Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-35730
STELLUS CAPITAL INVESTMENT CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Maryland
46-0937320
(State or Other Jurisdiction ofIncorporation or Organization)
(I.R.S. EmployerIdentification No.)
4400 Post Oak Parkway, Suite 2200
Houston, Texas 77027
(Address of Principal Executive Offices) (Zip Code)
(713) 292-5400
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
SCM
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended 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 ☒
The number of shares of the issuer’s Common Stock, $0.001 par value per share, outstanding as of November 7, 2023 was 24,125,642.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Statements of Assets and Liabilities as of September 30, 2023 (unaudited) and December 31, 2022
1
Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2023 and 2022 (unaudited)
2
Consolidated Statements of Changes in Net Assets for the three and nine-month periods ended September 30, 2023 and 2022 (unaudited)
3
Consolidated Statements of Cash Flows for the three and nine-month periods ended September 30, 2023 and 2022 (unaudited)
4
Consolidated Schedules of Investments as of September 30, 2023 (unaudited) and December 31, 2022
5
Notes to Unaudited Financial Statements
27
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
56
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
73
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
75
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
76
Item 6.
Exhibits
SIGNATURES
77
PART I — FINANCIAL INFORMATION
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
September 30, 2023
(unaudited)
December 31, 2022
ASSETS
Non-controlled, non-affiliated investments, at fair value (amortized cost of $941,679,195 and $875,823,177, respectively)
$
886,338,148
844,733,638
Cash and cash equivalents
19,210,721
48,043,329
Receivable for sales and repayments of investments
594,726
718,794
Interest receivable
5,600,021
3,984,409
Other receivables
60,495
34,245
Deferred offering costs
—
1,100
Prepaid expenses
149,755
667,267
Total Assets
911,953,866
898,182,782
LIABILITIES
Notes payable
98,883,814
98,549,692
Credit Facility payable
161,192,612
197,685,281
SBA-guaranteed debentures
319,955,852
307,895,195
Dividends payable
3,215,948
Management fees payable
3,933,121
7,150,407
Income incentive fees payable
3,058,550
2,464,408
Capital gains incentive fees payable
569,528
Interest payable
1,316,334
4,640,841
Related party payable
1,060,321
Unearned revenue
343,210
320,675
Administrative services payable
402,627
356,919
Income tax payable
1,116,369
1,175,373
Deferred tax liability
206,361
61,936
Other accrued expenses and liabilities
203,288
475,593
Total Liabilities
593,828,086
622,406,169
Commitments and contingencies (Note 7)
Net Assets
318,125,780
275,776,613
NET ASSETS
Common stock, par value $0.001 per share (100,000,000 shares authorized; 24,125,642 and 19,666,769 issued and outstanding, respectively)
24,125
19,667
Paid-in capital
337,289,265
275,114,720
Total distributable (loss) earnings
(19,187,610)
642,226
Total Liabilities and Net Assets
Net Asset Value Per Share
13.19
14.02
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
For the three
For the nine
months ended
September 30, 2022
INVESTMENT INCOME
Interest income
26,223,986
19,617,468
75,295,485
50,392,437
Other income
941,040
524,799
2,529,905
1,353,279
Total Investment Income
27,165,026
20,142,267
77,825,390
51,745,716
OPERATING EXPENSES
Management fees
3,827,669
11,533,811
11,025,435
Valuation fees
139,267
145,865
332,762
315,482
Administrative services expenses
470,846
447,381
1,399,188
1,388,602
Income incentive fees
2,705,200
1,635,641
7,433,039
Capital gains incentive fee reversal
(646,757)
(569,528)
(1,672,549)
Professional fees
276,592
315,809
877,276
845,275
Directors’ fees
93,250
83,500
303,750
254,500
Insurance expense
123,725
127,274
366,156
377,671
Interest expense and other fees
8,049,063
6,448,280
