offering is $29.88. Shares sold in the Follow-On Class FA Private Offering are subject to a selling commission of up to 5.5% and placement agent fee of up to 3.0% of the sale price.

Capital Transactions

During the period October 1, 2019 through November 13, 2019, the Company received additional net proceeds from the Class FA Private Offerings, Public Offering and its distribution reinvestment plan of:

	Class FA Private Offerings and Public Offering															Distribution Reinvestment Plan							Total
Share Class	Shares			Gross Proceeds				Up-front Selling Commissions and Placement Agent / Dealer Manager Fees				Net Proceeds to Company				Shares			Gross Proceeds				Shares			Net Proceeds to Company				Average Net Proceeds per Share
Class FA	117,805			$	3,223,982			$	(3,250	)		$	3,220,732			—			$	—			117,805			$	3,220,732			$	27.34
Class A	26,828			772,200				(54,930		)		717,270				2,760			73,671				29,588			790,941				26.73
Class T	36,852			1,038,500				(49,329		)		989,171				249			6,664				37,101			995,835				26.84
Class D	16,938			447,674				—				447,674				1,323			34,858				18,261			482,532				26.42
Class I	40,779			1,099,000				—				1,099,000				2,313			62,180				43,092			1,161,180				26.95
	239,202			$	6,581,356			$	(107,509	)		$	6,473,847			6,645			$	177,373			245,847			$	6,651,220			$	27.05

Investment

In November 2019, the Company made an additional debt investment in Roundtables in the form of a $2.0 million senior secured bridge note. The senior secured bridge note accrues interest at a per annum rate of 8.0% and will mature in November 2020 with extension options.

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Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is based on the unaudited condensed consolidated financial statements as of September 30, 2019 and December 31, 2018, and for the quarter ended September 30, 2019 and 2018, the nine months ended September 30, 2019, and the period from February 7, 2018 (commencement of operations) through September 30, 2018. Amounts as of December 31, 2018 included in the unaudited condensed consolidated balance sheets have been derived from the audited consolidated financial statements as of that date. This information should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto, as well as the audited consolidated financial statements, notes and management’s discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2018 (our “Form 10-K”). Capitalized terms used in this Item 2 have the same meaning as in the accompanying condensed financial statements unless otherwise defined herein.

Statement Regarding Forward-Looking Information

Certain statements in this quarterly report on Form 10-Q (this “Quarterly Report”) constitute “forward-looking statements.” Forward-looking statements are statements that do not relate strictly to historical or current facts, but reflect management’s current understandings, intentions, beliefs, plans, expectations, assumptions and/or predictions regarding the future of our business and its performance, the economy and other future conditions and forecasts of future events and circumstances. Forward-looking statements are typically identified by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plans,” “continues,” “pro forma,” “may,” “will,” “seeks,” “should” and “could,” and words and terms of similar substance, although not all forward-looking statements include these words. The forward-looking statements contained in this Quarterly Report involve risks and uncertainties, including statements as to:

•	our future operating results;

•	our business prospects and the prospects of our businesses and other assets;

•	unanticipated costs, delays and other difficulties in executing our business strategy;

•	performance of our businesses and other assets relative to our expectations and the impact on our actual return on invested equity, as well as the cash provided by these assets;

•	our contractual arrangements and relationships with third parties;

•	actual and potential conflicts of interest with the Manager, the Sub-Manager and their respective affiliates;

•	the dependence of our future success on the general economy and its effect on the industries in which we target;

•	events or circumstances which undermine confidence in the financial markets or otherwise have a broad impact on financial markets, such as the sudden instability or collapse of large depository institutions or other significant corporations, terrorist attacks, natural or man-made disasters or threatened or actual armed conflicts;

•	the use, adequacy and availability of proceeds from our current public offering, financing sources, working capital or borrowed money to finance a portion of our business strategy and to service our outstanding indebtedness;

•	the timing of cash flows, if any, from our businesses and other assets;

•	the ability of the Manager and the Sub-Manager to locate suitable acquisition opportunities for us and to manage and operate our businesses and other assets;

•	the ability of the Manager, the Sub-Manager and their respective affiliates to attract and retain highly talented professionals;

•	the ability to operate our business efficiently, manage costs (including general and administrative expenses) effectively and generate cash flow;

•	the lack of a public trading market for our shares;

•	the ability to make and the amount and timing of anticipated future distributions;

•	estimated net asset value per share of our shares;

•	the loss of our exemption from the definition of an “investment company” under the Investment Company Act of 1940, as amended (“the Investment Company Act”);

•	fiscal policies or inaction at the U.S. federal government level, which may lead to federal government shutdowns or negative impacts on the U.S economy;

•	the degree and nature of our competition; or

•	the effect of changes to government regulations, accounting rules or tax legislation.

Our forward-looking statements are not guarantees of our future performance and shareholders are cautioned not to place undue reliance on any forward-looking statements. While we believe our forward-looking statements are reasonable, such statements are inherently susceptible to uncertainty and changes in circumstances. As with any projection or forecast, forward-looking statements are necessarily dependent on assumptions, data and/or methods that may be incorrect or imprecise, and may not be realized. Our forward-looking statements are based on our current expectations and a variety of risks, uncertainties and other factors, many of which are beyond our ability to control or accurately predict.

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Important factors that could cause our actual results to vary materially from those expressed or implied in our forward-looking statements include, but are not limited to, the factors listed and described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Risk Factors” sections of the Company’s documents filed from time to time with the U.S. Securities and Exchange Commission, including, but not limited to, our Form 10-K and our subsequent quarterly reports on Form 10-Q.

All written and oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by these cautionary statements. Forward-looking statements speak only as of the date on which they are made; we undertake no obligation to, and expressly disclaim any obligation to, update or revise forward-looking statements to reflect new information, changed assumptions, the occurrence of subsequent events, or changes to future operating results over time unless otherwise required by law.

Overview

CNL Strategic Capital, LLC is a limited liability company that primarily seeks to acquire and grow durable, middle-market U.S. businesses. We are externally managed by the Manager, CNL Strategic Capital Management, LLC, and sub-managed by the Sub-Manager, Levine Leichtman Strategic Capital, LLC, an affiliate of Levine Leichtman Capital Partners, LLC.

The Manager and the Sub-Manager are collectively responsible for sourcing potential acquisitions and debt financing opportunities, subject to approval by the Manager’s management committee that such opportunity meets our investment objectives and final approval of such opportunity by our board of directors, and monitoring and managing the businesses we acquire and/or finance on an ongoing basis. The Sub-Manager is primarily responsible for analyzing and conducting due diligence on prospective acquisitions and debt financings, as well as the overall structuring of transactions.

We seek to acquire businesses that are highly cash flow generative with annual revenues primarily between $25 million and $250 million and whose management teams seek an ownership stake in the company. Our business strategy is to acquire controlling equity interests in combination with debt positions in middle-market U.S. companies and in doing so, provide long-term capital appreciation and current income while protecting invested capital. In addition, and to a lesser extent, we may acquire other debt and minority equity positions. We may also acquire various types of debt in the secondary market including secured and senior unsecured debt and syndicated senior secured corporate loans of U.S. and, to a lesser extent, non-U.S. corporations, partnerships, limited liability companies and other business entities other than companies. We may also co-invest with other vehicles managed by the Sub-Manager or their affiliates to acquire minority equity positions and debt positions in a co-investment capacity. We expect that these positions will comprise a minority of our total assets.

We were formed as a Delaware limited liability company on August 9, 2016 and we intend to operate our business in a manner that will permit us to avoid registration under the Investment Company Act. We are not a “blank check” company within the meaning of Rule 419 of the Securities Act. We commenced operations on February 7, 2018 when aggregate subscription proceeds in excess of the minimum offering amount of $80 million were received in the 2018 Private Offering.

Our Common Shares Offerings

The 2018 Private Offering

We commenced operations on February 7, 2018 when we met our minimum offering requirement of $80 million in Class FA shares under the 2018 Private Offering and issued approximately 3.3 million Class FA shares resulting in gross proceeds of approximately $81.7 million. The 2018 Private Offering was closed in February 2018.

