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 March 31, 2020

Commission File Number: 000-55767

Flat Rock Capital Corp.

Maryland		82-0894786
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1350 6th Avenue, 18th Floor, New York, NY		10019
(Address of principal executive offices)		(Zip Code)

(212) 596-3413

(Registrant’s telephone number, including area code)

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, or a smaller reporting 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

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
None		None		None

As of May 12, 2020, the registrant had 2,893,527 shares of common stock, $0.001 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Consolidated Financial Statements	1
	Consolidated Statements of Assets and Liabilities as of March 31, 2020 (Unaudited) and December 31, 2019	1
	Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019 (Unaudited)	2
	Consolidated Statements of Changes in Net Assets for the Three Months Ended March 31, 2020 and 2019 (Unaudited)	3
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (Unaudited)	4
	Consolidated Schedules of Investments as of March 31, 2020 (Unaudited) and December 31, 2019	5
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	35

PART II.	OTHER INFORMATION	36
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37

Signatures		38

PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements.

Flat Rock Capital Corp.

Consolidated Statements of Assets and Liabilities

	March 31, 2020 (Unaudited)			December 31, 2019

Assets:
Non-controlled/non-affiliated investments, at fair value (amortized cost of $101,325,212 and $101,846,603, respectively)	$	98,206,006		$	101,537,724
Cash and cash equivalents		2,627,484			3,359,446
Restricted cash		75,000			-
Foreign currency, at fair value (cost of $47,289 and $47,289, respectively)		47,289			47,289

Receivables:
Subscriptions		45,000			-
Receivable for sales of investments		187,412			1,771
Receivable for paydowns of investments		-			81,410
Due from investment adviser		286,869			196,728
Dividend receivable		72,188			64,524
Interest receivable		815,552			265,314
Prepaid expenses and other assets		-			75,000
Total Assets	$	102,362,800		$	105,629,206

Liabilities:
Credit facility, net (Note 6)	$	31,776,664		$	29,796,235
Payables:
Payable for investments purchased		15,031,763			18,996,667
Distributions payable		272,838			257,614
Management fee payable		723,985			368,452
Incentive fee payable		331,290			155,491
Accrued other general and administrative expenses		181,240			84,877
Total Liabilities	$	48,317,780		$	49,659,336

Commitments and contingencies (Note 8)

Net Assets:
Preferred shares, $0.001 par value; 25,000,000 shares authorized; 0 issued and outstanding as of March 31, 2020, and December 31, 2019	$	-		$	-
Common Shares, $0.001 par value; 125,000,000 shares authorized; 2,874,863 as of March 31, 2020, and 2,832,840 as of December 31, 2019 issued and outstanding, respectively		2,875			2,833
Additional paid-in capital		57,287,623			56,459,407
Total distributable earnings (accumulated deficit)		(3,245,478	)		(492,370	)
Total Net Assets	$	54,045,020		$	55,969,870
Total Liabilities and Net Assets	$	102,362,800		$	105,629,206
Net Asset Value Per Common Share	$	18.80		$	19.76

The accompanying notes are an integral part of these consolidated financial statements.

Flat Rock Capital Corp.

Consolidated Statements of Operations

(Unaudited)

	For the Three Months Ended
	March 31, 2020			March 31, 2019
Income:
Investment income from non-controlled, non-affiliated investments:
Interest income	$	1,845,027		$	1,437,288
Dividend income		156,760			-
Other income		34,149			125,292
Total investment income from non-controlled, non-affiliated investments		2,035,936			1,562,580
Total Investment Income		2,035,936			1,562,580

Expenses:
Interest expenses		378,382			407,411
Management fees		355,533			291,417
Incentive fees		175,798			-
Professional fees		74,685			61,644
Other general and administrative expenses		111,235			98,486
Total Expenses		1,095,633			858,958
Less: Management fee waiver (Note 3)		(58,092	)		(42,375	)
Less: Incentive fee waiver (Note 3)		(32,048	)		-
Net expenses		1,005,493			816,583
Net Investment Income (Loss)		1,030,443			745,997

Realized and unrealized gains (losses) on investments and foreign currency transactions
Net realized gains (losses):
Non-controlled, non-affiliated investments		3,333			56,833
Forward foreign currency exchange contracts (Note 2)		-			350,650
Total net realized gains (losses)		3,333			407,483
Net change in unrealized gains (losses):
Non-controlled, non-affiliated investments		(2,810,328	)		(87,439	)
Foreign currency translation		(3,605	)		102,878
Forward foreign currency exchange contracts (Note 2)		-			(479,679	)
Total net change in unrealized gains (losses)		(2,813,933	)		(464,240	)
Total realized and unrealized gains (losses)		(2,810,600	)		(56,757	)

Net Increase (Decrease) in Net Assets Resulting from Operations	$	(1,780,157	)	$	689,240

Per Common Share Data:
Basic and diluted net investment income per common share	$	0.36		$	0.39
Basic and diluted net increase (decrease) in net assets resulting from operations	$	(0.63	)	$	0.36
Weighted Average Common Shares Outstanding - Basic and Diluted		2,846,085			1,931,100

The accompanying notes are an integral part of these consolidated financial statements.

Flat Rock Capital Corp.

Consolidated Statements of Changes in Net Assets

(Unaudited)

	For the Three Months Ended
	March 31, 2020			March 31, 2019
Increase (Decrease) in Net Assets Resulting from Operations:
Net investment income (loss)	$	1,030,443		$	745,997
Net realized gains (losses) on investments and foreign currency transactions		3,333			407,483
Net change in unrealized gains (losses) on investments, foreign currency translations,
and foreign currency exchange contracts		(2,813,933	)		(464,240	)
Net Increase (Decrease) in Net Assets Resulting from Operations		(1,780,157	)		689,240

Decrease in Net Assets Resulting from Stockholder Distributions
Dividends and distributions to stockholders		(972,951	)		(624,439	)

Net Decrease in Net Assets Resulting from Stockholder Distributions		(972,951	)		(624,439	)

Increase in Net Assets Resulting from Capital Share Transactions
Issuance of common shares		884,925			3,104,850
Reinvestment of distributions		160,916			-
Repurchase of common shares		(217,583	)		-
Net Increase in Net Assets Resulting from Capital Share Transactions		828,258			3,104,850
Total Increase (Decrease) in Net Assets		(1,924,850	)		3,169,651
Net Assets, Beginning of Period		55,969,870			36,855,107
Net Assets, End of Period	$	54,045,020		$	40,024,758
Net Asset Value per Common Share	$	18.80		$	19.77
Common shares outstanding at the end of the period		2,874,863			2,024,555

The accompanying notes are an integral part of these consolidated financial statements.

Flat Rock Capital Corp.

Consolidated Statements of Cash Flows

(Unaudited)

	For the Three Months Ended
	March 31, 2020			March 31, 2019

Cash Flows from Operating Activities:
Net increase (decrease) in net assets resulting from operations	$	(1,780,157	)	$	689,240
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities:
Net realized (gains)/losses on investments		(3,333	)		(407,483	)
Net change in unrealized (gains)/losses on investments		2,810,328			87,439
Net change in unrealized (gains)/losses on foreign currency translations		3,605			(102,878	)
Net change in unrealized (appreciation)/depreciation on forward foreign currency contracts		-			479,678
Net accretion of discount on investments		(48,463	)		(22,492	)
Purchases of investments		(20,038,595	)		(34,874,630	)
Proceeds from sale of investments		20,608,176			25,141,037
Amortization of debt issuance costs		33,278			28,467
Changes in operating assets and liabilities:
Receivable for sales of investments		(185,641	)		(4,963,750	)
Interest and dividends receivable		(557,902	)		200,340
Due from investment adviser		(90,141	)		89,849
Receivable for paydowns of investments		81,410			678
Prepaid expenses and other assets		75,000			-
Payable for investments purchased		(3,964,904	)		5,737,369
Management fees payable		355,533			249,042
Incentive fee payable		175,799			-
Payable to affiliate		-			24,545
Accrued other general and administrative expenses		96,363			(139,543	)
Net cash used in operating activities		(2,429,644	)		(7,783,092	)
Cash Flows from Financing Activities:
Borrowings on credit facility		10,090,193			7,523,856
Payments on credit facility		(8,131,897	)		(1,902,786	)
Payments of debt issuance costs		(11,145	)		24,391
Distributions paid in cash		(796,811	)		(610,861	)
Proceeds from issuance of common shares, net of change in subscriptions receivable of $45,000 and $0, respectively		839,925			3,104,850
Repurchase of common shares		(217,583	)		-
Net cash provided by financing activities		1,772,682			8,139,450
Net increase (decrease) in cash, cash equivalents, restricted cash and foreign currency		(656,962	)		356,358
Cash, cash equivalents, restricted cash, and foreign currency, beginning of period		3,406,735			1,179,518
Cash, cash equivalents, restricted cash, and foreign currency, end of period⁽¹⁾	$	2,749,773		$	1,535,876

Supplemental and Non-Cash Information:
Interest paid during the period	$	378,382		$	407,411
Distributions declared during the period	$	972,951		$	-
Reinvestment of distributions during the period	$	160,916		$	-
Distributions payable	$	272,838		$	213,723

(1)	Agrees to the total of “Cash and cash equivalents”, “Restricted cash”, and “Foreign currency, at fair value” balances on the Consolidated Statements of Assets and Liabilities.

The accompanying notes are an integral part of these consolidated financial statements.

Flat Rock Capital Corp.

Consolidated Schedule of Investments

As of March 31, 2020

(Unaudited)

			Acquisition	Maturity	Par /		Amortized		Fair		Percentage
Portfolio Company⁽³⁾	Industry	Interest Rate	Date	Date	Units		Cost⁽¹⁾⁽⁶⁾		Value		of Net Assets
Debt Investments
First Lien Senior Secured⁽²⁾
AIS HoldCo, LLC(7)	Insurance Services	3M USD L + 5.00% (0% Floor)	8/15/2018	8/15/2025		3,850,000	$	3,850,519	$	3,850,000		7.1	%
ALM Media, Inc.(7)	Media: Advertising, Printing, and Publishing	3M USD L + 6.50% (1% Floor)	11/25/2019	11/25/2024		4,937,500		4,844,613		4,838,750		8.9	%
Broder Bros Co.(7)	Wholesale	1M USD L + 8.50% (1% Floor)	1/30/2019	12/2/2022		1,922,627		1,922,627		1,884,174		3.5	%
Ceva Logistics Finance B.V.(4)	Transportation: Cargo	1M USD L + 5.00% (0% Floor)	2/22/2019	8/4/2025		2,977,500		2,897,260		2,203,350		4.1	%
Coastal Construction Products(7)	Construction & Building	2M USD L + 5.125% (1% Floor)	10/10/2018	9/4/2024		3,805,021		3,767,222		3,772,297		7.0	%
Diversified Risk Holdings, LLC	Insurance Services	3M USD L + 8.00% (1% Floor)	11/28/2018	11/28/2023		14,812,500		14,701,970		14,960,625		27.6	%
Hill International, Inc.(7)	Business Services	3M USD L + 5.75% (1% Floor)	9/22/2017	6/21/2023		1,458,750		1,453,769		1,455,103		2.7	%
Isagenix International LLC(7)	Direct Selling	3M USD L + 5.75% (1% Floor)	4/26/2018	4/25/2025		2,734,648		2,742,233		1,914,253		3.5	%
Mills Fleet Farms(7)	Consumer Goods	1M USD L + 7.00% (0.75% PIK - 1% Floor)	10/19/2018	10/19/2024		4,957,991		4,877,128		4,517,226		8.3	%
NM Z Parent Inc (Zep Inc)(7)	Chemicals & Allied Products	3M USD L+ 4.00% (1% Floor)	5/25/2018	8/9/2024		979,900		970,648		787,349		1.5	%
North Pole US LLC(4)	Aerospace & Defense	3M USD L + 7.00% (0% Floor)	4/10/2019	4/10/2025		1,900,000		1,729,370		1,705,630		3.1	%
Potpourri Group, Inc.(7)	Direct Selling	1M USD L + 8.25% (0% Floor)	7/3/2019	7/3/2024		9,812,500		9,725,312		9,053,013		16.7	%
Specialist Resources Global Inc.(5)(7)	Healthcare Services	1M USD L + 5.25% (0% Floor)	9/23/2019	9/23/2025		3,316,667		3,278,003		3,162,773		5.8	%
Spencer Gifts LLC(7)	Retail	1M USD L + 6.00% (0% Floor)	6/14/2019	6/12/2026		4,900,219		4,809,834		4,705,190		8.7	%
ThreeBridge Solutions Delayed Draw(7)	IT Implementation	-	12/1/2017	12/1/2022		277,916		275,886		274,942		0.5	%
ThreeBridge Solutions Term Loan(5)(7)	IT Implementation	Greater of 13.00% Fixed or 1M USD L + 9.00%	12/1/2017	12/1/2022		5,062,084		5,018,649		5,007,920		9.2	%
Trident Technologies, LLC(7)	IT Services	3M USD L + 6.00% (1.5% Floor)	1/23/2020	12/19/2025		4,987,500		4,914,735		4,912,688		9.1	%
World Insurance Associates, LLC Delayed Draw(7)	Banking, Finance, Insurance & Real Estate	1M USD L + 4.50% (1% Floor)	7/2/2018	7/18/2024		1,688,667		1,682,884		1,688,667		3.1	%
World Insurance Associates, LLC(7)	Banking, Finance, Insurance & Real Estate	1M USD L + 4.50% (1% Floor)	7/2/2018	7/18/2024		3,174,410		3,148,996		3,174,410		5.9	%
Total First Lien Senior Secured						77,556,400	$	76,611,658	$	73,868,360		136.3	%