24,037,462
16,864,255
Income tax expense
335,508
361,115
1,082,057
1,066,768
Other general and administrative expenses
217,655
207,170
727,754
766,562
Total Operating Expenses
16,344,227
12,952,947
47,523,727
32,867,642
Net Investment Income
10,820,799
7,189,320
30,301,663
18,878,074
Net realized gain on non-controlled, non-affiliated investments
600,403
1,553,450
324,782
4,658,817
Net realized loss on foreign currency translation
(22,166)
(676)
(72,782)
(8,026)
Net change in unrealized depreciation on non-controlled, non-affiliated investments
(13,793,320)
(4,798,980)
(24,338,195)
(12,810,173)
Net change in unrealized depreciation on foreign currency translation
(2,794)
(18,120)
(21,243)
(53,874)
(Provision) benefit for taxes on net unrealized (appreciation) depreciation on investments
(312)
30,535
(144,425)
(151,278)
Net (Decrease) Increase in Net Assets Resulting from Operations
(2,397,390)
3,955,529
6,049,800
10,513,540
Net Investment Income Per Share—basic and diluted
0.47
0.37
1.42
0.97
Net (Decrease) Increase in Net Assets Resulting from Operations Per Share – basic and diluted
(0.11)
0.20
0.28
0.54
Weighted Average Shares of Common Stock Outstanding—basic and diluted
22,824,221
19,545,935
21,289,880
19,535,708
Distributions Per Share—basic and diluted
0.41
0.34
1.22
0.96
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (unaudited)
Common Stock
Total
Number
Par
Paid-in
distributable
of shares
value
capital
earnings (loss)
Balances at December 31, 2021
19,517,595
19,518
274,559,121
10,532,594
285,111,233
Net investment income
5,514,183
3,458,090
(7,350)
(3,721,602)
Provision for taxes on unrealized appreciation on investments
(21,157)
Distributions from net investment income
(5,464,666)
Issuance of common stock, net of offering costs(1)
14,924
15
167,655
167,670
Balances at March 31, 2022
19,532,519
19,533
274,726,776
10,290,092
285,036,401
6,174,571
Net realized loss on non-controlled, non-affiliated investments
(352,723)
(4,289,591)
Net change in unrealized depreciation on foreign currency translations
(35,754)
(160,656)
(6,643,663)
13,416
13
137,520
137,533
Balances at June 30, 2022
19,546
274,864,296
4,982,276
279,866,118
Benefit for taxes on unrealized depreciation on investments
Balances at September 30, 2022
2,294,142
277,177,984
Balances at December 31, 2022
19,666,769
9,067,620
34,967
(39,912)
(4,249,642)
Net change in unrealized appreciation on foreign currency translations
1,874
(78,760)
(7,951,284)
581,614
581
8,289,988
8,290,569
Balances at March 31, 2023
20,248,383
20,248
283,404,708
(2,572,911)
280,852,045
10,413,244
(310,588)
(10,704)
(6,295,233)
(20,323)
(65,353)
(8,659,144)
2,309,521
2,310
32,418,774
32,421,084
Balances at June 30, 2023
22,557,904
22,558
315,823,482
(7,521,012)
308,325,028
(9,269,208)
1,567,738
1,567
21,465,783
21,467,350
Balances at September 30, 2023
24,125,642
(1) See Note 4 to the Consolidated Financial Statements contained herein for more information on offering costs.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Cash flows from operating activities
Net increase in net assets resulting from operations
Adjustments to reconcile net increase in net assets from operations to net cash used in operating activities:
Purchases of investments
(139,650,422)
(180,956,810)
Proceeds from sales and repayments of investments
79,053,967
74,385,466
Net change in unrealized depreciation on investments
24,338,195
12,810,173
21,087
28,405
Increase in investments due to PIK
(2,732,530)
(1,010,061)
Amortization of premium and accretion of discount, net
(2,078,183)
(1,839,720)
Deferred tax provision
144,425
151,278
Amortization of loan structure fees
436,257
420,356
Amortization of deferred financing costs
334,122
Amortization of loan fees on SBA-guaranteed debentures
938,247
905,294
Net realized gain on investments
(324,782)
(4,658,817)
Changes in other assets and liabilities
Increase in interest receivable
(1,615,612)
(907,787)
Increase in other receivables
(26,250)
(5,743)
Increase in related party receivables