We did not incur any selling commissions or placement agent fees from the sale of the approximately 3.3 million Class FA shares sold under the terms of the 2018 Private Offering. We incurred obligations to reimburse the Manager and Sub-Manager for organization and offering costs of approximately $0.7 million based on actual amounts raised through the 2018 Private Offering. These organization and offering costs related to the 2018 Private Offering had been previously advanced by the Manager and Sub-Manager, as described further in Note 5. “Related Party Transactions” of Item 1. “Financial Statements.”

Public Offering

Once the Registration Statement became effective on March 7, 2018, we began offering up to $1,000,000,000 of shares, on a best efforts basis, which means that CNL Securities Corp., as the Managing Dealer of the Public Offering, will use its best efforts, but is not required to sell any specific amount of shares. We are offering, in any combination, four classes of shares in the Public Offering: Class A shares, Class T shares, Class D shares and Class I shares. There are differing selling fees and commissions for each class. We also pay distribution and shareholder servicing fees, subject to certain limits, on the Class T and Class D shares sold in the Public Offering (excluding sales pursuant to our distribution reinvestment plan).

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We are also offering, in any combination, up to $100,000,000 of Class A shares, Class T shares, Class D shares and Class I shares to be issued pursuant to our distribution reinvestment plan.

Since the Public Offering became effective through September 30, 2019, we have received net proceeds from the Public Offering of approximately $46.3 million, including approximately $0.6 million received through our distribution reinvestment plan. As of September 30, 2019, the Public Offering price was $29.11 per Class A share, $28.07 per Class T share, $26.27 per Class D share and $26.83 per Class I share. See Note 7. “Capital Transactions” and Note 12. “Subsequent Events” in Item 1. “Financial Statements” for additional information regarding the Public Offering.

Since the Public Offering became effective through September 30, 2019, we have incurred selling commissions and dealer manager fees of approximately $1.4 million from the sale of Class A shares and Class T shares. The Class D shares and Class I shares sold through September 30, 2019 were not subject to selling commissions and dealer manager fees. We also incurred obligations to reimburse the Manager and Sub-Manager for organization and offering costs of approximately $0.7 million based on actual amounts raised through the Public Offering since the Public Offering became effective through September 30, 2019. These organization and offering costs related to the Public Offering had been previously advanced by the Manager and Sub-Manager, as described further in Note 5. “Related Party Transactions” of Item 1. “Financial Statements.”

In October 2019, our board of directors approved new per share public offering prices for each share class in the Public Offering. The new public offering prices are effective as of October 29, 2019. The following table provides the new public offering prices and applicable upfront selling commissions and dealer manager fees for each share class available in the Public Offering:

		Class A				Class T				Class D				Class I
Effective October 29 2019:
Public Offering Price, Per Share		$	29.22			$	28.18			$	26.43			$	26.95
Selling Commissions, Per Share		1.75				0.85				—				—
Dealer Manager Fees, Per Share		0.73				0.49				—				—

Class FA Private Offerings

We are currently conducting separate Class FA Private Offerings of up to $50.0 million each of Class FA shares pursuant to 506(c) under Regulation D. CNL Securities Corp., an affiliate of the Manager, serves as placement agent for each of the Class FA Private Offerings. In June 2019, we met our minimum offering amount with approximately $3.1 million in aggregate gross proceeds from subscriptions for Class FA Shares from the Class FA Private Offering and we held our initial escrow closing on subscriptions for the Class FA Private Offering. There are no selling commissions or placement agent fees for the sale of Class FA shares in our Class FA Private Offering. Under the Follow-On Class FA Private Offering we pay the Placement Agent a selling commission of up to 5.5% and placement agent fee of up to 3.0% of the sale price for each Class FA share sold in the Follow-On Class FA Private Offering, except where the selling commission or placement agent fee may be reduced. Subject to requirements under the Securities Act and the applicable state securities laws of any jurisdiction, we intend to conduct each Class FA Private Offering until the earlier of: (i) the date we have sold the maximum offering amount of each respective Class FA Private Offering or (ii) December 31, 2019.

In conjunction with the launch of the Class FA Private Offering, our board of directors reclassified 4,000,000 authorized shares of Class T shares to Class FA shares, resulting in shares authorized of 7,400,000 Class FA shares, 94,660,000 Class A shares, 658,620,000 Class T shares, 94,660,000 Class D shares and 94,660,000 Class I shares.

In October 2019, our board of directors approved a new per share offering price of $27.34 and $29.88 for the Class FA shares in the Class FA Private Offerings and the Follow-On Class FA Private Offering, respectively.

Portfolio and Investment Activity

In August 2019, we acquired a controlling interest in Roundtables, pursuant to the Purchase Agreement entered into in June 2019 described in Note 3. “Investments” of Item 1. “Financial Statements”. Roundtables is an information services and advisory solutions business to the consumer finance industry. Prior to this transaction, Roundtables operated as a division of Auriemma Consulting Group, Inc. Roundtables offers membership in any of 30+ topic-specific roundtables across five verticals (credit cards, auto finance, retail banking, wealth management and fintech) that includes participation in hosted executive meetings, proprietary benchmarking studies, and custom surveys. The subscription-based model provides executives with key operational data to optimize business practices and address current issues within the consumer finance industry. As of September 30, 2019, we owned approximately 80.8% of the outstanding equity in Roundtables on an undiluted basis. The cost basis of our investments in Roundtables was approximately $32.4 million of our common equity and approximately $12.1 million for our debt investment as of September 30, 2019. Under the Purchase Agreement, the Seller has the opportunity to earn up to an additional $2.0 million based on the achievement by Roundtables of certain performance metrics. As of the acquisition date and through September 30,

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2019, management determined that the performance metrics for the Seller to earn the contingent consideration were unlikely of being achieved; therefore an earn-out obligation was not accrued as of the acquisition date and there was no impact to the fair value of the investment as of September 30, 2019. The final purchase price is subject to this and other post-closing adjustments. In November 2019, we made an additional debt investment in Roundtables in the form of a $2.0 million senior secured bridge note. The senior secured bridge note accrues interest at a per annum rate of 8.0% and will mature in November 2020 with extension options.

In February 2018, we acquired a controlling equity interest in Lawn Doctor from an affiliate of the Sub-Manager, through an investment consisting of common equity and a debt investment in the form of a secured second lien note to Lawn Doctor. Lawn Doctor is a leading franchisor of residential lawn care programs and services. Lawn Doctor’s core service offerings provide residential homeowners with year-round monitoring and treatment by focusing on weed and insect control, seeding, and professionally and consistently-administered fertilization, using its proprietary line of equipment. Lawn Doctor is not involved in other lawn maintenance services, such as mowing, edging and leaf blowing. As of September 30, 2019 and December 31, 2018, we owned approximately 62.5% and 62.9%, respectively, of the outstanding equity in Lawn Doctor on an undiluted basis. The cost basis of our investments in Lawn Doctor was approximately $30.5 million for our common equity investment and $15.0 million for our debt investment as of September 30, 2019.    

In February 2018, we acquired a controlling equity interest in Polyform from an affiliate of the Sub-Manager, through an investment consisting of common equity and a debt investment in the form of a secured first lien note to Polyform. Polyform is a leading developer, manufacturer and marketer of polymer clay products worldwide. Through its two primary brands, Sculpey® and Premo!®, Polyform sells a comprehensive line of premium craft products to a diverse mix of customers including specialty and big box retailers, distributors and e-tailers.  As of September 30, 2019 and December 31, 2018, we owned approximately 87.1% of the outstanding equity in Polyform on an undiluted basis. The cost basis of our investments in Polyform was approximately $15.6 million for our common equity investment and $15.7 million for our debt investment as of September 30, 2019.

Each of our debt investments accrue interest at a per annum rate of 16.0%. Each note will mature in August 2023. The note purchase agreements contain customary covenants and events of default. As of September 30, 2019, all of our portfolio companies were in compliance with our debt covenants.