Collateralized Securities and Structured Products
Churchill Middle Market CLO IV Ltd.Class E2(4)	Investment Funds & Vehicles	3M USD L + 9.27% (0% Floor)	12/12/2019	1/23/2032		4,000,000		3,805,017		3,494,800		6.4	%
Total Collateralized Securities and Structured Products						4,000,000		3,805,017		3,494,800		6.4	%
Total Debt Investments						81,556,400	$	80,416,675	$	77,363,160		142.7	%

Equity Investments
BCP Great Lakes Fund LP(4)(8)(9)(10)	Investment Funds & Vehicles	N/A	8/9/2019	N/A		5,876,774		5,876,774		5,818,594		10.7	%
New Mountain Finance Corp.(4)(5)	Investment Funds & Vehicles	N/A	3/31/2020	N/A		5,265		35,468		35,802		0.1	%
Total Equity Investments						5,882,039	$	5,912,242	$	5,854,396		10.8	%

	Yield to			Maturity	Acquisition	Number of		Par /		Amortized		Fair			Percentage
Security⁽³⁾	Maturity			Date	Date	Shares		Units		Cost⁽⁶⁾		Value			of Net Assets
U.S. Government Securities
U.S. Treasury Bill(5)		0.00	%	4/1/2020	3/31/2020		15,000,000		15,000,000	$	14,996,295	$	14,988,450			27.7	%
Total U.S. Government Securities									15,000,000		14,996,295		14,988,450			27.7	%

Total Investments									102,438,439	$	101,325,212	$	98,206,006			181.2	%
Liabilities in Excess of Other Assets													(44,160,986	)		(81.2	)%
Net Assets												$	54,045,020			100.0	%

(1)

The amortized cost represents the original cost adjusted for the amortization of discounts and premiums, as applicable, on debt investments using the effective interest method.

(2)

Loan contains a variable rate structure, subject to an interest rate floor. Variable rate loans bear interest at a rate that may be determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) (which can include one-, two-, three- or six-month LIBOR) or an alternate base rate (which can include the Federal Funds Effective Rate or the Prime Rate), at the borrower’s option, and which reset periodically based on the terms of the loan agreement. For each such loan, the Company has provided the interest rate in effect on the date presented. As of March 31, 2020, the 1 month (1M), 2 month (2M), and 3 month (3M) USD LIBOR rates were 0.99%, 1.26%, and 1.45%, respectively.

(3)

As of March 31, 2020, all investments are non-controlled, non-affiliated investments. Non-controlled, non-affiliated investments are defined as investments in which the Company owns less than 5% of the portfolio company’s outstanding voting securities and does not have the power to exercise control over the management or policies of such portfolio company.

(4)

Non-qualifying investment as defined by Section 55(a) of the Investment Company Act of 1940. The Company may not acquire any non-qualifying asset unless, at the time of acquisition, qualifying assets represent at least 70% of the Company’s total assets. As of March 31, 2020, 13.0% of the Company’s total assets were in non-qualifying investments.

(5)

Investments or a portion of investments are unsettled as of March 31, 2020.

(6)

As of March 31, 2020, the tax cost of the Company’s investments approximates their amortized cost.

(7)

Security or portion thereof held within FRC Funding I, LLC and is pledged as collateral supporting the amounts outstanding under a revolving credit facility with State Bank and Trust Company (see Note 6 to the consolidated financial statements).

(8)

Security exempt from registration under the Securities Act of 1933 (the “Securities Act”), and may be deemed to be “restricted securities” under the Securities Act. As of March 31, 2020, the aggregate fair value of securities held by the Company is $5,818,594 or 10.7% of net assets.

(9)

The BCP Great Lakes Fund LP is a limited partnership commitment, and has a three year reinvestment period expiring November 27, 2021, and is subject to two (2) one year extensions thereof with the consent of BMO Harris Bank and BC Partners Advisors, L.P.

(10)

Of the entire $7,300,000 commitment to BCP Great Lakes Fund LP, $385,533 was unfunded as of March 31, 2020. As such, no dividend is being earned on this investment.

The accompanying notes are an integral part of these consolidated financial statements.

Flat Rock Capital Corp.

Consolidated Schedule of Investments

As of December 31, 2019

Portfolio Company⁽³⁾	Industry	Interest Rate	Acquisition Date	Maturity Date		Principal / Par		Cost		Fair Value		Percentage of Net Assets
Debt Investments
First Lien Senior Secured Debt^(1)(2)(6)
AIS HoldCo, LLC(7)	Insurance Services	3M USD L + 5.00% (0% Floor)	8/15/2018		8/15/2025	$	3,875,000	$	3,875,108	$	3,826,562		6.8	%
ALM Media, Inc.(7)	Media: Advertising, Printing, and Publishing	3M USD L + 6.50% (1% Floor)	11/25/2019		11/25/2024		5,000,000		4,901,774		4,900,000		8.8	%
Broder Bros Co.(7)	Wholesale	3M USD L + 8.50% (1% Floor)	1/30/2019		12/2/2022		1,932,883		1,932,883		1,932,883		3.5	%
Ceva Logistics Finance B.V.(4)	Transportation: Cargo	3M USD L + 5.00% (0% Floor)	2/22/2019		8/4/2025		2,985,000		2,901,303		2,567,100		4.6	%
Coastal Construction Products(7)(10)	Construction & Building	1M USD L + 5.125% (1% Floor)	10/10/2018		9/4/2024		3,805,021		3,765,373		3,805,021		6.8	%
Diversified Risk Holdings, LLC	Insurance Services	3M USD L + 8.00% (1% Floor)	11/28/2018		11/28/2023		14,850,000		14,732,774		14,998,500		26.8	%
Hill International, Inc.(7)	Business Services	3M USD L + 5.75% (1% Floor)	9/22/2017		6/21/2023		1,462,500		1,457,080		1,458,844		2.6	%
Isagenix International LLC(7)	Direct Selling	3M USD L + 5.75% (1% Floor)	4/26/2018		4/25/2025		2,773,173		2,781,173		2,495,856		4.5	%
Mills Fleet Farms(7)	Consumer Goods	1M USD L + 6.25% (1% Floor)	10/19/2018		10/19/2024		4,961,078		4,876,119		4,712,031		8.4	%
NM Z Parent Inc (Zep Inc)(7)	Chemicals & Allied Products	3M USD L+ 4.00% (1% Floor)	5/25/2018		8/9/2024		982,412		972,631		808,820		1.4	%
North Pole US LLC(4)	Aerospace & Defense	3M USD L + 7.00% (0% Floor)	4/10/2019		4/10/2025		1,925,000		1,745,737		1,750,595		3.1	%
Potpourri Group, Inc.(7)	Direct Selling	1M USD L + 8.25% (0% Floor)	7/3/2019		7/3/2024		9,875,000		9,781,895		9,776,250		17.5	%
Specialist Resources Global Inc.(5)(7)(10)	Healthcare Services	1M USD L + 5.25% (0% Floor)	9/23/2019		9/23/2025		3,325,000		3,284,781		3,283,417		5.9	%
Spencer Gifts LLC(7)	Retail	1M USD L + 6.00% (0% Floor)	6/14/2019		6/12/2026		4,987,500		4,891,998		4,889,246		8.7	%
ThreeBridge Solutions Delayed Draw(7)	IT Implementation	-	12/1/2017		12/1/2022		277,916		275,688		277,916		0.5	%
ThreeBridge Solutions Term Loan(5)(7)	IT Implementation	1M USD L+ 9.00% (1% Floor)	12/1/2017		12/1/2022		5,164,392		5,115,830		5,164,392		9.2	%
World Insurance Associates, LLC Delayed Draw(7)	Banking, Finance, Insurance & Real Estate	1M USD L + 4.50% (1% Floor)	7/2/2018		7/18/2024		1,692,930		1,686,765		1,676,001		3.0	%
World Insurance Associates, LLC(7)	Banking, Finance, Insurance & Real Estate	1M USD L + 4.50% (1% Floor)	7/2/2018		7/18/2024		3,182,458		3,155,653		3,150,633		5.6	%
Total First Lien Senior Secured Debt						$	73,057,263	$	72,134,565	$	71,474,067		127.7	%

Collateralized Loan Obligations(1)(6)
Churchill Middle Market CLO IV Ltd., Class E2(4)	Investment Vehicle	3M USD L + 10.20% (0% Floor)	12/12/2019		1/23/2032		4,000,000		3,800,904		4,060,800		7.3	%
Total Collateralized Loan Obligations							4,000,000		3,800,904		4,060,800		7.3	%
Total Debt Investments						$	77,057,263	$	75,935,469	$	75,534,867		135.0	%

Private Fund Investments
BCP Great Lakes Fund LP(4)(8)(9)	Investment Vehicle	-	8/9/2019		-				6,914,467		7,006,429		12.5	%
Total Private Fund Investments								$	6,914,467	$	7,006,429		12.5	%

Security⁽³⁾	Yield to Maturity			Maturity Date	Acquisition Date	Number of Shares	Principal / Par		Amortized Cost⁽⁶⁾		Fair Value			Percentage of Net Assets
U.S. Government Securities⁽¹⁾⁽⁶⁾
U.S. Treasury Bill(5)		1.05	%	1/7/2020	12/31/2019	19,000,000	$	19,000,000	$	18,996,667	$	18,996,428			33.9	%
Total U.S. Government Securities								19,000,000		18,996,667		18,996,428			33.9	%

Total Investments							$	96,057,263	$	101,846,603	$	101,537,724			181.4	%
Liabilities in Excess of Other Assets												(45,567,854	)		(81.4	)%
Net assets											$	55,969,870			100.0	%

(1) The amortized cost represents the original cost adjusted for the amortization of discounts and premiums, as applicable, on debt investments using the effective interest method.

(2) Loan contains a variable rate structure, subject to an interest rate floor. Variable rate loans bear interest at a rate that may be determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) (which can include one-, two-, three- or six-month LIBOR) or an alternate base rate (which can include the Federal Funds Effective Rate or the Prime Rate), at the borrower’s option, and which reset periodically based on the terms of the loan agreement. For each such loan, the Company has provided the interest rate in effect on the date presented. As of December 31, 2019, the 1 month (1M), 2 month (2M), and 3 month (3M) USD LIBOR rates were 1.76%, 1.83%, and 1.91%, respectively.

(3) As of December 31, 2019, all investments are non-controlled, non-affiliated investments. Non-controlled, non-affiliated investments are defined as investments in which the Company owns less than 5% of the portfolio company’s outstanding voting securities and does not have the power to exercise control over the management or policies of such portfolio company.

(4) Non-qualifying investment as defined by Section 55(a) of the Investment Company Act of 1940. The Company may not acquire any non-qualifying asset unless, at the time of acquisition, qualifying assets represent at least 70% of the Company’s total assets. As of December 31, 2019, 14.6% of the Company’s total assets were in non-qualifying investments.

(5) Investments or a portion of investments are unsettled as of December 31, 2019.

(6) As of December 31, 2019, the tax cost of the Company’s investments approximates their amortized cost.

(7) Security or portion thereof held within FRC Funding I, LLC, a special purpose wholly-owned subsidiary of the Company, and is pledged as collateral supporting the amounts outstanding under a revolving credit facility (see Note 6 to the consolidated financial statements).

(8) Security exempt from registration under the Securities Act of 1933 (the “Securities Act”), and may be deemed to be a “restricted security” under the Securities Act. As of December 31, 2019, the aggregate fair value of restricted securities held by the Company was $7,006,429 or 12.5% of net assets.

(9) The BCP Great Lakes Fund LP (the “Private Fund”) is a limited partnership commitment, and has a three year reinvestment period expiring November 27, 2021, and is subject to two (2) one year extensions thereof with the consent of BMO Harris Bank and BC Partners Advisors, L.P. The Private Fund’s investment strategy is to invest in middle market sponsor backed uni-tranche term loans. The reinvestment period is 3 years from the close date. The Private Fund does not permit withdrawal from the Private Fund or the withdrawal of any portion of the Company's capital account until the termination of the Private Fund or as provided in the Private Fund's limited partnership agreement. Of the $7,300,000 commitment to the Private Fund, $385,533 was unfunded as of December 31, 2019 (See Note 8 to the Consolidated Financial Statements).

(10) The Company had unfunded loan commitments to the portfolio company as of December 31, 2019. See Note 8 to the Consolidated Financial Statements.

The accompanying notes are an integral part of these consolidated financial statements.

Flat Rock Capital Corp.