(19,034)
Decrease in prepaid expenses
517,512
293,135
(Decrease) increase in management fees payable
(3,217,286)
3,578,496
Increase in income incentive fees payable
594,142
160,521
Decrease in capital gains incentive fees payable
Increase (decrease) in administrative services payable
45,708
(9,481)
Decrease in interest payable
(3,324,507)
(2,808,314)
Decrease in related party payable
(1,060,321)
Increase (decrease) in unearned revenue
22,535
(185,171)
Decrease in income tax payable
(59,004)
(2,183,176)
(Decrease) increase in other accrued expenses and liabilities
(272,305)
59,623
Net Cash Used in Operating Activities
(42,434,733)
(92,616,254)
Cash flows from Financing Activities
Proceeds from the issuance of common stock
63,348,436
420,004
Sales load for common stock issued
(943,248)
(5,957)
Offering costs paid for common stock issued
(225,085)
(335,953)
Stockholder distributions paid
(22,663,688)
(17,708,494)
Proceeds from SBA-guaranteed debentures
11,400,000
56,000,000
Financing costs paid on SBA-guaranteed debentures
(277,590)
(1,363,600)
Financing costs paid on Credit facility
(35,000)
(193,659)
Borrowings under Credit Facility
79,700,000
121,608,702
Repayments of Credit Facility
(116,701,700)
(97,559,902)
Net Cash Provided by Financing Activities
13,602,125
60,861,141
Net Decrease in Cash and Cash Equivalents
(28,832,608)
(31,755,113)
Cash and Cash Equivalents Balance at Beginning of Period
44,174,856
Cash and Cash Equivalents Balance at End of Period
12,419,743
Supplemental and Non-Cash Activities
Cash paid for interest expense
25,653,343
18,012,797
Income and excise tax paid
1,141,061
3,249,944
Increase in dividends payable
1,043,498
(Decrease) increase in deferred offering costs
(1,100)
227,109
Stellus Capital Investment Corporation
Consolidated Schedule of Investments
Principal
% of
Investment
Headquarters/
Amount/
Amortized
Fair
Net
Investments
Footnotes
Security(2)
Coupon
Floor
Cash
PIK
Date
Maturity
Industry
Shares(3)
Cost
Value(1)
Assets
Non-controlled, non-affiliated investments
(4)(5)
2X LLC
(9)
Berwyn, PA
Term Loan
(11)
First Lien
3M SOFR+
6.50
%
2.00
11.89
6/5/2023
6/5/2028
Services: Business
5,500,208
5,369,314
5,445,206
1.71
2X Investors LP Class A Units
Equity
58,949
589,496
572,719
0.18
5,958,810
6,017,925
1.89
Ad.Net Acquisition, LLC
Los Angeles, CA
Term Loan (SBIC II)
(5)(11)
6.00
1.00
11.65
5/7/2021
5/7/2026
15,237,500
15,107,037
4.79
Revolver
649,510
Ad.Net Holdings, Inc. Series A Common Stock (SBIC II)
(5)
7,794
77,941
66,754
0.02
Ad.Net Holdings, Inc. Series A Preferred Stock (SBIC II)
7,015
701,471
600,785
0.19
16,535,959
16,554,549
5.20
ADS Group Opco, LLC
Lakewood, CO
6.75
12.24
6/4/2021
6/4/2026
Aerospace & Defense
14,325,000
14,155,309
14,253,375
4.48
100,000
99,500
0.03
ADS Group Topco, LLC Class A Units
77,626
288,691
-
0.00
ADS Group Topco, LLC Class B Units
56,819
211,309
ADS Group Topco, LLC Class Z Units
6/15/2022
72,043
267,929
ADS Group Topco, LLC Class Y Units
4/11/2023
23,859
88,733
124,047
0.04
15,111,971
14,476,922
4.55
American Refrigeration, LLC
Jacksonville, FL
Term Loan (SBIC)
(4)(11)
1.50
3/31/2023
3/31/2028
8,234,299
8,043,923
2.59
AR-USA Holdings, LLC Class A Units
141
141,261
214,565
0.07
8,185,184
8,448,864
2.66
Advanced Barrier Extrusions, LLC
Rhinelander, WI
Term Loan B (SBIC)
1M SOFR+
7.50
11.25
11/30/2020
11/30/2026
Containers, Packaging, & Glass
17,018,750
16,819,198
14,636,124
4.60
GP ABX Holdings Partnership, L.P. Partner Interests
8/8/2018
644,737
528,395
GP ABX Holdings Partnership, L.P. Series B Preferred Interests
1/5/2023
353
35,308
15,828
17,382,901
14,651,952
Anne Lewis Strategies, LLC
Washington, DC
3/5/2021
5/9/2028
10,220,625
10,109,467
10,016,213
3.15
4/15/2022
3,189,548
3,147,215
3,125,757
0.98
40,000
39,200
0.01
SG AL Investment, LLC Common Units
(6)
1,000
606,733
1,765,399
0.55
13,903,415
14,946,569
4.69
APE Holdings, LLC
Deer Park, TX
Class A Units
9/5/2014
Chemicals, Plastics, & Rubber
375,000
28,410
Atmosphere Aggregator Holdings II, L.P.