As of September 30, 2019 and December 31, 2018, our investment portfolio included six distinct investment positions comprised of the following:

	As of September 30, 2019											As of December 31, 2018
Asset Category	Cost				Fair Value				Fair Value Percentage of Investment Portfolio			Cost				Fair Value				Fair Value Percentage of Investment Portfolio
Senior debt
Senior secured debt - first lien	$	27,814,338			$	27,814,338			21.4	%		$	15,700,000			$	15,700,000			19.0	%
Senior secured debt - second lien	15,000,000				15,000,000				11.5	%		15,000,000				15,000,000				18.2	%
Total senior debt	42,814,338				42,814,338				32.9	%		30,700,000				30,700,000				37.2	%
Equity	78,460,001				87,455,662				67.1	%		46,074,339				51,800,000				62.8	%
Total investments	$	121,274,339			$	130,270,000			100.0	%		$	76,774,339			$	82,500,000			100.0	%

As of September 30, 2019 and December 31, 2018, the weighted average yield on our debt portfolio was 16.0%.

See Note 3. “Investments” in Item 1. “Financial Statements” for additional information related to our investments.

Concentrations of Risk

As of September 30, 2019 and for the nine months ended September 30, 2019, we had the following portfolio companies that individually accounted for 10% or more of our aggregate total assets or investment income:

Portfolio Company		Percentage of Total Investment Income		Percentage of Total Assets
Lawn Doctor		41.8%		37.1%
Polyform		44.8%		21.3%
Roundtables		5.8%		30.3%

The portfolio companies are required to make monthly interest payments on their debt, with the debt principal due upon maturity. Failure of any of these portfolio companies to pay contractual interest payments could have a material adverse effect on our results

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of operations and cash flows from operations which would impact our ability to make distributions to shareholders.

Adjusted EBITDA

When evaluating the performance of our portfolio, we monitor Adjusted EBITDA to measure the financial and operational performance of our portfolio companies and their ability to pay contractually obligated debt payments to us. In connection with this evaluation, the Manager and Sub-Manager review monthly portfolio company operating performance versus budgeted expectations and conduct regular operational review calls with the management teams of the portfolio companies.

We present Adjusted EBITDA as a supplemental measure of the performance of our portfolio companies. We define Adjusted EBITDA as net income (loss), plus (i) interest expense, net, and loan cost amortization, (ii) taxes and (iii) depreciation and amortization, as further adjusted for certain other non-recurring items that we do not consider indicative of the ongoing operating performance of our portfolio companies. These further adjustments are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future our portfolio companies may incur expenses that are the same as or similar to some of the adjustments in this presentation. This presentation of Adjusted EBITDA should not be construed as an inference that the future results of our portfolio companies will be unaffected by unusual or non-recurring items.

We present Adjusted EBITDA because we believe it assists investors in comparing the performance of such businesses across reporting periods on a consistent basis by excluding items that we do not believe are indicative of their core operating performance.

Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are: (i) Adjusted EBITDA does not reflect cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; (iii) Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on indebtedness; (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect any cash requirements for such replacements; (v) Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we do not consider to be indicative of the on-going operations of our portfolio companies; and (vi) other companies in similar industries as our portfolio companies may calculate Adjusted EBITDA differently, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on the GAAP results and using Adjusted EBITDA only supplementally.

Summarized Net Income to Adjusted EBITDA Reconciliations (Unaudited)

Lawn Doctor

	Quarter Ended September 30, 2019				Quarter Ended September 30, 2018				Nine Months Ended September 30, 2019				For the Period from February 7, 2018 (1) to September 30, 2018
Net income (loss) attributable to Lawn Doctor (GAAP)	$	149,671			$	(258,801	)		$	375,486			$	757,801
Interest and debt related expenses	1,103,302				1,122,675				3,291,180				2,780,572
Depreciation and amortization	631,753				770,623				1,880,613				1,590,799
Income tax expense (benefit)	10,795				(122,186		)		(1,740		)		(75,919		)
Adjusted EBITDA (non-GAAP)	$	1,895,521			$	1,512,311			$	5,545,539			$	5,053,253

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Polyform

	Quarter Ended September 30, 2019				Quarter Ended September 30, 2018				Nine Months Ended September 30, 2019				For the Period from February 7, 2018 (1) to September 30, 2018
Net loss (GAAP)	$	(233,850	)		$	(224,295	)		$	(427,916	)		$	(906,371	)
Interest and debt related expenses	736,148				736,148				2,184,440				1,893,241
Depreciation and amortization	412,704				509,716				1,236,268				1,494,467
Income tax benefit	(93,000		)		(90,000		)		(169,000		)		(236,000		)
Transaction related expenses (2)	—				—				—				353,910
Adjusted EBITDA (non-GAAP)	$	822,002			$	931,569			$	2,823,792			$	2,599,247

Roundtables

	For the Period from August 1, 2019 (3) to September 30, 2019
Net loss	$	(684,909	)
Interest and debt related expenses	406,667
Depreciation	7,123
Income tax expense	85,028
Transaction related expenses (2)	1,066,814
Adjusted EBITDA (non-GAAP)	$	880,723

 FOOTNOTES:

(1)	February 7, 2018 is the date we acquired Lawn Doctor and Polyform.

(2)	Transaction related expenses are non-recurring.

(3)	August 1, 2019 is the date we acquired Roundtables.

Factors Impacting Our Operating Results

We expect that the results of our operations will be affected by a number of factors. Many of the factors that will affect our operating results are beyond our control.

We will be dependent upon the earnings of and cash flow from the businesses that we acquire to meet our corporate overhead and management fee expenses and to make distributions. These earnings and cash flows, net of any minority interests in these businesses, will be available:

•	first, to meet our management fees and corporate overhead expenses ; and

•	second, to fund business operations and distributions by us to shareholders.

Size of assets

If we are unable to raise substantial funds, we will be limited in the number and type of acquisitions we may make. The size of our assets will be a key revenue driver. Generally, as the size of our assets grows, the amount of income we receive will increase. In addition, our assets may grow at an uneven pace as opportunities to acquire assets may be irregularly timed, and the timing and extent of the Manager’s and the Sub-Manager’s success in identifying such opportunities, and our success in making acquisitions, cannot be predicted.

Market conditions

From time to time, the global capital markets may experience periods of disruption and instability, which could materially and adversely impact the broader financial and credit markets and reduce the availability to us of debt and equity capital. Significant changes or volatility in the capital markets may also have a negative effect on the valuations of our businesses and other assets. While all of our assets are likely to not be publicly traded, applicable accounting standards require us to assume as part of our valuation process that our assets are sold in a principal market to market participants (even if we plan on holding an asset long term or through its maturity) and impairments of the market values or fair market values of our assets, even if unrealized, must

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be reflected in our financial statements for the applicable period, which could result in significant reductions to our net asset value for the period. Significant changes in the capital markets may also affect the pace of our activity and the potential for liquidity events involving our assets. Thus, the illiquidity of our assets may make it difficult for us to sell such assets to access capital if required, and as a result, we could realize significantly less than the value at which we have recorded our assets if we were required to sell them for liquidity purposes.

Liquidity and Capital Resources

General

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments, fund and maintain our assets and operations, repay borrowings, make distributions to our shareholders and other general business needs. We will use significant cash to fund acquisitions, make additional investments in our portfolio companies, make distributions to our shareholders and fund our operations. Our primary sources of cash will generally consist of:

•	the net proceeds from our Offerings;

•	distributions and interest earned from our assets; and

•	proceeds from sales of assets and principal repayments from our assets.

We expect we will have sufficient cash from current sources to meet our liquidity needs for the next twelve months. However, we may opt to supplement our equity capital and increase potential returns to our shareholders through the use of prudent levels of borrowings. We may use debt when the available terms and conditions are favorable to long-term investing and well-aligned with our business strategy. In determining whether to borrow money, we seek to optimize maturity, covenant packages and rate structures. Most importantly, the risks of borrowing within the context of our business outlook and the impact on our businesses are extensively analyzed by the Manager and our board of directors in making this determination.

While we generally intend to hold our assets for the long term, certain assets may be sold in order to manage our liquidity needs, meet other operating objectives and adapt to market conditions. The timing and impact of future sales of our assets, if any, cannot be predicted with any certainty.

As of September 30, 2019 and December 31, 2018, we had approximately $15.9 million and $21.7 million of cash, respectively.