Notes to Consolidated Financial Statements (Unaudited)

Note 1. Organization

Organization

Flat Rock Capital Corp. (the “Company”) is a Maryland corporation formed on March 20, 2017 that commenced operations on May 3, 2017. The Company was formed to primarily make debt investments in senior secured loans of U.S. middle-market companies (“Senior Loans”). The Company is an externally managed, non-diversified, closed-end investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for tax purposes, the Company has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). Because the Company has elected to be regulated as a BDC and has elected to be treated as a RIC under the Code, the Company’s portfolio is subject to diversification and other requirements. The Company’s investment objective is the preservation of capital while generating current income from its debt investments and seeking to maximize the portfolio’s total return.

Flat Rock Global, LLC (the “Adviser” or “Flat Rock Global”), a Delaware limited liability company, serves as the Company’s investment adviser. The Adviser is registered with the Securities and Exchange Commission (“SEC”) as an investment adviser under the Investment Advisers Act of 1940 (the “Advisers Act”). The Adviser oversees the management of the Company’s activities and is responsible for making investment decisions with respect to, and providing day-to-day management and administration of, the Company’s investment portfolio under the terms of an investment advisory agreement between the Company and the Adviser (the “Investment Advisory Agreement”), subject to the supervision of the Company’s Board of Directors (the “Board”). The Board consists of three directors, two of whom are not “interested persons,” as such term is defined in Section 2(a)(19) of the 1940 Act, of the Company of Flat Rock Global.

The Company is conducting a continuous private offering of shares of its common stock (“Shares”) to investors in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). Shares are offered solely to investors that are “accredited investors” as defined in Rule 501(a) of Regulation D promulgated under the Securities Act. The Company offers Shares through its agents and employees without sales commission or other remuneration on a “best efforts” basis. The Company believes that each of its employees and agents qualifies as an “associated person not deemed to be broker” within the meaning of Rule 3a4-1 promulgated pursuant to the Securities Exchange Act of 1934, as amended.

Note 2. Significant Accounting Policies

Basis of Presentation

The accompanying audited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying consolidated financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Articles 6 or 10 of Regulation S-X. The Company is an investment company, and, therefore, applies the specialized accounting and reporting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services - Investment Companies.

Basis of Consolidation

As provided under Regulation S-X and ASC Topic 946, the Company will generally not consolidate its investment in a company other than a wholly-owned investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s special purpose wholly-owned subsidiary, FRC Funding I, LLC, which was formed on August 31, 2018, in its consolidated financial statements. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reported periods. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially.

Cash and Cash Equivalents

Cash and cash equivalents (e.g. U.S. Treasury bills) may include demand deposits and highly liquid investments with original maturities of three months or less. Cash and cash equivalents are carried at cost, which approximates fair value. The Company deposits its cash and cash equivalents with highly-rated banking corporations and, at times, may exceed the insured limits under applicable law.

Flat Rock Capital Corp.

Notes to Consolidated Financial Statements (Unaudited)

Income Taxes

The Company has elected to be treated for U.S. federal income tax purposes as a RIC under the Code. So long as the Company maintains its status as a RIC, it generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes at least annually to its stockholders as dividends. Rather, any tax liability related to income earned by the Company represents obligations of the Company’s investors and will not be reflected in the financial statements of the Company. To qualify as a RIC under Subchapter M of the Code, the Company must, among other things, meet certain source-of-income and asset diversification requirements. In addition, to qualify for RIC tax treatment, the Company must distribute to its stockholders, for each taxable year, at least 90% of its “investment company taxable income” for that year, which is generally its ordinary income plus the excess of its realized net short-term capital gains over its realized net long-term capital losses.

In order for the Company not to be subject to U.S. federal excise taxes, it must distribute annually an amount at least equal to the sum of (i) 98% of its net ordinary income (taking into account certain deferrals and elections) for the calendar year, (ii) 98.2% of its capital gains in excess of capital losses for the calendar year and (iii) any net ordinary income and capital gains in excess of capital losses for preceding years that were not distributed during such years. The Company, at its discretion, may carry forward taxable income in excess of calendar year dividends and pay a 4% nondeductible U.S. federal excise tax on this income.

The Company evaluates tax positions taken or expected to be taken in the course of preparing its financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions not deemed to meet the “more-likely-than- not” threshold are reserved and recorded as a tax benefit or expense in the current year. All penalties and interest associated with income taxes are included in income tax expense. Conclusions regarding tax positions are subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof.

Although the Company files federal and state tax returns, its major tax jurisdiction is federal. The Company’s inception-to-date federal tax years remain subject to examination by the Internal Revenue Service and the State of Maryland Department of Assessments and Taxation.

Valuation of Portfolio Investments

The Company has adopted FASB ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements.

ASC Topic 820 clarifies that fair value is defined as the price that the Company would receive upon selling an investment or paying to transfer a liability to a market participant in the principal or most advantageous market for the investment. 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 that 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 as discussed in Note 5.

The Board has established procedures for the valuation of the Company’s investment portfolio. The valuation committee, which is comprised of the independent members of the Board, is responsible for executing the valuation policy, with assistance from Flat Rock Global and one or more independent valuation firms. These procedures are detailed below.

Flat Rock Capital Corp.

Notes to Consolidated Financial Statements (Unaudited)

Investments for which market quotations are readily available are valued at such market quotations.

Most of the Company’s investments are not traded on a national securities exchange and do not have the benefit of market quotations or other pricing data from such an exchange. With respect to investments for which pricing data is not readily available or when such pricing data is deemed not to represent fair value, the Board has approved a multi-step valuation process each quarter, as described below:

each portfolio company or investment is valued by Flat Rock Global, potentially with information received from one or more independent valuation firms engaged by the Company;

an independent valuation firm conducts independent valuations and makes an independent assessment of the value of each investment on a rotating basis so that each investment is valued at least twice annually;

the valuation committee of the Board reviews and discusses the preliminary valuations prepared by Flat Rock Global and that of the independent valuation firm; and

the Board discusses the valuations and determines the fair value of each investment in the Company’s portfolio in good faith based on the input of Flat Rock Global, an independent valuation firm and the valuation committee.

Investments are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present value amount (discounted) calculated based on an appropriate discount rate. The measurement is based on the net present value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that may be taken into account in fair value pricing the Company’s investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, 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 discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, the principal market and enterprise values, among other factors.

Investments in private investment companies are measured based upon NAV as a practical expedient to determine fair value. The Company applies the practical expedient to private investment companies on an investment-by-investment basis, and consistently with the Company’s entire position in a particular investment, unless it is probable that the Company will sell a portion of an investment at an amount different from the NAV of the investment. Each of these investments has certain restrictions with respect to rights of withdrawal by the Company as specified in the respective agreements. Generally, the Company is required to provide notice of its intent to withdraw after the investment has been maintained for a certain period of time. The management agreements of the private investment companies provide for compensation to the managers in the form of fees ranging from 0% to 2% annually of the net assets and performance incentive allocations or fees ranging from 0% to 20% on net profits earned.

Flat Rock Capital Corp.

Notes to Consolidated Financial Statements (Unaudited)

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

The Company measures realized gains or losses by the difference between the net proceeds from the repayment or sale and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized. The Company utilizes specific identification on a First-In, First-Out (“FIFO”) basis as their tax-lot relief method.

Debt Issuance Costs

The Company records origination and other expenses related to its debt obligations as debt issuance costs. These expenses are deferred and amortized over the life of the related debt instrument. Debt issuance costs are presented on the consolidated statements of assets and liabilities as a direct deduction from the debt liability. As of March 31, 2020, the balance of debt issuance costs was $338,266, included in Credit Facility, net of $31,776,664 on the consolidated statements of assets and liabilities. As of December 31, 2019, the balance of debt issuance costs was $371,544, included in Credit Facility, net of $29,796,235 on the consolidated statements of assets and liabilities.

Derivatives and Hedging Activities

Derivative instruments are defined as financial instruments whose value and performance are based on the value and performance of another security or financial instrument. During the three months ended March 31, 2020, the Company did not utilize forward foreign currency contracts to hedge its foreign currency exposure.

During the three months ended March 31, 2019, the Company utilized forward foreign currency contracts to hedge its foreign currency exposure.

The following table provides quantitative disclosures about fair values of, and unrealized appreciation (depreciation) on, the Company’s derivative instruments as of and for the three months ended March 31, 2019, grouped by contract type and risk exposure category.

Derivatives

Unrealized appreciation (depreciation) on forward foreign currency exchange contracts

Forward Contracts		$	(109,866	)
Derivative Liability		$	(109,866	)

The following table lists the amount of change in unrealized appreciation (depreciation) included in net increase (decrease) in net assets resulting from operations during the three months ended March 31, 2019, grouped by contract type and risk exposure.

Derivatives	Consolidated Statement of Operations Location	Foreign Currency Contracts			Total
	Net change in unrealized gains (losses) from forward foreign currency exchange contracts
Forward Contracts		$	(479,679	)	$	(479,679	)
		$	(479,679	)	$	(479,679	)

During the three months ended March 31, 2019, the Company’s quarterly average volume of derivatives is as follows:

Forward Foreign Currency Exchange Contracts - Payable (Value at Trade Date)
		$	(4,915,656	)

Distributions to Common Stockholders

Distributions to common stockholders are recorded on the record date. The amount to be distributed is determined by the Board and is generally based upon current and estimated net earnings. Net realized long-term capital gains, if any, would be generally distributed at least annually, although the Company may decide to retain such capital gains for investment.

Foreign Currency Translation

The Company’s books and records are maintained in U.S. dollars. Any foreign currency amounts are translated into U.S. dollars on the following basis:

Fair value of investment securities, other assets and liabilities — at the exchange rates prevailing at the end of the applicable period; and

Purchases and sales of investment securities, income and expenses — at the exchange rates prevailing on the respective dates of such transactions.

Flat Rock Capital Corp.

Notes to Consolidated Financial Statements (Unaudited)

Although net assets and fair values are presented based on the applicable foreign exchange rates described above, the Company does not isolate that portion of the results of operations due to changes in foreign exchange rates on investments, other assets and debt from the fluctuations arising from changes in fair values of investments and liabilities held. Such fluctuations are included with the net realized gain (loss) and net change in unrealized gain (loss) from investments and liabilities.

Foreign security and currency translations may involve certain considerations and risks not typically associated with investing in U.S. companies and U.S. government securities. These risks include, but are not limited to, currency fluctuations and revaluations and future adverse political, social and economic developments, which could cause investments in foreign markets to be less liquid and prices to be more volatile than those of comparable U.S. companies or U.S. government securities.

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The primary focus of ASU 2018-13 is to improve the effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are required to include fair value measurement disclosures. In general, the amendments in ASU 2018-13 are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early adopt the removed or modified disclosures upon the issuance of ASU 2018-13 and may delay adoption of the additional disclosures, which are required for public companies only, until their effective date. Management has adopted certain disclosures of ASU 2018-13 and delayed adoption of additional disclosures as permitted by the standard.

Note 3. Agreements and Related Party Transactions

Investment Advisory Agreement

On May 16, 2017, the Company entered into the Investment Advisory Agreement with Flat Rock Global. Pursuant to the Investment Advisory Agreement, the Company pays Flat Rock Global a fee for its services consisting of two components — a management fee and an incentive fee. The management fee is calculated at an annual rate of 1.375% of the Company’s average gross assets as of the end of the two most recently completed quarters and is payable quarterly in arrears. The management fee for any partial month or quarter will be appropriately pro-rated. In order to meet the diversification tests required to qualify as a RIC, the Company, on March 31, 2020, acquired $15,000,000 in face value of short-term U.S. Treasury Bills. This transaction had the effect of increasing management fees payable to Flat Rock Global by $58,092 for a total gross management fee of $355,533; however, Flat Rock Global waived the portion relating to the acquisition of short-term U.S. Treasury Bills. In order to meet the diversification tests required to qualify as a RIC, the Company, on December 31, 2019, acquired $19,000,000 in face value of short-term U.S. Treasury Bills. This transaction had the effect of increasing management fees payable to Flat Rock Global by $76,236 for a total gross management fee payable of $368,452; however, Flat Rock Global waived the portion relating to the acquisition of short-term U.S. Treasury Bills. In addition, there are no recoupment agreements in place, and waived fees will not be recouped by Flat Rock Global.

The incentive fee consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears based on 15% of the Company’s pre-incentive fee net investment income for the immediately preceding quarter. The payment of the incentive fee on income is subject to payment of a preferred return to investors each quarter, expressed as a quarterly rate of return on adjusted capital at the beginning of the most recently completed calendar quarter, of 1.5% (6.0% annualized), subject to a “catch up” feature. The foregoing incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre- incentive fee net investment income is payable except to the extent that 15.0% of the cumulative net increase in net assets resulting from operations for the prior twelve quarters exceeds the cumulative incentive fees accrued and/or paid for the prior twelve quarters. In other words, any incentive fee on income that is payable in a calendar quarter is limited to the lesser of (i) 15.0% of the amount by which the Company’s pre- incentive fee net investment income for such calendar quarter that exceeds the 1.5% hurdle, subject to the “catch-up” provision and (ii) (x) 15.0% of the cumulative net increase in net assets resulting from operations for the prior twelve quarters minus (y) the cumulative incentive fees accrued and/or paid for the prior twelve quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the sum of the Company’s pre-incentive fee net investment income, realized gains and losses and unrealized gains and losses since inception.