Atlanta, GA
Common Units
1/26/2016
254,250
2,456,288
0.77
Stratose Aggregator Holdings, L.P. Common Units
6/30/2015
750,000
7,245,688
2.28
9,701,976
3.05
ArborWorks Acquisition LLC
Oakhurst, CA
(11)(18)
7.00
11/23/2021
11/9/2026
Environmental Industries
14,923,831
14,825,696
5,745,675
1.81
3,446,002
1,326,711
0.42
ArborWorks Holdings LLC Units
12/29/2021
115
115,385
ArborWorks Holdings LLC Class A-1 Units
5/15/2023
29
15,515
18,402,598
7,072,386
2.23
Archer Systems, LLC
Houston, TX
11.54
8/11/2022
8/11/2027
3,788,754
3,751,744
1.19
CF Arch Holdings LLC Class A Units
8/10/2022
151,168
0.05
3,851,744
3,939,922
1.24
Axis Portable Air, LLC
Phoenix, AZ
5.75
11.29
3/22/2022
3/22/2028
Capital Equipment
12,000,000
11,810,730
3.77
4/17/2023
1,893,610
1,858,191
0.60
11.17
80,000
Delayed Draw Term Loan
99,161
Axis Air Parent, LLC Preferred Units
4,436
443,636
780,891
0.25
14,291,718
14,854,501
4.68
Baker Manufacturing Company, LLC
Evansville, IN
(5)(10)(12)
5.25
11.36
7/5/2022
7/5/2027
13,701,636
13,479,303
4.31
BSC Blue Water Holdings, LLC Series A Units (SBIC II)
743,770
805,661
14,223,073
14,507,297
4.56
BLP Buyer, Inc.
1.25
12.02
2/1/2022
2/1/2027
6,132,049
6,044,461
6,101,389
1.92
12.27
4/14/2023
1,729,958
1,683,744
1,721,308
11.92
76,566
76,183
BL Products Parent, L.P. Class A Units
879,060
983,608
1,316,125
8,788,379
9,215,005
2.89
Café Valley, Inc.
7.24
12.63
8/28/2019
8/28/2024
Beverage, Food, & Tobacco
15,592,857
15,526,148
4.90
CF Topco LLC Units
9,160
916,015
1,329,108
16,442,163
16,921,965
5.32
Camp Profiles LLC
Boston, MA
10.79
9/3/2021
9/3/2026
Media: Advertising, Printing & Publishing
10,045,000
9,917,365
3.16
CIVC VI-A 829 Blocker, LLC Units
250
250,000
494,949
0.16
10,167,365
10,539,949
3.32
CEATI International Inc.
(7)(9)
Montreal, Canada
12.09
2/19/2021
2/19/2026
8,549,525
8,458,104
8,506,777
2.67
CEATI Holdings, LP Class A Units
259,707
0.08
8,708,104
8,766,484
2.75
Cerebro Buyer, LLC
Columbia, SC
12.17
3/15/2023
3/15/2029
Healthcare & Pharmaceuticals
4,658,911
4,550,245
4,635,616
1.46
Cerebro Holdings Partnership, L.P. Series A Partner Interests
62,961
59,128
Cerebro Holdings Partnership, L.P. Series B Partner Interests
341,091
320,323
0.10
4,954,297
5,015,067
1.58
CF512, Inc.