Sources of Liquidity and Capital Resources

Offerings. We received approximately $39.8 million and $85.6 million in net proceeds (1.5 million shares and 3.5 million shares, respectively) during the nine months ended September 30, 2019 and the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively, from our Offerings, which excludes approximately $0.5 million (18,873 shares) and $0.04 million (1,707 shares) raised through our distribution reinvestment plan during the nine months ended September 30, 2019 and the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively. Additionally, the amount raised during the period from February 7, 2018 (commencement of operations) to September 30, 2018 included a $2.4 million non-cash contribution by an affiliate of the Sub-Manager, as described in Note 5. “Related Party Transactions” of Item 1. “Financial Statements.” As of September 30, 2019, we had approximately 945 million common shares available for sale through the Public Offering and Class FA Private Offerings.

Operating Activities. During the nine months ended September 30, 2019 and the period from February 7, 2018 (commencement of operations) to September 30, 2018, we generated operating cash flows (excluding amounts related to purchases of investments) of approximately $2.6 million and $3.0 million, respectively. The decrease in operating cash flows (excluding amounts related to purchases of investments) is primarily attributable to an increase in net amounts due from related parties of approximately $1.6 million, offset by an increase in net investment income of approximately $1.2 million primarily due to an increase in interest earned on our debt investments.

Borrowings. In June 2019, the Company, through a wholly-owned subsidiary, entered into a Loan Agreement for a $20.0 million Line of Credit. The purpose of the Line of Credit is for general Company working capital and acquisition financing purposes. The Line of Credit has a maturity date of 364 days from the effective date of the Loan Agreement plus one 12-month extension. We had not borrowed any amounts under the Line of Credit as of September 30, 2019.

Uses of Liquidity and Capital Resources

Investments. We used approximately $44.4 million and $74.4 million of cash proceeds from our Offerings to purchase investments during the nine months ended September 30, 2019 and the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively. Cash used for investments during the nine months ended September 30, 2019 excludes approximately $0.1 million of amounts payable for the purchase of investments as of September 30, 2019.

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Distributions. We paid distributions to our shareholders of approximately $3.4 million and $2.0 million during the nine months ended September 30, 2019 and during the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively. See “Distributions” below for additional information.

Share Repurchases. We paid approximately $0.3 million during the nine months ended September 30, 2019 to repurchase shares in accordance with our Share Repurchase Program. We did not repurchase shares during the period from February 7, 2018 (commencement of operations) to September 30, 2018.

Distributions Declared

In January 2019, our board of directors began declaring cash distributions to shareholders based on monthly record dates, and such distributions were paid monthly in arrears. During the nine months ended September 30, 2019, our board of directors declared nine monthly distributions totaling approximately $4.1 million, of which approximately $3.5 million was paid to shareholders and $0.6 million was reinvested through the distribution reinvestment plan (including amounts paid and reinvested in October 2019 of approximately $0.4 million and $0.1 million, respectively).

During the period from February 7, 2018 (commencement of operations) to September 30, 2018, our board of directors declared cash distributions to shareholders based on weekly record dates, and such distributions were paid monthly in arrears. Our board of directors declared 30 weekly distributions starting March 7, 2018 through and including September 28, 2018, totaling approximately $2.4 million, of which approximately $2.3 million was paid to shareholders and $0.1 million was reinvested through the distribution reinvestment plan during the period February 7, 2018 (commencement of operations) to September 30, 2018. See Note 6. “Distributions” in Item 1. “Financial Statements” for additional information, including distributions declared per share for each share class.

Cash distributions declared during the periods presented were funded from the following sources noted below:

	Nine Months Ended September 30, 2019							Period from February 7, 2018 (Commencement of Operations) to September 30, 2018
	Amount				% of Cash Distributions Declared			Amount				% of Cash Distributions Declared
Net investment income(1)	$	3,574,737			86.7	%		$	2,329,005			97.5	%
Distributions in excess of net investment income(2)	548,357				13.3	%		59,453				2.5	%
Total distributions declared(3)	$	4,123,094			100.0	%		$	2,388,458			100.0	%

 FOOTNOTES:

(1)	Net investment income includes expense support from the Manager and Sub-Manager of $1,090,845 and $421,923 for the nine months ended September 30, 2019 and for the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively. See Note 5. “Related Party Transactions” of Item 1. “Financial Statements” for additional information.

(2)	Consists of offering proceeds for both periods presented.

(3)

For the nine months ended September 30, 2019, includes $567,067 of distributions reinvested pursuant to our distribution reinvestment plan, of which $92,699 was reinvested in October 2019 with the payment of distributions declared in September 2019. For the period from February 7, 2018 to September 30, 2018, includes $57,622 of distributions reinvested pursuant to our distribution reinvestment plan, of which $13,868 was reinvested in October 2018.

We calculate each shareholder’s specific distribution amount for the period using record and declaration dates. Distributions are made on all classes of our shares at the same time. Amounts distributed are allocated among each class in proportion to the number of shares of each class outstanding. Amounts distributed to each class are allocated among the holders of our shares in such class in proportion to their shares. The per share amount of distributions on Class A, Class T, Class D and Class I shares will differ because of different allocations of certain class-specific expenses. Specifically, distributions on Class T shares and Class D shares may be lower than distributions on Class A, Class FA and Class I shares because we are required to pay ongoing distribution and shareholder servicing fees with respect to the Class T shares and Class D shares sold in the primary offering. Additionally, distributions on the Non-founder shares may be lower than distributions on Class FA shares because we are required to pay higher management and incentive fees to the Manager and the Sub-Manager with respect to the Non-founder shares. There is no assurance that we will pay distributions in any particular amount, if at all. See Note 6. “Distributions” in Item 1. “Financial Statements” for additional disclosures regarding distributions, including per share amounts declared per share class for the periods presented.

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Distribution Reinvestment Plan

We have adopted a distribution reinvestment plan pursuant to which shareholders who purchase shares in the Public Offering have their cash distributions automatically reinvested in additional shares having the same class designation as the class of shares to which such distributions are attributable, unless such shareholders elect to receive distributions in cash, are residents of Opt-In States, or are clients of certain participating broker-dealers that do not permit automatic enrollment in our distribution reinvestment plan. Opt-In States include Alabama, Arkansas, Idaho, Kansas, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Nebraska, New Hampshire, New Jersey, North Carolina, Ohio, Oregon, and Washington. Shareholders who are residents of Opt-In States, holders of Class FA shares and clients of certain participating broker-dealers that do not permit automatic enrollment in our distribution reinvestment plan automatically receive their distributions in cash unless they elect to have their cash distributions reinvested in additional shares. Cash distributions paid on Class FA shares are reinvested in additional shares of Class A shares.

The purchase price for shares purchased under our distribution reinvestment plan is equal to the most recently determined and published net asset value per share of the applicable class of shares. Because the distribution and shareholder servicing fee is calculated based on net asset value, it reduces net asset value and/or distributions with respect to Class T shares and Class D shares, including shares issued under the distribution reinvestment plan with respect to such share classes. To the extent newly issued shares are purchased from us under the distribution reinvestment plan or shareholders elect to reinvest their cash distribution in our shares, we retain and/or receive additional funds for acquisitions and general purposes including the repurchase of shares under the Share Repurchase Program.

We do not pay selling commissions or dealer manager fees on shares sold pursuant to our distribution reinvestment plan. However, the amount of the distribution and shareholder servicing fee payable with respect to Class T or Class D shares, respectively, sold in the Public Offering is allocated among all Class T or Class D shares, respectively, including those sold under our distribution reinvestment plan and those received as distributions.

Our shareholders will be taxed on their allocable share of income, even if their distributions are reinvested in additional shares of our common shares and even if no distributions are made.

Share Repurchase Program

We adopted a Share Repurchase Program effective March 2019, pursuant to which we conduct quarterly share repurchases to allow our shareholders to sell all or a portion of their shares (at least 5% of his or her shares) back to us at a price equal to the net asset value per share of the month immediately prior to the repurchase date. The repurchase date is generally the last business day of the month of a calendar quarter end. We are not obligated to repurchase shares under the Share Repurchase Program. If we determine to repurchase shares, the Share Repurchase Program also limits the total amount of aggregate repurchases of Class A, Class FA, Class T, Class D and Class I shares to up to 2.5% of our aggregate net asset value per calendar quarter (based on the aggregate net asset value as of the last date of the month immediately prior to the repurchase date) and up to 10% of our aggregate net asset value per year (based on the average aggregate net asset value as of the end of each of our trailing four quarters). The Share Repurchase Program also includes certain restrictions on the timing, amount and terms of our repurchases intended to ensure our ability to qualify as a partnership for U.S. federal income tax purposes.