The total return requirement described above is designed to measure the performance of Flat Rock Global over a longer time horizon than on a quarterly basis and to ensure that Flat Rock Global does not earn fees for exceeding the hurdle rate in selected quarters while under-performing on a longer- term basis. The total return requirement is likewise designed to incentivize Flat Rock Global to not focus solely on quarterly performance, but to seek investments that exhibit strong performance on a long-term basis. The Company believes that the total return requirement is beneficial to investors and has the potential to reduce the fees payable to Flat Rock Global in the event of under-performance on a long-term basis.

Under the capital gains component of the incentive fee, the Company pays Flat Rock Global at the end of each calendar year 15.0% of its aggregate cumulative realized capital gains from inception through the end of that year, computed net of the Company’s aggregate cumulative realized capital losses and the Company’s aggregate cumulative unrealized losses through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees. For the foregoing purpose, the Company’s “aggregate cumulative realized capital gains” does not include any unrealized gains. It should be noted that the Company accrues an incentive fee for accounting purposes taking into account any unrealized gains in accordance with U.S. GAAP. The capital gains component of the incentive fee is not subject to any minimum return to stockholders. If such amount is negative, then no capital gains incentive fee is payable for such year. Additionally, if the Investment Advisory Agreement is terminated as of a date that is not a calendar year end, the termination date is treated as though it were a calendar year end for purposes of calculating and paying the capital gains incentive fee.

Flat Rock Capital Corp.

Notes to Consolidated Financial Statements (Unaudited)

For the three months ended March 31, 2020, the Company incurred incentive fees on income of $175,798 of which $32,048 was waived by Flat Rock Global. In addition, there are no recoupment agreements in place, and waived incentive fees will not be recouped by Flat Rock Global.

For the three months ended March 31, 2019, the Company did not incur incentive fees on income.

The Company includes unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to Flat Rock Global if the Company’s entire portfolio was liquidated at its fair value as of the balance sheet date even though Flat Rock Global is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized. For the three months ended March 31, 2020 and 2019, the Company did not accrue capital gains incentive fees. On a quarterly basis, the Company accrues for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.

Administration Agreement

The Company entered into an administration agreement with Flat Rock Global to serve as its Administrator. Pursuant to the administration agreement, Flat Rock Global provides the Company with services such as accounting, financial reporting, legal and compliance support and investor relations support necessary for the Company to operate or has engaged a third-party firm to perform some or all of these functions. The Company does not pay Flat Rock Global any fees pursuant to the Administration Agreement. The Company reimburses Flat Rock Global for administrative expenses it incurs as a result of providing these services.

Note 4. Investments

The following table presents the composition of the Company’s investment portfolio at amortized cost and fair value as of March 31, 2020 and December 31, 2019:

	March 31, 2020				December 31, 2019
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
First-lien Senior Secured Debt	$	76,611,658	$	73,868,360	$	72,134,565	$	71,474,067
Equity Investments		5,912,242		5,854,396		6,914,467		7,006,429
Collateralized Securities and Structured Products		3,805,017		3,494,800		3,800,904		4,060,800
U.S. Government Securities		14,996,295		14,988,450		18,996,667		18,996,428
Total Investments	$	101,325,212	$	98,206,006	$	101,846,603	$	101,537,724

As of March 31, 2020, 9.8% of the investment portfolio at amortized cost and 8.9% of the investment portfolio measured at fair value, respectively, were invested in portfolio companies with foreign domiciles, specifically Luxembourg and Switzerland, or non-controlled investment companies. Such investments are not qualifying assets as defined by Section 55(a) of the 1940 Act.

As of December 31, 2019, 14.6% of the investment portfolio at amortized cost and 14.6% of the investment portfolio measured at fair value, respectively, were invested in portfolio companies with foreign domiciles, specifically Luxembourg and Switzerland, or non-controlled investment companies. Such investments are not qualifying assets as defined by Section 55(a) of the 1940 Act.

The industry composition of investments based on fair value as of March 31, 2020 and December 31, 2019 was as follows:

	March 31, 2020			December 31, 2019

Insurance Services		19.2	%		18.6	%
U.S. Government Securities		15.3	%		18.8	%
Direct Selling		11.2	%		12.1	%
Investment Funds & Vehicles		9.5	%		10.9	%
IT Implementation		5.4	%		5.3	%
Banking, Finance, Insurance & Real Estate		5.0	%		4.8	%
IT Services		5.0	%		0.0	%
Media: Advertising, Printing, and Publishing		4.9	%		4.8	%
Retail		4.8	%		4.8	%
Consumer Goods		4.6	%		4.6	%
Construction & Building		3.8	%		3.8	%
Healthcare Services		3.2	%		3.2	%
Transportation: Cargo		2.2	%		2.5	%
Wholesale		1.9	%		1.9	%
Aerospace & Defense		1.7	%		1.7	%
Business Services		1.5	%		1.4	%
Chemicals & Allied Products		0.8	%		0.8	%
Total		100.0	%		100.0	%

Flat Rock Capital Corp.

Notes to Consolidated Financial Statements (Unaudited)

The geographic composition of investments based on total investment portfolio fair value as of March 31, 2020 and December 31, 2019 was as follows:

	March 31, 2020			December 31, 2019
United States:
Northeast		40.7	%		42.1	%
West		17.2	%		17.1	%
U.S. Government Securities		15.3	%		18.8	%
Southeast		12.1	%		7.0	%
Midwest		10.0	%		10.0	%
South		0.8	%		0.8	%
Switzerland		2.2	%		2.5	%
Luxembourg		1.7	%		1.7	%
Total		100.0	%		100.0	%

Note 5. Fair Value of Investments

Fair value is defined as the price that the Company would receive upon selling an investment or paying to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. Accounting guidance emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs.

Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances. The valuation hierarchical levels are based upon the transparency of the inputs to the valuation of the investment as of the measurement date. The three levels are defined as follows:

	Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities at the measurement date.

	Level 2 — Valuations based on inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable at the measurement date. This category includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in non-active markets including actionable bids from third parties for privately held assets or liabilities, and observable inputs other than quoted prices such as yield curves and forward currency rates that are entered directly into valuation models to determine the value of derivatives or other assets or liabilities.

	Level 3 — Valuations based on inputs that are unobservable and where there is little, if any, market activity at the measurement date.

Investments in private investment companies measured based upon NAV as a practical expedient to determine fair value are not required to be categorized in the fair value hierarchy.

The inputs for the determination of fair value may require significant management judgment or estimation and are based upon management’s assessment of the assumptions that market participants would use in pricing the assets or liabilities. These investments include debt and equity investments in private companies or assets valued using the market or income approach and may involve pricing models whose inputs require significant judgment or estimation because of the absence of any meaningful current market data for identical or similar investments. The inputs in these valuations may include, but are not limited to, capitalization and discount rates, beta 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. 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.

Flat Rock Capital Corp.

Notes to Consolidated Financial Statements (Unaudited)

Pricing inputs and weightings applied to determine fair value require subjective determination. Accordingly, valuations do not necessarily represent the amounts that may eventually be realized from sales or other dispositions of investments.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following table presents the fair value hierarchy of investments as of March 31, 2020 and December 31, 2019. Assets valued using NAV as a practical expedient, an indicator of fair value, are listed in a separate column to permit reconciliation to totals in the Consolidated Statements of Assets and Liabilities:

	Fair Value Hierarchy as of March 31, 2020
Investments:	Level 1		Level 2		Level 3		Investments Valued at Net Asset Value		Total
First-lien Senior Secured Debt	$	-	$	-	$	73,868,360	$	-	$	73,868,360
Equity Investments		35,802		-		-		5,818,594		5,854,396
Collateralized Securities and Structured Products		-		-		3,494,800		-		3,494,800
U.S. Government Securities		-		14,988,450		-		-		14,988,450
Total Investments	$	35,802	$	14,988,450	$	77,363,160	$	5,818,594	$	98,206,006

	Fair Value Hierarchy as of December 31, 2019
Investments:	Level 1		Level 2		Level 3		Investments Valued at Net Asset Value		Total
First-lien senior Secured Debt	$	-	$	-	$	71,474,067	$	-	$	71,474,067
Equity Investments		-		-		-		7,006,429		7,006,429
Collateralized Securities and Structured Products						4,060,800				4,060,800
U.S. Government Securities		-		18,996,428		-		-		18,996,428
Total Investments	$	-	$	18,996,428	$	75,534,867	$	7,006,429	$	101,537,724

The following table presents changes in the fair value of investments for which Level 3 inputs were used to determine the fair value as of and for the three months ended March 31, 2020 and 2019:

	For the Three Months Ended
First-lien senior secured debt	March 31, 2020			March 31, 2019
Fair value, beginning of period	$	71,474,067		$	61,194,099
Purchases of investments		4,934,413			25,227,200
Proceeds from principal payments and sales of investments		(501,670	)		(10,085,095	)
Net change in unrealized gain (loss)		(2,082,800	)		15,471
Net accretion of discount on investments		44,350			22,492
Transfers into (out of) Level 3		-			-
Fair value, end of period	$	73,868,360		$	76,374,167

	For the Three Months Ended
Collateralized loan obligations	March 31, 2020			March 31, 2019
Fair value, beginning of period	$	4,060,800		$	-
Purchases of investments		-			-
Proceeds from principal payments and sales of investments		-			-
Net change in unrealized gain (loss)		(570,113	)		-
Net accretion of discount on investments		4,113			-
Transfers into (out of) Level 3		-			-
Fair value, end of period	$	3,494,800		$	-

Flat Rock Capital Corp.

Notes to Consolidated Financial Statements (Unaudited)

The following table presents the net change in unrealized gains/(losses) for the period relating to these Level 3 assets that were still held by the Company for the three months ended March 31, 2020 and 2019:

	For the Three Months Ended
Net Change in Unrealized Gain (Loss)	March 31, 2020			March 31, 2019
First-lien senior secured debt	$	(2,234,500	)	$	45,385
Collateralized Securities and Structured Products		(570,113	)		-
	$	(2,804,613	)	$	45,385

Market Based Approach: The Company may estimate the total enterprise value of each portfolio company by utilizing market value cash flow (EBITDA) multiples of publicly traded comparable companies and comparable transactions. The Company considers numerous factors when selecting the appropriate companies whose trading multiples are used to value its portfolio companies. These factors include, but are not limited to, the type of organization, similarity to the business being valued, and relevant risk factors, as well as size, profitability and growth expectations. The Company may apply an average of various relevant comparable company EBITDA multiples to the portfolio company’s latest twelve–month EBITDA or projected EBITDA to calculate the enterprise value of the portfolio company. Significant increases or decreases in the EBITDA multiple will result in an increase or decrease in enterprise value, which may result in an increase or decrease in the fair value estimate of the investment. In applying the market-based approach as of March 31, 2020 and December 31, 2019, the Company used the relevant EBITDA and revenue multiple ranges set forth in the table below to determine the enterprise value of its portfolio companies.

The Company believes these were reasonable ranges in light of current comparable company trading levels and the specific portfolio companies involved.

Income Based Approach: The Company also may use a discounted cash flow analysis to estimate the fair value of an investment. Projected cash flows represent the relevant security’s contractual interest, fee and principal payments plus the assumption of full principal recovery at the investment’s expected maturity date. These cash flows are discounted at a rate established utilizing a yield calibration approach, which incorporates changes in the credit quality (as measured by relevant statistics) of the portfolio company, as compared to changes in the yield associated with comparable credit quality market indices, between the date of origination and the valuation date. Significant increases or decreases in the discount rate would result in a decrease or increase in the fair value measurement. In applying the income-based approach as of March 31, 2020 and December 31, 2019, the Company used the discount ranges set forth in the table below to value investments in its portfolio companies.

Fair value was also determined in some cases based on transaction pricing or recent acquisition or sale as the best measure of fair value with no material changes in operations of the related portfolio company since the transaction date.

The following table presents quantitative information about the significant unobservable inputs of the Company’s Level 3 investments as of March 31, 2020 and December 31, 2019. The table is not intended to be all-inclusive but instead captures the significant unobservable inputs relevant to the Company’s determination of fair value.

As of March 31, 2020

Range

Fair Value

Valuation
Technique

Unobservable
Input

(Weighted Average)

Collateralized securities and structured products

3,494,800

Third Party Vendor Pricing Service

Broker Quotes

87.37 - 87.37 (87.37)

First-lien senior secured debt

9,775,765

Recent transaction

Transaction price

98.50 - 100.00 (99.25)

First-lien senior secured debt

64,092,595

Market & income approach

EBITDA multiple

4.3x - 17.2x (10.1x)

77,363,160

Revenue multiple

0.3x - 5.2x (1.8x)

Discount rate

7.3% - 17.0% (9.6%)

As of December 31, 2019

Valuation

Unobservable

Range

Fair Value

Technique

Input

(Weighted Average)

Collateralized securities and structured products

4,060,800

Third Party Vendor Pricing Service

Broker Quotes

101.52 - 101.52 (101.52)

First-lien senior secured debt

4,900,000

Recent transaction

Transaction price

98.00 - 98.00 (98.00)

First-lien senior secured debt

66,574,067

Market & income approach

EBITDA multiple

8.4x - 16.5x (12.7x)

75,534,867

Revenue multiple

0.88x - 3.5x (2.1x)

Discount rate

4.31% - 11.62% (9.33%)

Flat Rock Capital Corp.