Blue Bell, PA
11.60
9/1/2021
9/1/2026
13,946,832
13,769,619
13,807,364
4.34
11.58
3,011,596
2,991,683
2,981,480
0.94
StellPen Holdings, LLC Membership Interests
220,930
225,062
16,982,232
17,013,906
5.35
Channel Partners Intermediateco, LLC
Tampa Bay, FL
12.53
2/24/2022
2/7/2027
Retail
13,287,041
13,190,845
13,087,735
4.11
3/27/2023
1,694,182
1,679,006
1,668,769
0.52
12.60
49,998
49,248
14,919,849
14,805,752
4.65
6
CompleteCase, LLC
Seattle, WA
12.04
12/21/2020
12/21/2025
Services: Consumer
6,699,028
6,632,116
6,665,533
2.10
CompleteCase Holdings, Inc. Class A Common Stock (SBIC II)
417
CompleteCase Holdings, Inc. Series A Preferred Stock (SBIC II)
522
521,734
470,841
0.15
CompleteCase Holdings, Inc. Class A Common Stock
4/27/2023
89
CompleteCase Holdings, Inc. Series C Preferred Stock
111
111,408
100,542
7,265,264
7,236,922
Compost 360 Acquisition, LLC
Tampa, FL
11.87
8/2/2023
8/2/2028
9,595,100
9,360,916
2.94
8,333
8,130
Compost 360 Investments, LLC Class A Units
2,508
250,761
250,800
9,620,010
9,619,846
3.02
COPILOT Provider Support Services, LLC
Maitland, FL
11/22/2022
11/22/2027
4,950,000
4,863,835
1.56
QHP Project Captivate Blocker, Inc. Common Stock
285,714
264,343
5,149,549
5,214,343
1.64
Craftable Intermediate II Inc.
Dallas, TX
6/30/2023
6/30/2028
High Tech Industries
10,083,715
9,889,469
3.11
Gauge Craftable LP Partnership Interests
626,690
10,516,159
3.31
Curion Holdings, LLC
Chicago, IL
12.29
7/29/2022
7/29/2027
12,929,401
12,720,756
12,541,519
3.94
97,000
SP CS Holdings LLC Class A Units
739,999
685,539
0.22
13,560,755
13,324,058
4.19
Dresser Utility Solutions, LLC
Bradford, PA
Second Lien
8.50
13.92
10/1/2018
4/1/2026
Utilities: Oil & Gas
10,000,000
9,937,449
3.14
DRS Holdings III, Inc.
St. Louis, MO
6.25
11.67
11/1/2019
11/1/2025
Consumer Goods: Durable
9,043,265
9,006,651
8,998,049
2.83
DTE Enterprises, LLC
Roselle, IL
DTE Holding Company, LLC Class A-2 Units
4/13/2018
Energy: Oil & Gas
776,316
466,204
275,763
0.09
DTE Holding Company, LLC Class AA Units
723,684
1,241,097
0.39
1,189,888
1,516,860
0.48
EH Real Estate Services, LLC
Skokie, IL
Term Loan A-1 (SBIC)
(4)(17)
12.00
FIRE: Real Estate
5,337,200
5,249,242
1,601,160
0.50
Term Loan A-2 (SBIC)
4/3/2023
1,140,558
0.36
Term Loan A-2
(17)
570,279
Term Loan A-3 (SBIC)
6/7/2023
392,910
0.12
Term Loan A-3
196,455
0.06
Term Loan A-4 (SBIC)
7/12/2023
1,003,691
0.32
Term Loan A-4
501,846
EH Holdco, LLC Series A Preferred Units
7,892
7,891,642
16,946,623
5,406,899
1.70
EHI Buyer, Inc.
Grand Prarie, TX
Term A Loan (SBIC)
7/31/2023
7/31/2029
6,111,343
5,961,449
5,961,448
1.87
EHI Group Holdings, L.P. Class A Units
618
617,801
6,579,250
6,579,249
2.06
7
Elliott Aviation, LLC
Moline, IL
8.00
11.47
1/31/2020
6/30/2025
8,493,140
8,444,039
7,389,032
2.32
Revolver A
1,403,251
1,220,828
0.38
Revolver B
3/1/2023
333,926
290,516
SP EA Holdings LLC Class A Units
900,000
11,081,216
8,900,376
2.79
EOS Fitness Holdings, LLC
Class A Preferred Units
12/30/2014
Hotel, Gaming, & Leisure
118
242,989
Class B Common Units
3,017
638,973
881,962
Equine Network, LLC
Boulder, CO
12.15
5/22/2023
5/22/2028
4,995,699
4,876,957
4,945,742
1.55
12,000
11,880
4,888,957
4,957,622
Evriholder Acquisition, Inc.