The aggregate amount of funds under the Share Repurchase Program is determined on a quarterly basis at the sole discretion of our board of directors. During any calendar quarter, the total amount of aggregate repurchases is limited to the aggregate proceeds from our distribution reinvestment plan during the previous quarter unless our board of directors determines otherwise. At the sole discretion of our board of directors, we may also use other sources, including, but not limited to, offering proceeds and borrowings to repurchase shares. 

To the extent that the number of shares submitted to us for repurchase exceeds the number of shares that we are able to purchase, we will repurchase shares on a pro rata basis, from among the requests for repurchase received by us based upon the total number of shares for which repurchase was requested and the order of priority described in the Share Repurchase Program. We may repurchase shares including fractional shares, computed to three decimal places.

During the nine months ended September 30, 2019, we received requests for the repurchase of approximately $0.6 million of our common shares, which exceeded proceeds received from its distribution reinvestment plan in the previous quarters by approximately $0.4 million. Our board of directors approved the use of other sources to satisfy repurchase requests received in excess of proceeds received from the distribution reinvestment plan. The following table summarizes the shares repurchased during the nine months ended September 30, 2019:

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	Nine Months Ended September 30, 2019
	Shares Repurchased			Total Consideration				Average Price Paid per Share
Class FA shares	18,800			$	510,980			$	27.18
Class A shares	244			6,534				26.75
Class I shares	4,745			127,680				26.91
Total	23,789			$	645,194			$	27.12

Results of Operations

We commenced operations on February 7, 2018, as described above under “Overview.” We acquired our two initial businesses in February 2018 using a substantial portion of the net proceeds from the 2018 Private Offering. We acquired our third business in August 2019 using a substantial portion of the net proceeds from our Public Offering. See “Portfolio and Investment Activity” above for discussion of the general terms and characteristics of our investments, and for information regarding investment activities since we commenced operations on February 7, 2018.

The following is a summary of our operating results for the quarter ended September 30, 2019 and 2018, the nine months ended September 30, 2019, and the period from February 7, 2018 (commencement of operations) to September 30, 2018:

	Quarter Ended September 30, 2019				Quarter Ended September 30, 2018				Nine Months Ended September 30, 2019				Period from February 7, 2018 (Commencement of Operations) to September 30, 2018
Total investment income	$	2,094,291			$	1,951,024			$	5,707,240			$	4,703,226
Total operating expenses	(1,085,714		)		(1,163,898		)		(3,223,348		)		(2,796,145		)
Expense support	264,325				234,565				1,090,845				421,923
Net investment income	1,272,902				1,021,691				3,574,737				2,329,004
Net change in unrealized appreciation on investments	819,000				3,317,000				3,270,000				4,769,873
Net increase in net assets resulting from operations	$	2,091,902			$	4,338,691			$	6,844,737			$	7,098,877

Investment Income

Investment income consisted of the following for the quarter ended September 30, 2019 and 2018, the nine months ended September 30, 2019, and the period from February 7, 2018 (commencement of operations) to September 30, 2018:

	Quarter Ended September 30, 2019				Quarter Ended September 30, 2018				Nine Months Ended September 30, 2019				Period from February 7, 2018 (Commencement of Operations) to September 30, 2018
Interest income	$	1,688,852			$	1,292,957			$	4,489,554			$	3,284,236
Dividend income	405,439				658,067				1,217,686				1,418,990
Total investment income	$	2,094,291			$	1,951,024			$	5,707,240			$	4,703,226

The majority of our interest income is generated from our debt investments, all of which had fixed rate interest as of September 30, 2019 and 2018. As of September 30, 2019 and 2018, our weighted average annual yield on our accruing debt investments was 16.0% based on amortized cost, as defined above in “Portfolio and Investment Activity.” Interest income from our debt investments was approximately $1.6 million and $1.3 million for the quarter ended September 30, 2019 and 2018, respectively, while interest income earned on our cash accounts was approximately $0.1 million and $0.04 million, respectively. Interest income from our debt investments was approximately $4.1 million and $3.2 million for the nine months ended September 30, 2019 and the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively, while interest income earned on our cash accounts was approximately $0.4 million and $0.1 million, respectively. The increase in interest income during the quarter and nine months ended September 30, 2019, as compared to the quarter ended September 30, 2018 and the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively, is primarily attributable to our debt investment in Roundtables of approximately $12.1 million in August 2019.

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During the quarter ended September 30, 2019 and 2018, we received dividend income of approximately $0.4 million and $0.7 million, respectively, from our equity investments. We received dividend income of approximately $1.2 million and $1.4 million during the nine months ended September 30, 2019 and the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively.

We do not believe that our interest income, dividend income and total investment income are representative of either our stabilized performance or our future performance. We expect investment income to increase in future periods as we increase our base of investments that we expect to result from existing cash, borrowings and an expected increase in capital available for investment using proceeds from our Offerings.

Operating Expenses

Our operating expenses for the quarter ended September 30, 2019 and 2018, the nine months ended September 30, 2019, and the period from February 7, 2018 (commencement of operations) to September 30, 2018 were as follows:

	Quarter Ended September 30, 2019				Quarter Ended September 30, 2018				Nine Months Ended September 30, 2019				Period from February 7, 2018 (Commencement of Operations) to September 30, 2018
Organization and offering expenses	$	168,395			$	210,288			$	490,399			$	749,082
Base management fees	355,893				211,025				862,659				494,561
Total return incentive fees	64,005				453,874				560,665				762,609
Professional services	212,157				140,708				622,163				373,238
Pursuit costs	76,052				—				76,052				—
Director fees and expenses	56,461				51,130				167,540				133,410
General and administrative expenses	39,513				16,029				97,824				109,839
Custodian and accounting fees	36,420				32,097				160,387				96,530
Insurance expense	64,057				46,966				157,081				75,043
Distribution and shareholder servicing fees	12,761				1,781				28,578				1,833
Total operating expenses	1,085,714				1,163,898				3,223,348				2,796,145
Expense support	(264,325		)		(234,565		)		(1,090,845		)		(421,923		)
Net expenses	$	821,389			$	929,333			$	2,132,503			$	2,374,222

We consider the following expense categories to be relatively fixed in the near term: insurance expenses and director fees and expenses. Variable operating expenses include general and administrative, custodian and accounting fees, professional services, pursuit costs, base management fees, total return incentive fees, and distribution and shareholder servicing fees. We expect these variable operating expenses to increase either in connection with the growth in our asset base (base management fees and total return incentive fees), the number of shareholders and open accounts (transfer agency services and shareholder services, distribution and shareholder servicing fees) and the complexity of our investment processes and capital structure (professional services).

Organization and Offering Expenses

Organization expenses are expensed on our statement of operations as incurred. Offering expenses, which consist of amounts incurred for items such as legal, accounting, regulatory and printing work incurred related to our Offerings, are capitalized on our statements of assets and liabilities as deferred offering expenses and expensed to our statement of operations over the lesser of the offering period or 12 months; however, the end of the deferral period will not exceed 12 months from the date the offering expense is incurred by the Manager and the Sub-Manager.

We expensed organization and offering expenses of approximately $0.2 million for each of the quarters ended September 30, 2019 and 2018, and approximately $0.5 million and $0.7 million during the nine months ended September 30, 2019 and the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively. The decrease in organization and offering expenses is primarily due to a decrease in gross proceeds raised through our Offerings during the nine months ended September 30, 2019, as compared to the period from February 7, 2018 (commencement of operations) to September 30, 2018.

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Base Management Fee

Our base management fee is calculated for each share class at an annual rate of (i) for the Non-founder shares, 2% of the product of (x) our average gross assets and (y) the ratio of Non-founder share Average Adjusted Capital for a particular class to total Average Adjusted Capital and (ii) for the Founder shares, 1% of the product of (x) our average gross assets and (y) the ratio of outstanding Founder share Average Adjusted Capital to total Average Adjusted Capital, in each case excluding cash, and is payable monthly in arrears.