Notes to Consolidated Financial Statements (Unaudited)

Note 6. Borrowings

In accordance with the 1940 Act, with certain limitations, BDCs are allowed to borrow amounts such that their asset coverage ratios, as defined in the 1940 Act, are at least 200% after such borrowing. As of May 30, 2019, as a result of complying with the requirements set forth in the Small Business Credit Availability Act (“SBCAA”), the Company is able to borrow amounts such that its asset coverage ratio is at least 150%, rather than 200%. As of March 31, 2020 and December 31, 2019, the Company’s asset coverage ratio was 270% and 288%, respectively.

On October 12, 2018, the Company, through a special purpose wholly-owned subsidiary, FRC Funding I, LLC (“FRC Funding” and together with the Company, the “Borrowers”) entered into a Loan and Security Agreement (the “Loan Agreement”) with certain financial institutions as lenders (“Lenders”), State Bank and Trust Company as the administrative agent (“State Bank”) and Alostar Capital Finance (“Alostar”), as Lead Arranger and Bookrunner, pursuant to which the Lenders agreed to provide the Company with a revolving line of credit (the “Credit Facility”). The Loan Agreement was effective as of October 12, 2018. Per the second amendment of the Loan Agreement, Cadence Bank, N.A. is the successor by merger to State Bank and Trust Company. The termination date for the Loan Agreement is October 12, 2022.

The Loan Agreement provides for an initial $20.0 million in Revolver Commitments (as defined in the Loan Agreement) to be available at closing that the Company can draw down and repay for three years, subject to borrowing base eligibility. The Loan Agreement matures at the earliest of (a) the date that is four (4) years from closing, (b) the date on which FRC Funding terminates the Revolver Commitments pursuant to the Loan Agreement; or (c) the date on which the Revolver Commitments are terminated pursuant to certain events of default under the Loan Agreement; and the Scheduled Revolving Period End Date (as defined in the Loan Agreement) is three years from closing. On December 10, 2018, the Loan Agreement was amended to add Hitachi Capital America Corp. to the definition of “Lenders” and to amend the definition of “Revolver Commitments” to increase the aggregate amount available to the Borrowers under the Revolver Commitments to $30 million, beginning with the effective date of the amendment. On May 31, 2019, the Loan Agreement was further amended to revise the definitions for “Asset Coverage Ratio” and “Service Termination Event,” and increase the aggregate amount available to Borrowers under the Revolver Commitments to $35 million, beginning with the effective date of the amendment.

Debt obligations consisted of the following as of March 31, 2020 and December 31, 2019:

	March 31, 2020
	Aggregate Principal Committed		Outstanding Principal		Amount Available⁽¹⁾		Net Carrying Value⁽²⁾
Credit Facility	$	35,000,000	$	32,006,609	$	2,791,210	$	31,776,664
Total debt	$	35,000,000	$	32,006,609	$	2,791,210	$	31,776,664

(1)

The amount available reflects any limitations related to the Credit Facility’s borrowing base.

(2)

The carrying value of the Credit Facility is presented net of debt issuance costs of $0.4 million.

	December 31, 2019
	Aggregate Principal Committed		Outstanding Principal		Amount Available⁽¹⁾		Net Carrying Value⁽²⁾
Credit Facility	$	35,000,000	$	30,048,313	$	2,579,058	$	29,796,235
Total debt	$	35,000,000	$	30,048,313	$	2,579,058	$	29,796,235

(1)

The amount available reflects any limitations related to the Credit Facility’s borrowing base.

(2)

The carrying value of the Credit Facility is presented net of debt issuance costs of $0.4 million.

Average debt outstanding during the three months ended March 31, 2020 was $30,969,747.

Average debt outstanding during the three months ended March 31, 2019 was $25,525,435.

The Loan Agreement accrues interest at the Daily LIBOR Rate, plus a 2.88% margin, and principal is repayable in full at maturity. Interest is generally required to be paid monthly in arrears. The Loan Agreement requires the payment of an unused line fee of between 0.50% and 1.0%, commencing on the date that is two months from closing, based on the amount by which the Revolver Commitments exceed the average daily balance of the Revolver Loans (as defined in the Loan Agreement) during any month. Such fee is payable monthly in arrears. The Loan Agreement has an advance rate against FRC Funding’s Eligible Portfolio Investments (as defined in the Loan Agreement). The advance rate, as to any Eligible Portfolio Investment, is 75.0% when the Company’s asset coverage ratio is equal or greater than 200.0% or 70.0% when the Company’s asset coverage ratio is less than 200.0%, subject to certain eligibility requirements.

Flat Rock Capital Corp.

Notes to Consolidated Financial Statements (Unaudited)

For the three months ended March 31, 2020 and 2019, the components of interest expense relating to the credit facility were as follows:

	For the Three Months Ended
	March 31, 2020			March 31, 2019

Interest expense	$	335,077		$	343,177
Amortization of debt issuance costs		33,278			28,468
Total interest expense	$	368,355		$	371,645
Average interest rate		4.29	%		5.38	%

Pursuant to the terms of the Loan Agreement, the Borrowers granted to State Bank for the benefit of State Bank and Hitachi, Lenders, Alostar and its affiliates, a security interest and a lien in substantially all of FRC Funding’s assets. The Loan Agreement contains certain affirmative and negative covenants, including a minimum Company asset coverage ratio, a minimum fixed charge ratio, and a minimum Company tangible net worth. Under the Loan Agreement, the Borrowers are required to make certain customary representations and warranties and are required to comply with various covenants, reporting requirements and other requirements that are customary for similar credit facilities. The obligations under the Loan Agreement may be accelerated upon the occurrence of an event of default under the Loan Agreement or in the event of a change of control of the Company or FRC Funding.

Note 7. Share Transactions

Offering Proceeds

During the three months ended March 31, 2020, the Company issued and sold 44,810 shares of its common stock at an aggregate purchase price of approximately $0.9 million.

During the three months ended March 31, 2019, the Company issued and sold 157,135 shares at an aggregate purchase price of $3.1 million.

Distributions

The following table reflects the distributions paid on shares of the Company’s common stock during the three months ended March 31, 2020:

Total

Declaration

Record

Per

Payment

Distributions

Date

Declared

11/12/2019

1/24/2020

0.114

2/6/2020

322,943

11/12/2019

2/24/2020

0.114

3/6/2020

322,863

2/25/2020

3/26/2020

0.114

4/8/2020

⁽¹⁾

327,145

972,951

(1)

As of March 31, 2020, this distribution had not been paid, which consisted of a cash dividend of $272,838 and dividends reinvested of $54,307. See balance payable on the Consolidated Statements of Assets and Liabilities, as well as disclosure of payment noted in Note 11 to the consolidated financial statements.

The following table reflects the distributions paid on shares during the three months ended March 31, 2019:

Total

Declaration

Record

Per

Payment

Distributions

Date

Declared

11/13/2018

1/26/2019

0.108

2/6/2019

201,660

11/13/2018

2/26/2019

0.108

3/6/2019

209,035

2/28/2019

3/26/2019

0.108

4/8/2019

⁽¹⁾

213,723

624,418

(1)

As of March 31, 2019, this distribution had not been paid, which consisted of a cash dividend of $213,723 and no dividends reinvested. See balance payable on the Consolidated Statements of Assets and Liabilities, as well as disclosure of payment noted in Note 11 to the consolidated financial statements.

Flat Rock Capital Corp.

Notes to Consolidated Financial Statements (Unaudited)

Distribution Reinvestment Plan

On March 28, 2019, the Board approved the establishment of a distribution reinvestment plan (the “DRIP”). The DRIP was effective as of, and was first applied to the reinvestment of cash distributions paid on or after, May 1, 2019.

Under the DRIP, cash distributions paid to participating stockholders are reinvested in Shares at a price equal to the net asset value per share of the Shares as of such date. New stockholders of the Company on or after May 1, 2019 became participating stockholders in the DRIP unless they affirmatively declined participation in the DRIP. Existing stockholders of the Company prior to May 1, 2019 were given the opportunity to participate in the DRIP.

The following table reflects the common stock issued pursuant to the DRIP during the three months ended March 31, 2020:

Declaration	Record	Payment
Date	Date	Date	Shares
11/12/2019	1/26/2020	2/6/2020		2,695
11/12/2019	2/26/2020	3/6/2020		2,701
2/25/2020	3/26/2020	4/8/2020		2,826
				8,222

Repurchases of Shares

As a result of the Company’s compliance with the requirements set forth in the SBCAA, the asset coverage ratio test applicable to the Company was decreased from 200% to 150%, effective May 30, 2019.

Beginning with the tender offer that commenced on April 1, 2019, the Company commenced its share repurchase program, whereby it intends to offer to repurchase up to 5% if its issued and outstanding shares on a quarterly basis through registered tender offers. The table below shows the effects of the quarterly repurchase offers made by the Company during the three months ended March 31, 2020:

Repurchase Offer Date	Repurchase Date	Number of Shares Repurchased		Percentage of Shares Repurchased			Repurchase Price Per Share		Aggregate Consideration for Repurchased Shares
1/9/2020	2/7/2020		11,009		100	%	$	19.77	$	217,583


TOTAL			11,009						$	217,583

Flat Rock Capital Corp.

Notes to Consolidated Financial Statements (Unaudited)

Note 8. Commitments and Contingencies

The Company had an aggregate of $3,052,200 of unfunded commitments to provide debt financing to its portfolio companies or to fund limited partnership interests as of March 31, 2020. As of March 31, 2020, there were no capital calls or draw requests made by the portfolio companies to fund these commitments. Such commitments are generally up to the Company’s discretion to approve or are subject to the satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Company’s consolidated statements of assets and liabilities and are not reflected in the Company’s consolidated statements of assets and liabilities.

A summary of the composition of the unfunded commitments as of March 31, 2020 is shown in the table below:

		As of
	Expiration Date ⁽¹⁾	March 31, 2020

Coastal Construction Products	9/4/2020	$	1,000,000
Specialist Resources Global Inc.	9/26/2021		1,666,667
BCP Great Lakes Fund LP	11/27/2021		385,533
Total unfunded commitments		$	3,052,200

(1)

Commitments are generally subject to borrowers meeting certain criteria such as compliance with covenants and certain operational metrics. These amounts may remain outstanding until the commitment period of an applicable loan expires, which may be shorter than its maturity.

A summary of the composition of the unfunded commitments as of December 31, 2019 is shown in the table below:

		As of
	Expiration Date ⁽¹⁾	December 31, 2019

Coastal Construction Products	9/4/2020	$	1,000,000
Specialist Resources Global Inc.	9/26/2021		1,666,667
BCP Great Lakes Fund LP	11/27/2021		385,533
Total unfunded commitments		$	3,052,200

(1)

From time to time, the Company may become a party to certain legal proceedings incidental to the normal course of its business. As of March 31, 2020, management is not aware of any pending or threatened litigation.

Note 9. Earnings Per Share

In accordance with the provisions of ASC Topic 260, Earnings per Share, basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis. As of March 31, 2020 and 2019, there were no dilutive shares.

The following table sets forth the computation of basic and diluted earnings per common share for the three months ended March 31, 2020 and 2019:

	For the Three Months Ended
	March 31, 2020			March 31, 2019

Net increase (decrease) in net assets resulting from operations	$	(1,780,157	)	$	689,240
Weighted average common shares of common stock outstanding - basic and diluted		2,846,085			1,931,100
Earnings per common share - basic and diluted	$	(0.63	)	$	0.36

Flat Rock Capital Corp.

Notes to Consolidated Financial Statements (Unaudited)

Note 10. Financial Highlights

The following per common share data has been derived from information provided in the unaudited financial statements. The following is a schedule of financial highlights for the three months ended March 31, 2020 and 2019:

	For the Three Months Ended
	March 31, 2020			March 31, 2019
Per Common Share Operating Performance
Net Asset Value, Beginning of Period	$	19.76		$	19.74

Results of Operations:
Net Investment Income⁽¹⁾		0.36			0.39
Net Realized and Unrealized Gain (Loss) on Investments⁽¹⁾⁽⁵⁾		(0.98	)		(0.03	)
Net Increase (Decrease) in Net Assets Resulting from Operations		(0.62	)		0.36

Distributions to Common Stockholders
Distributions from Net Investment Income		(0.34	)		(0.33	)

Net Decrease in Net Assets Resulting from Distributions		(0.34	)		(0.33	)


Net Asset Value, End of Period	$	18.80		$	19.77

Shares Outstanding, End of Period		2,874,863			2,024,555

Ratio/Supplemental Data
Net assets, end of period	$	54,045,020		$	40,024,758
Weighted-average shares outstanding		2,846,085			1,931,100
Total Return⁽³⁾		(3.13	)%		1.79	%
Portfolio turnover		1.9	%		14.7	%
Ratio of operating expenses to average net assets without waiver and reimbursement⁽²⁾⁽⁴⁾		7.99	%		9.06	%
Ratio of operating expenses to average net assets with waiver and reimbursement⁽²⁾⁽⁴⁾		7.33	%		8.62	%
Ratio of net investment income (loss) to average net assets without waiver and reimbursement⁽²⁾⁽⁴⁾		6.86	%		7.43	%
Ratio of net investment income (loss) to average net assets with waiver and reimbursement⁽²⁾⁽⁴⁾		7.52	%		7.87	%

(1)

The per common share data was derived by using weighted average shares outstanding.