Anaheim, CA
1/23/2023
1/24/2028
12,837,500
12,549,100
4.04
KEJ Holdings LP Class A Units
873,333
1,034,409
0.33
13,422,433
13,871,909
4.37
Exacta Land Surveyors, LLC
(20)
Cleveland, OH
2/8/2019
2/8/2024
16,317,614
16,285,542
15,991,261
5.04
7/15/2022
991,799
986,556
971,963
0.31
SP ELS Holdings LLC Class A Units
1,122,250
367,199
18,394,348
17,330,423
5.47
Exigo, LLC
3/16/2022
3/16/2027
Software
8,834,320
8,736,756
8,790,148
2.76
Gauge Exigo Coinvest, LLC Common Units
377,535
9,114,291
9,167,683
2.88
Florachem Corporation
4/29/2022
4/29/2028
9,875,000
9,715,841
9,677,500
3.04
56,667
55,534
SK FC Holdings, L.P. Class A Units
362
362,434
321,832
10,134,942
10,054,866
General LED OPCO, LLC
San Antonio, TX
9.00
14.49
5/1/2018
3/31/2026
4,500,000
4,470,263
4,320,000
1.36
Green Intermediateco II, Inc.
Irvine, CA
12.12
8/8/2023
8/8/2028
11,170,252
10,897,577
3.43
Green Topco Holdings, LLC Class A Units
271,401
11,168,978
3.52
GS HVAM Intermediate, LLC
Carlsbad, CA
10/18/2019
4/2/2025
12,426,405
12,395,693
3.91
11.93
2,280,303
0.72
HV GS Acquisition, LP Class A Interests
10/2/2019
2,144
1,967,133
3,407,235
1.07
16,643,129
18,113,943
5.70
Health Monitor Holdings, LLC
Montvale, NJ
Health Monitor Holdings, LLC Series A Preferred Units
5/15/2019
1,105,838
1,052,919
8
Heartland Business Systems, LLC
Little Chute, WI
11.79
8/26/2022
8/26/2027
9,900,000
9,737,093
49,750
49,299
AMCO HBS Holdings, LP Class A Units
2,861
249,873
705,860
10,036,265
10,655,610
3.35
Heat Makes Sense Shared Services, LLC
Brooklyn, NY
6M SOFR+
0.75
10.87
7/1/2022
7/1/2029
Consumer Goods: Non-Durable
94,107
92,443
Ishtar Co-Invest-B LP Partnership Interests
77,778
207,327
Oshun Co-Invest-B LP Partnership Interests
22,222
59,236
192,443
360,670
HV Watterson Holdings, LLC
Schaumburg, IL
12/17/2021
12/17/2026
13,201,462
13,018,417
13,069,447
96,000
95,040
320,679
318,152
317,472
HV Acquisition VI, LLC Class A Units
1,632
1,631,591
2,046,367
0.64
15,064,160
15,528,326
4.88
I2P Holdings, LLC
Series A Preferred Units
1/31/2018
3,113,861
ICD Holdings, LLC
(7)
San Francisco, CA
1/1/2018
Finance
9,962
449,758
1,764,755
Impact Home Services LLC
4/28/2023
4/28/2028
5,922,057
5,782,855
5,803,616
1.82
269,184
262,697
263,800
55,833
54,716
Impact Holdings Georgia LLC Class A Units
311
310,844
214,078
6,412,229
6,336,210
1.99
Infolinks Media Buyco, LLC
Ridgewood, NJ
11/1/2021
11/1/2026
8,375,813
8,264,143
2.63
1,481,288
1,467,374
Tower Arch Infolinks Media, LP LP Interests
(6)(16)
10/28/2021
450,462
422,930
754,067
0.24
10,154,447
10,611,168
3.34
Informativ, LLC
Fresno, CA
7/30/2021
7/30/2026
9,800,000
9,680,650
9,702,000
3/31/2022
7,387,500
7,285,719
7,313,625
2.30
Credit Connection Holdings, LLC Series A Units
804,384
900,834
17,770,753
17,916,459
5.63
Inoapps Bidco, LLC
Term Loan B
3M SONIA+
2/15/2022
2/15/2027
£
13,197,258
11,930,055
3.75
11.38
82,500
81,855
Inoapps Holdings, LLC Series A-1 Preferred Units
739,844
783,756
908,651
0.29
14,062,869
12,921,206
4.07
Integrated Oncology Network, LLC
Newport Beach, CA
11.40
7/17/2019
6/24/2025
15,713,138
15,658,214
15,477,440
4.87
1,087,669
1,081,086
1,071,354
11.52
498,165
490,693
17,237,465
17,039,487
5.36
9
International Designs Holdings LLC
Farmingville, NY
4/1/2022
Construction & Building
200,000
148,670
Interstate Waste Services, Inc.