We incurred base management fees of approximately $0.4 million and $0.2 million during the quarter ended September 30, 2019 and 2018, respectively, and approximately $0.9 million and $0.5 million during the nine months ended September 30, 2019 and the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively. The increase in base management fees is primarily attributable to the increase in our average gross assets during the quarter and nine months ended September 30, 2019, as compared to the quarter ended September 30, 2018 and the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively.

Total Return Incentive Fee

The Manager and Sub-Manager are eligible to receive incentive fees based on the Total Return to Shareholders, as defined in the Management Agreement and Sub-Management Agreement, for each share class in any calendar year, payable annually in arrears. We accrue (but do not pay) the total return incentive fee on a quarterly basis, to the extent that it is earned, and perform a final reconciliation at completion of each calendar year. The total return incentive fee is due and payable to the Manager and Sub-Manager no later than ninety (90) calendar days following the end of the applicable calendar year. The total return incentive fee may be reduced or deferred by the Manager and the Sub-Manager under the Management Agreement and the Expense Support and Conditional Reimbursement Agreement.

We incurred total return incentive fees of approximately $0.1 million and $0.5 million during the quarter ended September 30, 2019 and 2018, respectively, and $0.6 million and $0.8 million during the nine months ended September 30, 2019 and the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively. The decrease in total return incentive fees during the quarter and nine months ended September 30, 2019 is primarily attributable to a decrease in the net change in unrealized appreciation on investments as compared to the quarter ended September 30, 2018 and the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively.

Pursuit Costs

Pursuit costs relate to transactional expenses incurred for investments that did not close, including fees and expenses associated with performing the due diligence reviews. We incurred pursuit costs of approximately $0.1 million during each of the quarter and nine months ended September 30, 2019. We did not incur pursuit costs during the period from February 7, 2018 (commencement of operations) to September 30, 2018.

Other Operating Expenses

Other operating expenses (consisting of professional services, director fees and expenses, general and administrative expenses, custodian and accounting fees, and insurance expense) were approximately $0.4 million and $0.3 million during the quarter ended September 30, 2019 and 2018, respectively, and approximately $1.2 million and $0.8 million during the nine months ended September 30, 2019 and the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively. The increase in other operating expenses during the quarter and nine months ended September 30, 2019 is primarily attributable to an increase in accounting, legal, tax and valuation professional services resulting from an increase in the number of shareholders and investments, as compared to the quarter ended September 30, 2018 and the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively.

Distribution and Shareholder Servicing Fee

The Managing Dealer is eligible to receive an distribution and shareholder servicing fee, subject to certain limits, with respect to our Class T and Class D shares sold in the Public Offering (excluding Class T shares and Class D shares sold through our distribution reinvestment plan and those received as share distributions) in an amount equal to 1.00% and 0.50%, respectively, of the current net asset value per share.

We incurred distribution and shareholder servicing fees of $12,761 and $1,781 during the quarter ended September 30, 2019 and 2018, respectively, and $28,578 and $1,833 during the nine months ended September 30, 2019 and the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively. The increase in distribution and shareholder servicing fees during the quarter and nine months ended September 30, 2019, is attributable to an increase in Class T and Class D shareholders.

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Expense Support and Conditional Reimbursement Agreement

Expense support from the Manager and Sub-Manager partially offsets operating expenses. Expense support totaled approximately $0.3 million and $0.2 million during the quarter ended September 30, 2019 and 2018, respectively, and approximately $1.1 million and $0.4 million during the nine months ended September 30, 2019 and the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively. The actual amount of expense support is determined as of the last business day of each calendar year and is paid within 90 days after each year end per the terms of the Expense Support and Conditional Reimbursement Agreement described below.

We have entered into an Expense Support and Conditional Reimbursement Agreement with the Manager and the Sub-Manager, pursuant to which each of the Manager and the Sub-Manager agrees to reduce the payment of base management fees, total return incentive fees and the reimbursements of reimbursable expenses due to the Manager and the Sub-Manager under the Management Agreement and the Sub-Management Agreement, as applicable, to the extent that our annual regular cash distributions exceed our annual net income (with certain adjustments). Expense Support is equal to the annual (calendar year) excess, if any, of (a) the distributions (as defined in the Expense Support and Conditional Reimbursement Agreement) declared and paid (net of our distribution reinvestment plan) to shareholders minus (b) the available operating funds. The Expense Support amount is borne equally by the Manager and the Sub-Manager and is calculated as of the last business day of the calendar year. The Manager and Sub-Manager equally conditionally reduce the payment of fees and reimbursements of reimbursable expenses in an amount equal to the conditional waiver amount (as defined in and subject to limitations described in the Expense Support and Conditional Reimbursement Agreement). The term of the Expense Support and Conditional Reimbursement Agreement has the same initial term and renewal terms as the Management Agreement or the Sub-Management Agreement, as applicable to the Manager or the Sub-Manager.

If, on the last business day of the calendar year, there are Excess Operating Funds, we will use such Excess Operating Funds to pay the Manager and the Sub-Manager all or a portion of the outstanding unreimbursed Expense Support amounts for each share class, as applicable, subject to the Conditional Reimbursements as described further in the Expense Support and Conditional Reimbursement Agreement. Our obligation to make Conditional Reimbursements shall automatically terminate and be of no further effect three years following the date which the Expense Support amount was provided and to which such Conditional Reimbursement relates, as described further in the Expense Support and Conditional Reimbursement Agreement. We did not have any Excess Operating Funds as of September 30, 2019.

Net Change in Unrealized Appreciation

During the quarter ended September 30, 2019 and 2018, the nine months ended September 30, 2019, and the period from February 7, 2018 (commencement of operations) to September 30, 2018, net unrealized appreciation on investments consisted of the following:

	Quarter Ended September 30, 2019				Quarter Ended September 30, 2018				Nine Months Ended September 30, 2019				Period from February 7, 2018 (Commencement of Operations) to September 30, 2018
Unrealized appreciation	$	819,000			$	3,317,000			$	3,270,000			$	4,769,873
Unrealized depreciation	—				—				—				—
Total net unrealized appreciation	$	819,000			$	3,317,000			$	3,270,000			$	4,769,873

The net change in unrealized appreciation for all periods presented primarily pertained to our investment in the equity of Lawn Doctor.  Such unrealized appreciation is based on the current fair value of such investment as determined by our board of directors based on inputs from the Sub-Manager and our independent valuation firm and consistent with our valuation policy, which take into consideration, among other factors, Lawn Doctor’s strong performance in comparison to budgeted results for the year, future growth prospects of Lawn Doctor, and the valuations of publicly traded comparable companies as determined by our independent valuation firm. 

Net Assets

During the quarter ended September 30, 2019 and 2018, the nine months ended September 30, 2019, and the period from February 7, 2018 (commencement of operations) to September 30, 2018, the change in net assets consisted of the following:

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	Quarter Ended September 30, 2019				Quarter Ended September 30, 2018				Nine Months Ended September 30, 2019				Period from February 7, 2018 (Commencement of Operations) to September 30, 2018
Operations	$	2,091,902			$	4,338,691			$	6,844,737			$	7,098,877
Distributions to shareholders	(1,526,864		)		(1,059,027		)		(4,123,094		)		(2,388,458		)
Capital share transactions	17,176,713				5,471,770				39,627,288				88,026,740
Change in net assets	$	17,741,751			$	8,751,434			$	42,348,931			$	92,737,159

Operations decreased by approximately $2.2 million and $0.3 million during the quarter and nine months ended September 30, 2019, respectively, as compared to the quarter ended September 30, 2018 and the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively. The decrease in operations is primarily due to a decrease of approximately $2.5 million and $1.5 million in the net change in unrealized appreciation during the quarter and nine months ended September 30, 2019, respectively, offset by an increase of approximately $0.3 million and $1.2 million in net investment income, respectively.

Distributions increased approximately $0.5 million and $1.7 million during the quarter and nine months ended September 30, 2019, respectively, as compared to the quarter ended September 30, 2018 and the period from February 7, 2018 (commencement of operations) to September 30, 2018, respectively, primarily as a result of an increase in shares outstanding.