(2)

The ratios reflect an annualized amount.

(3)

Total return is calculated as the change in net asset value (“NAV”) per share during the period, plus distributions per share (if any), divided by the beginning NAV per share. Total return is not annualized.

(4)

Includes interest expense of 2.44% and 3.89%, respectively, which is not subject to reimbursement by Flat Rock Global.

(5)

Realized and unrealized gains and losses per share in this caption are balancing amounts necessary to reconcile the change in net asset value per share for the period, and may not reconcile with the aggregate gains and losses in the Consolidated Statements of Operations due to share transactions during the period.

Note 11. Subsequent Events

The Company’s management has evaluated subsequent events through the date of issuance of the financial statements included herein. There have been no subsequent events that require recognition or disclosure in these financial statements except for the following:

Issuance of Common Stock

On April 30, 2020, the Company issued and sold approximately 15,789 shares of its common stock at an aggregate purchase price of $300,000. The issuance of the shares of common stock was exempt from the registration requirements of the Securities Act, pursuant to Section 4(a)(2) and Rule 506(b) of Regulation D thereof.

Distributions

On February 25, 2020, the Company declared a distribution of $0.114 per share, or $327,734, for holders of record as of April 27, 2020, which was paid on May 6, 2020.

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

The following discussion and analysis should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. Except as otherwise specified, references to “we,” “us,” “our,” or the “Company” refer to Flat Rock Capital Corp.

Forward-Looking Statements

The information contained in this section should be read in conjunction with the financial data and consolidated financial statements and notes thereto appearing elsewhere in this report. Some of the statements in this report (including in the following discussion) constitute forward-looking statements, which relate to future events or our future performance or our financial condition. The forward-looking statements contained in this section involve a number of risks and uncertainties, including:

●

statements concerning the impact of a protracted decline in the liquidity of credit markets;

●

the general economy, including the impact of interest and inflation rates, and the COVID-19 pandemic on the industries in which we invest;

●

our future operating results, our business prospects, the adequacy of our cash resources and working capital, and the impact of the COVID-19 pandemic thereon;

●

the ability of our portfolio companies to achieve their objectives and the impact of COVID-19 pandemic thereon;

●

our ability to make investments consistent with our investment objectives, including with respect to the size, nature and terms of our investments;

●

the ability of the Adviser to attract and retain highly talented professionals; and

●

the risk factors set forth in Item 1A.—Risk Factors contained in our annual report on Form 10-K for the year ended December 31, 2019 and in this quarterly report on Form 10-Q.

Forward-looking statements are identified by their use of such terms and phrases such as “anticipate”, “believe”, “continue”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “potential”, “project”, “seek”, “should”, “target”, “will”, “would” or similar expressions. Actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors set forth in Item 1A.—Risk Factors contained in our annual report on Form 10-K for the year ended December 31, 2019 and in this quarterly report on Form 10-Q.

We have based the forward-looking statements included in this report on information available to us on the date of this report. We assume no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Although we undertake no obligation to revise or update any forward-looking statements, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the United States Securities and Exchange Commission (the "SEC"), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Overview

The Company is a specialty finance company formed as a Maryland corporation on March 20, 2017. We are an externally managed, non-diversified closed-end investment company that has elected to be regulated as a business development company (“BDC”) under the 1940 Act, and has elected to be treated for tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

Flat Rock Global, LLC (our “Adviser” or “Flat Rock Global”), a Delaware limited liability company, acts as our investment adviser. Flat Rock Global is registered as an investment adviser under the Advisers Act. Flat Rock Global is controlled by Robert K. Grunewald, our Chairman and Chief Executive Officer. Mr. Grunewald has over 25 years of experience in BDCs, middle market finance, private equity and investment banking. Flat Rock Global manages our day-to-day operations and provides investment advisory and management services to us.

Our investment objective is the preservation of capital while generating current income from our debt investments and seeking to maximize our portfolio’s total return. We intend to achieve this objective by investing in a portfolio composed primarily of debt investments in senior secured loans of U.S. middle-market companies, which we refer to as Senior Loans. While our primary investment focus is to make loans to, and selected equity investments in, U.S. middle-market companies, we may also make opportunistic investments in larger or smaller companies or in vehicles that provide exposure to Senior Loans. We intend to achieve our investment objective by (i) accessing the established loan origination channels developed by our management team, (ii) selecting investments within our core middle-market focus, (iii) partnering with experienced private equity firms, or sponsors, in many cases with whom our management team has invested alongside in the past, (iv) implementing disciplined underwriting standards and (v) drawing upon the aggregate experience and resources of our management team. We expect that most of our Senior Loans will be made to borrowers with EBITDA of between $5 million and $75 million annually.

We plan to hold many of our investments to maturity or repayment, but will sell our investments earlier if a sale or recapitalization of a portfolio company takes place, or if we determine a sale of one or more of our investments is in our best interest. Once we raise significant capital in this or any future offering, we will seek to create a diverse portfolio of Senior Loans by investing approximately $10 to $25 million of capital, on average, in the securities of middle-market companies. Prior to raising significant capital, we intend to make smaller investments in Senior Loans.

Additionally, we may from time to time hold or invest in equity securities and other debt or equity securities generally arising from a restructuring of Senior Loan positions previously held by us. Flat Rock Global will also periodically evaluate all investments that are not Senior Loans to determine whether we should dispose of assets that are not Senior Loans. We utilize leverage to enhance stockholder returns, and believe that, when properly financed and hedged, our investment strategy can produce attractive risk-adjusted returns.

Recent Developments

COVID-19 Developments

On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (“COVID-19”) a global pandemic and recommended containment and mitigation measures worldwide. The COVID-19 pandemic has had a significant impact on the U.S. economy. The extent of the impact of the COVID-19 outbreak on the financial performance of our current and future investments will depend on future developments, including the duration and spread of the virus, related advisories and restrictions, and the health of the financial markets and economy as a result of COVID-19, all of which are highly uncertain and cannot be predicted. To the extent our portfolio companies are adversely impacted by the effects of the COVID-19 pandemic, we may have a material adverse impact on our future net investment income, the fair value of our portfolio investments, our financial condition and results of operations and the financial condition of our portfolio companies.

An increase in unrealized depreciation of our investment portfolio due to decreases in fair value of investments attributable to the COVID-19 pandemic has resulted in a significant reduction in our net asset value as of March 31, 2020, as compared to our net asset value as of December 31, 2019. As of March 31, 2020, we are in compliance with our asset coverage requirements under the 1940 Act. In addition, we are not in default of any of the asset coverage requirements under our credit facility as of March 31, 2020. For additional discussion on the impact of COVID-19 on our portfolio companies, see “Portfolio and Investment Activity”.

We will continue to monitor the rapidly evolving situation surrounding the COVID-19 pandemic and guidance from U.S. and international authorities, including federal, state and local public health authorities, and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plan of operation. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impact of COVID-19 on our financial condition, results of operations or cash flows in the future.

Characteristics of and Risks Related to Investments in Private Companies

A core component of our strategy is to invest in the corporate debt of privately held companies. Investments in private companies pose certain incremental risks as compared to investments in public companies. First, private companies have reduced access to the capital markets, resulting in diminished capital resources and ability to withstand financial distress. Second, the investments themselves may often be illiquid. As such, we may have difficulty exiting an investment promptly or at a desired price prior to maturity or outside of a normal amortization schedule. In addition, less public information generally exists about private companies. Finally, these companies may often not have third-party debt ratings or audited financial statements. We must therefore rely on the ability of Flat Rock Global to obtain adequate information through its due diligence efforts to evaluate the creditworthiness of and risks involved in investing in these companies. These companies and their financial information will also generally not be subject to the Sarbanes-Oxley Act and other rules that govern public companies that are designed to protect investors.

Operating and Regulatory Structure

Our investment activities are managed by Flat Rock Global and supervised by our board of directors (the “Board”), a majority of whom are independent of us and Flat Rock Global. Under the Investment Advisory Agreement, we pay Flat Rock Global a quarterly management fee based on our average gross assets as well as incentive fees based on our performance.

We have entered into an Administration Agreement with Flat Rock Global to serve as our administrator. Pursuant to the Administration Agreement, Flat Rock Global provides us with services such as accounting, financial reporting, legal and compliance support and investor relations support, necessary for us to operate or has engaged a third-party firm to perform some or all of these functions.

Revenues

We generate revenue in the form of dividends or interest payable on the debt securities that we hold and capital gains, if any, received prior to the maturity of any debt instruments or other equity interests that we acquire in portfolio companies. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, monitoring fees and possibly consulting and performance-based fees. Any such fees will be generated in connection with our investments and recognized as earned.

Expenses

Our primary operating expenses are the payment of advisory fees and other expenses under the Investment Advisory Agreement. The investment advisory fees compensate Flat Rock Global for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments.

We bear all other expenses of our operations and transactions, including (without limitation) fees and expenses relating to:

	●	the cost of calculating our net asset value, including the cost of any third-party valuation services;

	●	the cost of effecting sales and repurchase of shares of our common stock and other securities;

	●	management and incentive fees payable to Flat Rock Global pursuant to the Investment Advisory Agreement;

	●	custodial fees;

	●	federal, state and local taxes;

	●	interest payable on debt, if any, incurred to finance our investments;

	●	independent directors’ fees and expenses;

	●	brokerage commissions for our investments;

	●	costs of proxy statements, stockholders’ reports and notices;

	●	fidelity bond, directors and officers/errors and omissions liability insurance and other insurance premiums;

	●	costs associated with our reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws;

	●	direct costs such as printing, mailing, long distance telephone and staff costs; and

	●	fees and expenses associated with independent accountants, independent and internal audit and outside legal counsel.

Our Adviser is responsible for payment of any and all organization and offering expenses incurred on our behalf in connection with our private offering of shares. Specifically, our Adviser will not seek or be entitled to reimbursement from us for any of the following offering expenses.

	●	transfer agent fees;

	●	fees and expenses associated with marketing efforts (including attendance at investment conferences and similar events);

	●	federal and state registration fees; and

	●	all other offering expenses incurred by Flat Rock Global in performing its obligations;

Portfolio and Investment Activity

As of March 31, 2020, our weighted average total yield of debt and income producing securities at fair value was 10.05%, and our weighted average total yield of debt and income producing securities at amortized cost was 9.02%.

As of March 31, 2020, we had 22 debt and equity investments in 20 portfolio companies with an aggregate fair value of approximately $83.2 million.

Our investment activity for the three months ended March 31, 2020 and 2019 is presented below (information presented herein is at cost unless otherwise indicated).

	For the Three Months Ended

	March 31, 2020			March 31, 2019
New investments:
Gross investments	$	5,038,695		$	25,227,200
Less: sold investments		(1,608,176	)		(10,062,603	)
Total new investments		3,430,519			15,164,597

Principal amount of investments funded:
First-lien senior secured debt investments	$	4,934,413		$	25,227,200
Equity investments		104,282			-
Total principal amount of investments funded		5,038,695			25,227,200

Principal amount of investments sold:
First-lien senior secured debt investments		501,669			10,062,603
Equity investments		1,106,507			-
Total principal amount of investments sold or repaid		1,608,176			10,062,603

Number of new investment commitments		2			8
Average new investment commitment amount	$	3,000,000		$	1,750,000
Weighted average maturity for new investment commitments		5.9 years			6.6 years
Percentage of new debt investment commitments at floating rates		100	%		100	%
Percentage of new debt investment commitments at fixed rates		0	%		0	%
Weighted average interest rate of new investment commitments		7.50	%		8.05	%
Weighted average spread LIBOR of new floating rate investment commitments		6.00	%		5.46	%
Weighted average interest rate on investment sold or paid down		N/A			7.18	%

As of March 31, 2020 and December 31, 2019, our investments consisted of the following:

	March 31, 2020				December 31, 2019
	Amortized		Fair		Amortized		Fair
Investments:	Cost		Value		Cost		Value
First-lien Senior Secured Debt	$	76,611,658	$	73,868,360	$	72,134,565	$	71,474,067
Equity Investments		5,912,242		5,854,396		6,914,467		7,006,429
Collateralized Securities and Structured Products		3,805,017		3,494,800		3,800,904		4,060,800
U.S. Government Securities		14,996,295		14,988,450		18,996,667		18,996,428
Total Investments		101,325,212		98,206,006		101,846,603		101,537,724

The table below describes investments by industry composition based on fair value as of March 31, 2020 and December 31, 2019:

	March 31, 2020			December 31, 2019

Insurance Services		19.2	%		18.6	%
U.S. Government Securities		15.3	%		18.8	%
Direct Selling		11.2	%		12.1	%
Investment Funds & Vehicles		9.5	%		10.9	%
IT Implementation		5.4	%		5.3	%
Banking, Finance, Insurance & Real Estate		5.0	%		4.8	%
IT Services		5.0	%		0.0	%
Media: Advertising, Printing, and Publishing		4.9	%		4.8	%
Retail		4.8	%		4.8	%
Consumer Goods		4.6	%		4.6	%
Construction & Building		3.8	%		3.8	%
Healthcare Services		3.2	%		3.2	%
Transportation: Cargo		2.2	%		2.5	%
Wholesale		1.9	%		1.9	%
Aerospace & Defense		1.7	%		1.7	%
Business Services		1.5	%		1.4	%
Chemicals & Allied Products		0.8	%		0.8	%
Total		100.0	%		100.0	%

The table below describes investments by geographic composition based on total investment portfolio fair value as of March 31, 2020 and December 31, 2019:

	March 31, 2020			December 31, 2019

United States:
Northeast		40.7	%		42.1	%
West		17.2	%		17.1	%
U.S. Government Securities		15.3	%		18.8	%
Southeast		12.1	%		7.0	%
Midwest		10.0	%		10.0	%
South		0.8	%		0.8	%
Switzerland		2.2	%		2.5	%
Luxembourg		1.7	%		1.7	%
Total		100.0	%		100.0	%

The table below shows the weighted average yields and interest rate of our debt investments at fair value as of March 31, 2020 and December 31, 2019:

	March 31, 2020			December 31, 2019
Weighted average total yield of debt and income producing securities		10.05	%		9.25	%
Weighted average interest rate of debt and income producing securities		8.65	%		8.87	%
Weighted average spread over LIBOR of all floating rate investments		7.14	%		7.03	%

Our Adviser monitors our portfolio companies on an ongoing basis. It monitors the financial trends of each portfolio company to determine if they are meeting their respective business plans and to assess the appropriate course of action with respect to each portfolio company. Our Adviser has a number of methods of evaluating and monitoring the performance and fair value of our investments, which may include the following:

	●	Assessment of success of the portfolio company in adhering to its business plan and compliance with covenants;

	●	Periodic and regular contact with portfolio company management and, if appropriate, the financial or strategic sponsor, to discuss financial position, requirements and accomplishments;

	●	Comparisons to other companies in the portfolio company’s industry; and

	●	Review of monthly or quarterly financial statements and financial projections for portfolio companies.

As part of the monitoring process, our Adviser employs an investment rating system to categorize our investments. In addition to various risk management and monitoring tools, our Adviser rates the credit risk of all investments on a scale of 1 to 5. This system is intended primarily to reflect the underlying risk of a portfolio investment relative to our initial cost basis in respect of such portfolio investment (i.e., at the time of origination or acquisition), although it may also take into account the performance of the portfolio company’s business, the collateral coverage of the investment and other relevant factors. The rating system is as follows:

Investment Rating		Description

1		Investments with a rating of 1 involve the least amount of risk to our initial cost basis. The borrower is performing above expectations, and the trends and risk factors for this investment since origination or acquisition are generally favorable;

2		Investments rated 2 involve an acceptable level of risk that is similar to the risk at the time of origination or acquisition. The borrower is generally performing as expected and the risk factors are neutral to favorable. All investments or acquired investments in new portfolio companies are initially assessed a rate of 2;

3		Investments rated 3 involve a borrower performing below expectations and indicates that the loan’s risk has increased somewhat since origination or acquisition;

4		Investments rated 4 involve a borrower performing materially below expectations and indicates that the loan’s risk has increased materially since origination or acquisition. In addition to the borrower being generally out of compliance with debt covenants, loan payments may be past due (but generally not more than 120 days past due); and

5		Investments rated 5 involve a borrower performing substantially below expectations and indicates that the loan’s risk has increased substantially since origination or acquisition. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. Loans rated 5 are not anticipated to be repaid in full and we will reduce the fair market value of the loan to the amount we anticipate will be recovered.

Our Adviser rates the investments in our debt portfolio at least quarterly and it is possible that the rating of a portfolio investment may be reduced or increased over time. For investments rated 3, 4 or 5, our Adviser enhances its level of scrutiny over the monitoring of such portfolio company. The following table presents the ratings of our portfolio investments at March 31, 2020 and December 31, 2019.

	March 31, 2020					December 31, 2019
			Percentage					Percentage
	Investments at		of Total			Investments at		of Total
Investment Rating	Fair Value		Portfolio			Fair Value		Portfolio
1	$	14,960,625		18.0	%	$	18,803,521		18.5	%
2		58,798,951		70.7	%		74,717,496		73.6	%
3		9,422,178		11.2	%		8,016,707		7.9	%
Total	$	83,181,754		99.9	%	$	101,537,724		100.0	%

In response to the continuing impact of the outbreak of COVID-19 pandemic and its impact on the overall market environment and the health of our portfolio companies, we performed a company-by-company evaluation of the anticipated impact of COVID-19. The evaluation process consisted of dialogue with sponsors and portfolio companies to understand COVID-19’s impact on each portfolio company, the portfolio company’s response to any disruption, the level of sponsor support, and the current and projected financial and liquidity position of the portfolio company. Based on this evaluation, we assigned each portfolio company a “Risk Rating” of red, yellow and green, with red reflecting a portfolio company with the potential for the most severe impact, due to COVID-19, and green reflecting the least. As of March 31, 2020, we have assigned a “red” rating to approximately 7.7% of the assets in our portfolio and have assigned a “green” rating to approximately 53.4% of the assets in our portfolio. We will continue to monitor our portfolio in this manner in addition to the investment rating system described above as conditions develop.

Results of Operations

The following table represents the operating results for the for the three months ended March 31, 2020 and 2019:

	For the Three Months Ended
	March 31, 2020			March 31, 2019
Total investment income	$	2,035,936		$	1,562,580
Less: Net expenses		1,005,493			816,583
Net investment income		1,030,443			745,997
Net realized gains (losses) on investments		3,333			407,483
Net change in unrealized gains (losses) on investments		(2,813,933	)		(464,240	)
Net increase (decrease) in net assets resulting from operations	$	(1,780,157	)	$	689,240

Investment Income

Investment income for the three months ended March 31, 2020 and 2019, was as follows:

	For the Three Months Ended
	March 31, 2020		March 31, 2019
Dividend income	$	156,760	$	-
Interest from investments		1,845,027		1,437,288
Other income		34,149		125,292
Total investment income	$	2,035,936	$	1,562,580

For the three months ended March 31, 2020 and 2019

Investment income increased to approximately $2.0 million for the three months ended March 31, 2020 from approximately $1.6 million for the same period in the prior year, primarily due to an increase in interest income as a result of an increase in the size of our investment portfolio. Our investment portfolio, at par, excluding U.S. government securities, increased from approximately $77.8 million as of March 31, 2019, to approximately $87.4 million as of March 31, 2020.

Expenses

Operating expenses for the three months ended March 31, 2020 and 2019 was as follows:

	For the Three Months Ended
	March 31, 2020			March 31, 2019
Management fees	$	355,533		$	291,417
Incentive fees		175,798			-
Other operating expenses		185,920			160,130
Interest expenses		378,382			407,411
Management fee waiver		(58,092	)		(42,375	)
Incentive fee waiver		(32,048	)		-

Net expenses	$	1,005,493		$	816,583

For the three months ended March 31, 2020 and 2019

Net expenses increased to approximately $1.0 million for the three months ended March 31, 2020 from approximately $0.8 million for the same period in the prior year, primarily due to an increase in management fees and other operating expenses offset, in part, by a slight reduction in interest expenses. The increase in management fees and other operating expenses of approximately $0.1 million is primarily due to an increase in gross assets.

In order to meet the diversification tests required to qualify as a RIC, the Company, on March 31, 2020, acquired $15,000,000 in face value of short-term U.S. Treasury Bills. This transaction had the effect of increasing management fees payable to Flat Rock Global by $58,092 for a total gross management fee of $355,533. However, Flat Rock Global did not charge the Company for the portion relating to the acquisition of short-term U.S. Treasury Bills which equaled $58,092. For the three months ended March 31, 2020 and 2019, the Company incurred management fees of $355,533 and $291,417, respectively, of which $58,092, and $42,375, respectively, were waived by Flat Rock Global.

Net Change in Unrealized Gains (Losses) on Investments

We fair value our portfolio investments quarterly and any changes in fair value are recorded as unrealized gains or losses. During the periods ended March 31, 2020 and 2019, net change in unrealized gains (losses) on our investment portfolio were comprised of the following:

	For the Three Months Ended
	March 31, 2020			March 31, 2019
Net change in unrealized gains (losses) on investments	$	(2,813,933	)	$	(464,240	)

Net change in unrealized appreciation (depreciation) on investments reflects the net change in the fair value of our investment portfolio. For the three months ended March 31, 2020 and 2019, we had net unrealized depreciation of $2.8 million and $0.5 million, respectively. The increase in net unrealized depreciation was due primarily to the negative economic impact and the increased uncertainty caused by COVID-19.

Financial Condition, Liquidity and Capital Resources

We generate cash primarily from the net proceeds generated from our private offering and from cash flows from fees, interest and dividends earned from our investments and principal repayments and proceeds from sales of our investments. In addition, we borrow funds to make investments to the extent we determine that additional capital would allow us to take advantage of additional investment opportunities, if the market for debt financing presents attractively priced debt financing opportunities, or if our board of directors determines that leveraging our portfolio would be in our best interests and the best interests of our stockholders. We do not currently anticipate issuing any preferred stock.

Our primary use of funds is investments in Senior Loans, payments of our expenses and distributions to holders of our common stock. We commenced our private offering of shares on June 29, 2017. As of March 31, 2020, we sold 2,874,863 shares of common stock for gross proceeds of approximately $57.3 million. As of March 31, 2020, we had cash and cash equivalents of approximately $2.7 million. As of March 31, 2020, we had approximately $32.0 million outstanding under the Credit Facility.

As a BDC, we generally are required to meet a coverage ratio of total assets to total borrowings and other senior securities, which include all of our borrowings and any preferred stock that we may issue in the future, of at least 150%. If this ratio declines below 150%, we cannot incur additional debt and could be required to sell a portion of our investments to repay some debt when it is disadvantageous to do so.

Flat Rock Global has agreed to pay all of our organization and offering expenses in connection with our private offering, including, but not limited to, expenses incurred in connection with legal, accounting and printing expenses, expenses associated with stockholder relations, transfer agent fees, fulfillment costs, and expenses associated with advertising and sales literature prepared by us. We will not reimburse Flat Rock Global for such organization and offering expenses. Therefore, these fees and expenses will not reduce the net proceeds available to us from the sale of our shares in our private offering.

Capital Contributions

During the three months ended March 31, 2020, the Company issued and sold 44,810 shares at an aggregate purchase price of approximately $0.9 million.

Financing Arrangements

On October 12, 2018, we, through FRC Funding I, LLC (“FRC Funding” and together with the Company, the “Borrowers”) entered into a Loan and Security Agreement (the “Loan Agreement”) with certain financial institutions as lenders (“Lenders”), State Bank and Trust Company as the administrative agent (“State Bank”) and Alostar Capital Finance (“Alostar”), as Lead Arranger and Bookrunner, pursuant to which Lenders agreed to provide us with a revolving line of credit. The Loan Agreement was effective as of October 12, 2018. On December 10, 2018, the Loan Agreement was amended to add Hitachi Capital America Corp. to the definition of “Lenders” and to amend the definition of “Revolver Commitments” to increase the aggregate amount available to the Borrowers under the Revolver Commitments to $30 million, beginning with the effective date of the Amendment. On May 31, 2019, the Loan Agreement was amended to revise the definitions for “Asset Coverage Ratio” and “Service Termination Event,” and increase the aggregate amount available to Borrowers under the Revolver Commitments to $35 million, beginning with the effective date of the amendment.

As amended, the Loan Agreement provides for $35.0 million in Revolver Commitments (as defined in the Loan Agreement) to be available to the Company to draw down and repay for three years, subject to borrowing base eligibility. The Loan Agreement matures at the earliest of (a) the date that is four (4) years from closing, (b) the date on which FRC Funding terminates the Revolver Commitments pursuant to the Loan Agreement; or (c) the date on which the Revolver Commitments are terminated pursuant to certain events of default under the Loan Agreement. The Scheduled Revolving Period End Date (as defined in the Loan Agreement) is three years from closing.

The Loan Agreement accrues interest at the Daily LIBOR Rate (as defined in the Loan Agreement), plus a 2.88% margin, and principal is repayable in full at maturity. Interest is generally required to be paid monthly in arrears. The Loan Agreement requires the payment of an unused line fee of between 0.50% and 1.0%, commencing on the date that is two months from closing, based on the amount by which the Revolver Commitments exceed the average daily balance of the Revolver Loans (as defined in the Loan Agreement) during any month. Such fee is payable monthly in arrears. The Loan Agreement has an advance rate against FRC Funding’s Eligible Portfolio Investment (as defined in the Loan Agreement). The advance rate, as to any Eligible Portfolio Investment, is 75.0% when the Company’s asset coverage ratio is equal or greater than 200.0% or 70.0% when the Company’s asset coverage ratio is less than 200.0%, subject to certain eligibility requirements (as defined in the Loan Agreement).