Amsterdam, OH
1/15/2020
21,925
946,125
342,465
0.11
Intuitive Health, LLC
Plano, TX
5.50
12.23
10/18/2027
5,771,920
5,715,986
(10)(12)
8,117,989
8,039,721
2.55
8/31/2021
3,040,324
3,007,974
Legacy Parent, Inc. Class A Common Stock
10/30/2020
58
173,189
16,763,681
17,103,422
5.37
Invincible Boat Company LLC
Opa Locka, FL
3M LIBOR+
8/28/2025
5,381,042
5,317,010
5,273,421
1.66
4,967,116
4,929,802
4,867,774
1.53
6/1/2021
1,104,255
1,093,300
1,082,170
319,149
312,766
Warbird Parent Holdco, LLC Class A Units
1,362,575
1,299,691
998,057
12,958,952
12,534,188
J.R. Watkins, LLC
(4)
5.00
12/22/2017
3/31/2024
13,192,965
7,717,885
2.43
J.R. Watkins Holdings, Inc. Class A Preferred Stock
1,133
1,132,576
14,325,541
Jurassic Acquisition Corp.
Sparks, MD
10.92
12/28/2018
11/15/2024
Metals & Mining
16,668,750
16,612,448
16,585,405
5.22
Kelleyamerit Holdings, Inc.
Walnut Creek, CA
(4)(10)(12)
1M BSBY+
13.31
12/24/2020
12/24/2025
Automotive
9,750,000
9,652,308
3.06
1,500,000
1,484,970
11,137,278
11,250,000
3.53
KidKraft, Inc.
(10)(12)(19)
PRIME+
4/3/2020
1,580,768
821,999
0.26
KidKraft Group Holdings, LLC Preferred B Units
4,000,000
5,580,768
Ledge Lounger, Inc.
Katy, TX
Term Loan A (SBIC)
11/9/2021
7,510,954
7,410,599
2.36
SP L2 Holdings LLC Class A Units (SBIC)
245,110
7,785,599
7,756,064
2.44
Lightning Intermediate II, LLC
6/6/2022
6/6/2027
13,329,085
13,121,614
13,195,794
4.15
(6)(11)
30,000
29,700
Gauge Vimergy Coinvest, LLC Units
399
391,274
221,011
13,542,888
13,446,505
4.23
MacKenzie-Childs Acquisition, Inc.
Aurora, NY
9/2/2022
9/2/2027
99,000
97,774
98,505
86,667
86,234
MacKenzie-Childs Investment, LP Partnership Interests
81,364
284,441
266,103
10
Madison Logic Holdings, Inc.
New York, NY
12.39
12/30/2022
12/30/2028
Media: Broadcasting & Subscription
4,506,571
4,386,742
4,484,038
1.41
BC Partners Glengarry Co-Investment LP Class 1 Interests
7/7/2023
394,767
4,781,509
4,878,805
Microbe Formulas LLC
Meridian, ID
11.42
4/4/2022
4/3/2028
8,945,557
8,874,557
2.81
MOM Enterprises, LLC
Richmond, CA
6.48
5/19/2021
5/19/2026
16,096,167
15,909,146
15,935,204
5.01
MBliss SPC Holdings, LLC Units
933,333
990,813
16,842,479
16,926,017
Monitorus Holding, LLC
London, UK
12.65
5/24/2022
5/24/2027
Media: Diversified & Production
99,226
€
108,716
108,172
100,931
100,426
Sapphire Aggregator S.a r.l. Class A Shares
9/1/2022
557,689
11,156
12,961
Sapphire Aggregator S.a r.l. Class B Shares
557,682
12,960
Sapphire Aggregator S.a r.l. Class C Shares
Sapphire Aggregator S.a r.l. Class D Shares
Sapphire Aggregator S.a r.l. Class E Shares
Sapphire Aggregator S.a r.l. Class F Shares
Sapphire Aggregator S.a r.l. Class G Shares
Sapphire Aggregator S.a r.l. Class H Shares
Sapphire Aggregator S.a r.l. Class I Shares
409,277
424,739
Morgan Electrical Group Intermediate Holdings, Inc.