Capital share transactions increased approximately $11.7 million during the quarter ended September 30, 2019, as compared to the quarter ended September 30, 2018, primarily due to an increase in proceeds raised through our Public Offering of approximately $5.3 million, an increase in proceeds raised through our Class FA Private Offering and Follow-On Class FA Private Offering of approximately $6.5 million and an increase in proceeds raised through our distribution reinvestment plan of approximately $0.2 million, offset by an increase in share repurchases of approximately $0.3 million. Capital share transactions decreased approximately $48.4 million during the nine months ended September 30, 2019, as compared to the period from February 7, 2018 (commencement of operations) to September 30, 2018. The decrease was primarily due to the fact that during the period from February 7, 2018 (commencement of operations) to September 30, 2018, we raised net proceeds of approximately $81.5 million through the 2018 Private Offering, which we closed in February 2018, approximately $6.5 million through our Public Offering and approximately $0.1 million through our distribution reinvestment plan. During the nine months ended September 30, 2019, we raised net proceeds of approximately $30.2 million through our Public Offering, approximately $9.6 million through our Class FA Private Offering and Follow-On Class FA Private Offering, and approximately $0.5 million through our distribution reinvestment plan. Capital share transactions were reduced during the nine months ended September 30, 2019 as a result of the repurchasing of $0.6 million in shares under the Share Repurchase Program, which became effective in March 2019. No shares were repurchased in 2018.

Cumulative total returns without upfront selling commissions and placement agent / dealer manager fees from inception to September 30, 2019 were 17.7% for Class FA, 14.8% for Class A, 12.3% for Class T, 10.5% for Class D and 15.5% for Class I. Cumulative total returns assuming full upfront selling commissions and dealer manager fees from inception to September 30, 2019 were 5.0% for Class A and 6.9% for Class T. Cumulative total returns were 7.7% for Class FA shares sold in the Follow-On Class FA Private Offering assuming full upfront selling commissions and placement agent fees from inception to September 30, 2019.

We are not aware of any material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from our investments, other than those described above and the risk factors identified in Item 1A in Part I of our Form 10-K for the year ended December 31, 2018 and our subsequent quarterly reports on Form 10-Q.

Our shares are illiquid investments for which there currently is no secondary market. Investors should not expect to be able to resell their shares regardless of how we perform. If investors are able to sell their shares, they will likely receive less than their purchase price. Our net asset value and annualized returns — which are based in part upon determinations of fair value of Level 3 investments by our board of directors, not active market quotations — are inherently uncertain. Past performance is not a guarantee of future results.

Hedging Activities

As of September 30, 2019, we had not entered into any derivatives or other financial instruments. However, in an effort to stabilize our revenue and input costs where applicable, we may enter into derivatives or other financial instruments in an attempt to hedge our commodity risk. With respect to any potential financings, general increases in interest rates over time may cause the interest expense associated with our borrowings to increase, and the value of our debt investments to decline. We may seek to stabilize

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our financing costs as well as any potential decline in our assets by entering into derivatives, swaps or other financial products in an attempt to hedge our interest rate risk. In the event we pursue any assets outside of the United States we may have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar. We may in the future, enter into derivatives or other financial instruments in an attempt to hedge any such foreign currency exchange risk. It is difficult to predict the impact hedging activities may have on our results of operations.

Contractual Obligations

We have entered into the Management Agreement with the Manager and the Sub-Management Agreement with the Manager and the Sub-Manager pursuant to which the Manager and the Sub-Manager are entitled to receive a base management fee and reimbursement of certain expenses. Certain incentive fees based on our performance are payable to the Manager and the Sub-Manager after our performance thresholds are met. Each of the Manager and the Sub-Manager is entitled to 50% of the base management fee and incentive fees, subject to any reduction or deferral of any such fees pursuant to the terms of the Expense Support and Conditional Reimbursement Agreement.

If, on the last business day of the calendar year, there are Excess Operating Funds, we will use such Excess Operating Funds to pay the Manager and the Sub-Manager all or a portion of the outstanding unreimbursed Expense Support amounts for each share class, as applicable, subject to certain conditions as described further in the Expense Support and Conditional Reimbursement Agreement. Our obligation to make Conditional Reimbursements will automatically terminate and be of no further effect three years following the date which the Expense Support amount was provided and to which such Conditional Reimbursement relates, as described further in the Expense Support and Conditional Reimbursement Agreement. As of September 30, 2019, the amount of Expense Support related to the period from February 7, 2018 (commencement of operations) to December 31, 2018 collected from the Manager and Sub-Manager was $0.4 million. Our obligation to reimburse the Manager and Sub-Manager for Expense Support collected for the period from February 7, 2018 (commencement of operations) to December 31, 2018 will expire on December 31, 2021. As of September 30, 2019, management believes that reimbursement payments by the Company to the Manager and Sub-Manager are not probable under the terms of the Expense Support and Conditional Reimbursement Agreement.

We have also entered into the Administrative Services Agreement with the Administrator and the Sub-Administration Agreement with the Administrator and the Sub-Administrator pursuant to which the Administrator and the Sub-Administrator will provide us with administrative services and are entitled to reimbursement of expenses for such services. For a discussion of the compensation we pay in connection with the management of our business, see Note 5. “Related Party Transactions” in Item 1. “Financial Statements.”

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.

Inflation

We do not anticipate that inflation will have a significant effect on our results of operations. However, in the event of a significant increase in inflation, interest rates could rise and our assets may be materially adversely affected.

Seasonality

We do not anticipate that seasonality will have a significant effect on our results of operations.

Critical Accounting Policies and Use of Estimates

See our Form 10-K for the year ended December 31, 2018 and Note 2. “Significant Accounting Policies” of Part I of this Quarterly Report for a summary of our critical accounting policies.

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

We anticipate that our primary market risks will be related to the credit quality of our counterparties, market interest rates and changes in exchange rates. We will seek to manage these risks while, at the same time, seeking to provide an opportunity to shareholders to realize attractive returns through ownership of our shares.

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Credit Risk

We expect to encounter credit risk relating to (i) the businesses and other assets we acquire and (ii) our ability to access the debt markets on favorable terms. We will seek to mitigate this risk by deploying a comprehensive review and asset selection process, including scenario analysis, and careful ongoing monitoring of our acquired businesses and other assets as well as mitigation of negative credit effects through back up planning. Nevertheless, unanticipated credit losses could occur, which could adversely impact our operating results.

Changes in Market Interest Rates

We are subject to financial market risks, including changes in interest rates. Our debt investments are currently structured with fixed interest rates. Returns on investments that carry fixed rates are not subject to fluctuations in payments we receive from our borrowers, and will not adjust should rates move up or down. However, the fair value of our debt investments may be negatively impacted by rising interest rates. We may also invest in floating interest rate debt investments in the future.

We had not borrowed any money as of September 30, 2019. However, to the extent that we borrow money to make investments, our net investment income will be dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. In periods of rising interest rates, our cost of funds may increase, which may reduce our net investment income. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.

Exchange Rate Sensitivity

At September 30, 2019, we were not exposed to any foreign currency exchange rate risks that could have a material effect on our financial condition or results of operations. Although we do not have any foreign operations, some of the portfolio companies we invest in conduct business in foreign jurisdictions and therefore our investments have an indirect exposure to risks associated with changes in foreign exchange rates.

Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures are effective at the reasonable assurance level as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by us in the reports we filed under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the relevant SEC rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

We have not evaluated any change in our internal control over financial reporting that occurred during our last fiscal quarter due to a transition period established by the rules of the SEC for newly public companies. We expect to issue management’s first assessment regarding internal control over financial reporting for the year ending December 31, 2019 and to evaluate any changes in our internal controls over financial reporting in each quarterly and annual report thereafter.

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PART II. OTHER INFORMATION

 

Item 1.	Legal Proceedings

From time to time, we and individuals employed by us may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our businesses. In addition, our business and the businesses of the Manager, the Sub-Manager and the Managing Dealer are subject to extensive regulation, which may result in regulatory proceedings. Legal proceedings, lawsuits, claims and regulatory proceedings are subject to many uncertainties and their ultimate outcomes are not predictable with assurance.

As of September 30, 2019, we were not involved in any legal proceedings. Additionally, there is no action, suit or proceeding pending before any court, or, to our knowledge, threatened by any regulatory agency or other third party, against the Manager, the Sub-Manager or the Managing Dealer that would have a material adverse effect on us. 