Pursuant to the terms of the Loan Agreement, the Borrowers grant to State Bank for the benefit of State Bank, Lenders, Alostar and its affiliates, a security interest and a lien in substantially all of FRC Funding’s assets. The Loan Agreement contains certain affirmative and negative covenants, including a minimum company asset coverage ratio, a minimum fixed charge ratio, and a minimum company tangible net worth. Under the Loan Agreement, the Borrowers are required to make certain customary representations and warranties, and are required to comply with various covenants, reporting requirements and other requirements that are customary for similar credit facilities. The obligations under the Loan Agreement may be accelerated upon the occurrence of an event of default under the Loan Agreement or in the event of a change of control of the Company or FRC Funding.

Distribution Policy

Subject to our Board’s discretion and applicable legal restrictions, we intend to authorize and declare monthly distributions that will be paid on a monthly basis. Our initial monthly distribution was declared by our Board on August 25, 2017, and was paid to our stockholders on September 6, 2017. We calculate each stockholder’s specific distribution amount for the month based on a distribution amount per share per day of our common stock, which accrues daily for each stockholder from the date we accept their subscription for shares of our common stock. From time to time, we may also pay interim distributions, including capital gains distributions, at the discretion of our Board. Each year a statement on Internal Revenue Service Form 1099-DIV (or successor form) identifying the source of the distribution (i.e., paid from ordinary income, paid from net capital gain on the sale of securities, or a return of paid-in capital surplus which is a nontaxable distribution) will be mailed to our stockholders. Our distributions may exceed our earnings, especially during the period before we have substantially invested the proceeds from this offering. As a result, a portion of the distributions we make may represent a return of capital for tax purposes.

We elected to be treated for U.S. federal income tax purposes, and intend to maintain our qualification, as a RIC under Subchapter M of the Code. To maintain RIC tax treatment, we must, among other things, distribute at least 90.0% of our ordinary income and net short-term capital gain in excess of net long-term capital loss, if any. In order to avoid certain excise taxes imposed on RICs, we currently intend to distribute, or be deemed to distribute, during each calendar year an amount at least equal to the sum of (1) 98.0% of our ordinary income for the calendar year, (2) 98.2% of our capital gain in excess of capital loss for the one-year period ending on October 31 of such calendar year and (3) any ordinary income and net capital gain for preceding years that were not distributed during such years and on which we paid no U.S. federal income tax.

The following table reflects the cash distributions per share that we declared and paid on our common stock during the three months ended ended March 31, 2020 and 2019:

The following table reflects the distributions paid on shares during the three months ended March 31, 2020:

Total

Declaration

Record

Per

Payment

Distributions

Date

Declared

11/12/2019

1/24/2020

0.114

2/6/2020

322,943

11/12/2019

2/24/2020

0.114

3/6/2020

322,863

2/25/2020

3/26/2020

0.114

4/8/2020

⁽¹⁾

327,145

972,951

(1)

The following table reflects the distributions paid on shares during the three months ended March 31, 2019:

Total

Declaration

Record

Per

Payment

Distributions

Date

Declared

11/13/2018

1/26/2019

0.108

2/6/2019

201,660

11/13/2018

2/26/2019

0.108

3/6/2019

209,035

2/28/2019

3/26/2019

0.108

4/8/2019

⁽¹⁾

213,723

624,418

(1)

Distribution Reinvestment Plan

The Company adopted a distribution reinvestment plan (the “DRIP”), effective as of, and first applied to the reinvestment of cash distributions paid on or after May 1, 2019. Under the DRIP, cash distributions paid to participating stockholders are reinvested in shares at a price equal to the net asset value per share of the shares as of such date. New stockholders of the Company on or after May 1, 2019 were automatically enrolled in the DRIP unless they affirmatively declined participation in the DRIP. Existing stockholders of the Company prior to May 1, 2019 were given the opportunity to participate in the DRIP. The Company uses newly-issued shares to implement the DRIP. The number of newly-issued shares to be issued to a participating stockholder is determined by dividing the total dollar amount of the distribution payable to such stockholder by the net asset value per share of the applicable class. There are no commissions or other sales charges on shares issued to a participating stockholder.

The following table reflects the common stock issued pursuant to the DRIP during the three months ended March 2020 and 2019:

Declaration	Record	Payment
Date	Date	Date	Shares
11/12/2019	1/26/2020	2/6/2020		2,695
11/12/2019	2/26/2020	3/6/2020		2,701
2/25/2020	3/26/2020	4/8/2020		2,826
				8,222

Repurchases of Shares

Repurchase Offer Date	Repurchase Date	Number of Shares Repurchased		Percentage of Shares Repurchased			Repurchase Price Per Share		Aggregate Consideration for Repurchased Shares
1/9/2020	2/7/2020		11,009		100	%	$	19.77	$	217,583


TOTAL			11,009						$	217,583

Critical Accounting Policies

Our financial statements are prepared in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. The preparation of these financial statements will require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, we have described our critical accounting policies in the notes to our financial statements.

Valuation of Portfolio Investments

Our Board has established procedures for the valuation of our investment portfolio. These procedures are detailed below. Investments for which market quotations are readily available are valued at such market quotations.

Most of our investments will not be traded on a national securities exchange and we will not have the benefit of market quotations or other pricing data from such an exchange. Certain of our investments will have the benefit of third-party bid-ask quotations. With respect to investments for which pricing data is not readily available or when such pricing data is deemed not to represent fair value, our Board has approved a multi-step valuation process each quarter, as described below:

each portfolio company or investment will be valued by Flat Rock Global, potentially with information received from one or more independent valuation firms engaged by the Company;

an independent valuation firm will conduct independent valuations and make an independent assessment of the value of each investment on a rotating basis so that each investment is valued at least twice annually;

the valuation committee of our Board will review and discuss the preliminary valuation prepared by Flat Rock Global and that of the independent valuation firm; and

our Board will discuss the valuations and determine the fair value of each investment in our portfolio in good faith based on the input of Flat Rock Global, an independent valuation firm and the valuation committee.

Investments will be valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present value amount (discounted) calculated based on an appropriate discount rate. The measurement is based on the net present value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, 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 discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, the principal market and enterprise values, among other factors.

The Company applies Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 820, Fair Value Measurements and Disclosures, as amended, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements.

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

We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

Contractual Obligations

Payments for investment advisory services under the Investment Advisory Agreement are equal to (a) a management fee calculated at an annual rate of 1.375% of the value of our average gross assets as of the end of the two most recently completed quarters and (b) an incentive fee based on our performance. We have entered into an administration agreement with Flat Rock Global to serve as our Administrator. Pursuant to the administration agreement, Flat Rock Global provides us with services such as accounting, financial reporting, legal and compliance support and investor relations support, necessary for us to operate or has engaged a third-party firm to perform some or all of these functions.

A summary of our significant contractual payment obligations related to the repayment of our outstanding indebtedness at March 31, 2020 is as follows:

	Payments Due by Period
	Total		Less than 1 year		1-3 years		3-5 years		After 5 years
Credit Facility, net	$	31,776,664	$	-	$	-	$	31,776,664	$	-
Total contractual obligations	$	31,776,664	$	-	$	-	$	31,776,664	$	-

Off-Balance Sheet Arrangements

Other than contractual commitments and other legal contingencies incurred in the normal course of our business, we do not have any off- balance sheet financings or liabilities.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are subject to financial market risks, including changes in interest rates.

Valuation Risk

Most of our investments will not be traded on a national securities exchange, and we will not have the benefit of market quotations or other pricing data from such an exchange. Certain of our investments will have the benefit of third-party bid-ask quotations. With respect to investments for which pricing data is not readily available or when such pricing data is deemed not to represent fair value, our Board has approved a multi-step valuation process each quarter. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make.

Interest Rate Risk

Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. We intend to fund portions of our investments with borrowings, and at such time, our net investment income will be affected by the difference between the rate at which we invest and the rate at which we borrow. Accordingly, we cannot assure you that a significant change in market interest rates will not have a material adverse effect on our net investment income.

Pursuant to the terms of our credit facility with State Bank and Trust Company, borrowings are at a floating rate based on LIBOR. As a result, we are subject to risks relating to changes in market interest rates.

We have analyzed the potential impact of changes in interest rates on interest income from our investments. Assuming that our investments as of March 31, 2020 were to remain constant for a full fiscal year and no actions were taken to alter the existing interest rate terms, a hypothetical increase of 1.0% in interest rates would cause a corresponding increase of $812,785 to our interest income. Conversely, a hypothetical decrease of 1% would cause a corresponding decrease interest income of $501,967, due to the LIBOR floors in place.

Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the statements of assets and liabilities and other business developments that could magnify or diminish our sensitivity to interest rate changes, nor does it account for divergences in LIBOR and the commercial paper rate, which have historically moved in tandem but, in times of unusual credit dislocations, have experienced periods of divergence. Accordingly no assurances can be given that actual results would not materially differ from the potential outcome simulated by this estimate.

As of March 31, 2020, all of the debt investments in our portfolio were at floating rates.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures include internal controls and other procedures designed to provide reasonable assurance that information required to be disclosed in this and other reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, is recorded, processed, summarized, and reported within the required time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. It should be noted that no system of controls can provide complete assurance of achieving a company’s objectives and that future events may impact the effectiveness of a system of controls.

Our Chief Executive Officer and Chief Financial Officer, after conducting an evaluation, together with members of our management, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2020, have concluded that our disclosure controls and procedures, as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act, were effective as of March 31, 2020 at a reasonable level of assurance.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our fiscal quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under loans to or other contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

Item 1A. Risk Factors.

As of March 31, 2020, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K, filed with the SEC on March 19, 2020, except for the following:

We are currently operating in a period of capital markets disruption and economic uncertainty.

The U.S. capital markets have experienced extreme volatility and disruption following the global outbreak of COVID-19 that began in December 2019. Some economists and major investment banks have expressed concern that the continued spread of the virus globally could lead to a world-wide economic downturn. Disruptions in the capital markets have increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. These and future market disruptions and/or illiquidity could be expected to have an adverse effect on our business, financial condition, results of operations and cash flows. Unfavorable economic conditions also could be expected to increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events have limited and could continue to limit our investment originations, limit our ability to grow and have a material negative impact on our operating results and the fair values of our debt and equity investments.

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

During the three month period ended March 31, 2020, the Company issued and sold 44,810 shares of its common stock at an aggregate purchase price of $0.9 million. The issuance of the shares of common stock was exempt from the registration requirements of the Securities Act, pursuant to Section 4 (a)(2) and Rule 506(b) of Regulation D thereof.

Item 3. Default Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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.

Exhibit Index

3.1		Articles of Incorporation of Flat Rock Capital Corp. (Incorporated by reference to the initial filing of the Registration Statement on Form 10 (SEC File No. 000-55767) filed with the SEC on March 24, 2017.)

3.2		Amended and Restated Articles of Incorporation (Incorporated by reference to Amendment No. 2 to the Registration Statement on Form 10 (SEC File No. 000-55767) filed with the SEC on May 19, 2017.)

3.3		Bylaws (Incorporated by reference to Amendment No. 1 to the Registration Statement on Form 10 (SEC File No. 000- 55767) filed with the SEC on May 1, 2017.)

10.1		Investment Advisory Agreement (Incorporated by reference to Amendment No. 2 in the Registration Statement on Form 10 (SEC file No. 000-55767) filed with the SEC on May 19, 2017.)

10.2		Amendment No. 1 to Investment Advisory Agreement (Incorporated by reference to Amendment No. 3 to the Registration Statement on Form 10 (SEC File No. 000-55767) filed with the SEC on May 23, 2017.)

10.3		Administration Agreement (Incorporated by reference to Amendment No. 2 to the Registration Statement on Form 10 (SEC File No. 000-55767) filed with the SEC on May 19, 2017.)

10.4		Custody Agreement (Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2017, filed with the SEC on November 14, 2017.)

10.5		Custody Agreement (Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2017, filed with the SEC on November 14, 2017.)

10.6		Loan and Security Agreement among FRC Funding I, LLC as borrower, Flat Rock Capital Corp. as servicer, the Lenders party thereto, and State Bank and Trust Company as agent for the Lenders, dated October 12, 2018 (Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the SEC on October 18, 2018.)

10.7		First Amendment to Loan and Security Agreement by and among FRC Funding I, LLC as borrower, Flat Rock Capital Corp. as servicer, the Existing Lender party thereto, State Bank and Trust Company as agent for the Lenders and Hitachi Capital America Corp. as a New Lender, dated December 10, 2018 (Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the SEC on December 17, 2018.)

10.8		Second Amendment to Loan and Security Agreement by and among FRC Funding I, LLC as borrower, Flat Rock Capital Corp. as servicer, the Existing Lender Party thereto, Cadence Bank, N.A., as successor-by-merger to State Bank and Trust Company, as agent for the Lenders and Hitachi Capital America Corp. as a Lender, dated as of May 31, 2019 (Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the SEC on July 3, 2019.)

31.1*		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Filed herewith.

SIGNATURES

Pursuant to the requirements 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.

	Flat Rock Capital Corp.

Date: May 14, 2020	/s/ Robert K. Grunewald
	Name: Robert K. Grunewald
	Title: President and Chief Executive Officer (Principal Executive Officer)

Date: May 14, 2020	/s/ Richard A. Petrocelli
	Name: Richard A. Petrocelli
	Title: Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer)

Flat Rock Capital Corp. 10-Q