Item 1A.	Risk Factors

We have disclosed under the heading “Risk Factors” in our Form 10-K and our subsequent quarterly reports on Form 10-Q, risk factors which materially affect our business, financial condition or results of operations. The risk factor captioned “If we do not make an election under Section 754 of the Code, a subsequent transferee of our shares could be allocated more taxable income in respect of those shares prior to disposition than if such an election were made” included in our Form 10-K is no longer applicable and is hereby deleted in its entirety. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

Unregistered Sales of Equity Securities

During the nine months ended September 30, 2019, we sold 351,573 Class FA shares under the Class FA Private Offering and Follow-On Private Offering for net proceeds of approximately $9.6 million. We are conducting the Class FA Private Offering and the Follow-On Class FA Private Offering in reliance on the exemption from registration provided under Rule 506 (c) under Regulation D. There is no selling commission or placement agent fee for the sale of Class FA shares under the Class FA Private Offering. Under the Follow-On Class FA Private Offering we pay the Placement Agent a selling commission of up to 5.5% and placement agent fee of up to 3.0% of the sale price for each Class FA share sold in the Follow-On Class FA Private Offering, except where the selling commission or placement agent fee may be reduced. See Note 7. “Capital Transactions” in Item 1. “Financial Statements” for additional information related to the Class FA Private Offerings. Class FA shares are not offered for sale in the Public Offering.

Use of Proceeds

On March 7, 2018, the Registration Statement covering the Public Offering, of up to $1,100,000,000 Shares, was declared effective under the Securities Act. The Public Offering commenced on March 7, 2018, and is currently expected to terminate on or before Mach 7, 2020, unless extended by our board of directors.

Through CNL Securities Corp., the Managing Dealer for the Public Offering, we are offering to the public on a best efforts basis up to $1,000,000,000 Shares consisting of Class A shares, Class T shares, Class D shares and Class I shares.

We are also offering up to $100,000,000 Shares to be issued pursuant to our distribution reinvestment plan.

The Shares being offered can be reallocated among the different classes and between the primary Public Offering and the distribution reinvestment plan. The following table presents the net offering proceeds received from the Public Offering through September 30, 2019:

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	Total				Payments to Affiliates (1)			Payments to Others
Aggregate price of offering amount registered (2)	$	1,000,000,000
Shares sold (3)	1,728,286
Aggregate amount sold (3)	$	47,046,058
Payment of underwriting compensation (4)	(1,354,416		)		(1,354,416	)		—
Net offering proceeds to the issuer	45,691,642
Investments in portfolio companies (5)	(36,099,774		)		—			(36,099,774	)
Distributions to shareholders (6)	(536,679		)		(24	)		(536,655	)
Remaining proceeds from the Offering	$	9,055,189

FOOTNOTES:

(1)	Represents direct or indirect payments to our directors or officers, the Manager, the Sub-Manager and their respective affiliates; to persons owning 10% or more of any class of our shares; and to our affiliates.

(2)	We are also offering up to $100,000,000 of shares to be issued pursuant to our distribution reinvestment plan. The shares being offered can be reallocated among the different classes and between the primary Public Offering and the distribution reinvestment plan.

(3)

Excludes approximately $0.6 million (22,717 shares) issued pursuant to our distribution reinvestment plan, approximately $0.2 million (8,000 shares) of unregistered shares issued to the Manager, and the Sub-Manager in a private transaction exempt from the registration requirements pursuant to section 4(a)(2) of the Securities Act, approximately $81.5 million (3,258,260 million shares) of unregistered Class FA shares sold in the 2018 Private Offering and approximately $9.6 million (351,573 shares) of unregistered Class FA shares sold in the Class FA Private Offering.

(4)	Underwriting compensation includes selling commissions and dealer manager fees paid to the Managing Dealer; all or a portion of which may be reallowed to participating broker-dealers.

(5)	Excludes approximately $8.3 million funded using proceeds from our Class FA Private Offerings.

(6)	Until such time as we have sufficient operating cash flows from our assets, we will pay cash distributions, debt service and/or operating expenses from net proceeds of our Public Offering.  The amounts presented above represent the net proceeds used for such purposes.

Repurchase of Shares and Issuer Purchases of Equity Securities

On March 29, 2019, our board of directors approved and adopted a Share Repurchase Program (the “Share Repurchase Program”). The total amount of aggregate repurchases of Class A, Class FA, Class T, Class D and Class I shares will be limited to up to 2.5% of the aggregate net asset value per calendar quarter (based on the aggregate net asset value as of the last date of the month immediately prior to the repurchase date) and up to 10% of the aggregate net asset value per year (based on the average aggregate net asset value as of the end of each of the Company’s trailing four quarters). Unless our board of directors determines otherwise, we will limit the number of shares to be repurchased during any calendar quarter to the number of shares we can repurchase with the proceeds received from the sale of shares under our distribution reinvestment plan in the previous quarter. Notwithstanding the foregoing, at the sole discretion of our board of directors, we may also use other sources, including, but not limited to, offering proceeds and borrowings to repurchase shares. Our board of directors, in its sole discretion, may amend, suspend or terminate the Share Repurchase Program or waive any of its specific conditions to the extent it is in our best interest, including to ensure our ability to qualify as a partnership for U.S. federal income tax purposes

During the quarter ended September 30, 2018, we repurchased the following shares:

Period		Total Number of Shares Repurchased			Average Price Paid Per Share				Total Number of Shares Purchased as Part of Publicly Announced Plan			Maximum Value of Shares That May Yet Be Purchased Under the Plan (1)
July 1, 2019 to July 31, 2019		—			$	—			—			170,578
August 1, 2019 to August 31, 2019		—			—				—			170,578
September 1, 2019 to September 30, 2019		12,400			27.19				12,400			—

 FOOTNOTE:

(1)	Repurchases are limited under the Share Repurchase Program as described above. During the quarter ended September 30, 2019, we received requests for the repurchase of approximately $0.3 million of our common shares, which exceeded proceeds received from our distribution reinvestment plan in the previous quarter by approximately $0.1 million. Our board of directors

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approved the use of other sources to satisfy repurchase requests received in excess of proceeds received from the distribution reinvestment plan.

Item 3.	Defaults Upon Senior Securities

None.

Item 4.	Mine Safety Disclosures

Not applicable.

Item 5.	Other Information

Not applicable.

Item 6.	Exhibits

The exhibits required by this item are set forth in the Exhibit Index attached hereto and are filed or incorporated as part of this report.

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EXHIBIT INDEX

The following exhibits are filed or incorporated as part of this report.

 

1.1		Placement Agent Agreement (incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 16, 2019).
3.1		Certificate of Formation of CNL Strategic Capital, LLC dated August  8, 2016 (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 333-222986) filed with the SEC on February 12, 2018).
3.2		Fourth Amended and Restated Limited Liability Company Operating Agreement of CNL Strategic Capital, LLC (incorporated by reference to Exhibit 3.2 to the Company’s Form 10-Q filed with the SEC on August 8, 2019).
4.1		Distribution Reinvestment Plan (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-1 (File No. 333-222986) filed with the SEC on February 12, 2018).
4.2		Form of Subscription Agreement (incorporated by reference to Appendix B to the Post-Effective Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-222986) filed with the SEC on April 5, 2019).
4.3		Share Repurchase Program (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed with the SEC on April 1, 2019).
31.1*		Certification of Chief Executive Officer of CNL Strategic Capital, LLC, Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer of CNL Strategic Capital, LLC, Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer and Chief Financial Officer of CNL Strategic Capital, LLC, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*		The following materials from CNL Strategic Capital, LLC Quarterly Report on Form 10-Q for the quarter and nine months ended September 30, 2019 formatted in XBRL (Extensible Business Reporting Language); (i) Condensed Consolidated Statements of Assets and Liabilities, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Changes in Net Assets, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Schedules of Investments, and (vi) Notes to the Condensed Consolidated Financial Statements.

*	Filed herewith

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of 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, on the 14th day of November, 2019.

		CNL STRATEGIC CAPITAL, LLC
		By:	/s/ Chirag J. Bhavsar
			CHIRAG J. BHAVSAR
			Chief Executive Officer
			(Principal Executive Officer)
		By:	/s/ Tammy J. Tipton
			TAMMY J. TIPTON
			Chief Financial Officer
			(Principal Financial and Accounting Officer)

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