Freemont, CA
11.57
8/3/2023
8/3/2029
4,439,439
4,341,427
Morgan Electrical Group Holdings, LLC Series A-2 Preferred Units
357
356,800
4,698,227
1.47
Naumann/Hobbs Material Handling Corporation II, Inc.
12.14
8/30/2019
8/30/2024
8,407,498
8,371,290
2.64
5,301,800
5,278,967
1.67
Naumann Hobbs Holdings, L.P. Class A-1 Units
9/29/2022
123
220,379
423,825
0.13
Naumann Hobbs Holdings, L.P. Class A-2 Units
14,091,015
14,556,948
4.57
NINJIO, LLC
Westlake Village, CA
10/12/2022
10/12/2027
4,962,500
4,878,670
33,333
NINJIO Holdings, LLC Units
184
313,253
259,103
Gauge NINJIO Blocker LLC Preferred Units
9/22/2023
14
14,470
61,355
5,239,726
5,316,291
NS412, LLC
13.99
5/6/2019
11/6/2025
7,615,000
7,555,212
2.39
NS Group Holding Company, LLC Class A Units
782
795,002
915,014
8,350,214
8,530,014
2.68
NuMet Machining Techniques, LLC
Birmingham, United Kingdom
(11)(14)
11/5/2019
5/5/2026
12,675,000
12,553,102
Bromford Industries Limited Term Loan
7,800,000
7,722,555
20,275,657
11
NuSource Financial, LLC
Eden Prairie, MN
NuSource Financial Acquisition, Inc. (SBIC II)
Unsecured
13.75
4.00
9.75
1/29/2021
7/29/2026
5,881,652
5,826,223
5,587,569
1.76
NuSource Holdings, Inc. Warrants (SBIC II)
54,966
Nutritional Medicinals, LLC
Centerville, OH
6.21
11/15/2018
11/15/2025
9,145,708
9,098,393
2.87
3,850,203
3,817,395
1.21
Functional Aggregator, LLC Units
12,500
972,803
1,895,863
13,888,591
14,891,774
Onpoint Industrial Services, LLC
1.75
11/16/2022
11/16/2027
12,796,559
12,573,598
4.02
Spearhead TopCo, LLC Class A Units
606,742
717,526
0.23
13,180,340
13,514,085
4.25
PCP MT Aggregator Holdings, L.P.
Oak Brook, IL
3/29/2019
825,020
119,281
3,790,459
PCS Software, Inc.
Shenandoah, TX
7/1/2019
7/1/2024
Transportation & Logistics
13,955,184
13,901,627
4.39
1,830,188
1,823,164
0.58
965,000
0.30
PCS Software Parent, LLC Class A Common Units
9/16/2022
461,216
434,793
0.14
16,689,791
17,185,165
5.41
Pearl Media Holdings, LLC
Garland, TX
8/31/2022
8/31/2027
9,737,095
25,000
24,500
9,762,095
9,726,500
Peltram Plumbing Holdings, LLC
Auburn, WA
12/30/2021
12/30/2026
16,201,228
15,977,159
16,120,221
5.07
42,500
42,288
Peltram Group Holdings LLC Class A Units
508,516
384,865
16,528,175
16,547,374
Premiere Digital Services, Inc.
10.68
11/3/2021
11/3/2026
13,250,600
13,206,664
4.17
Premiere Digital Holdings, Inc. Common Stock
10/18/2018
5,000
2,817,394
0.89
16,067,994
5.06
Protect America, Inc.
Austin, TX
(11)(13)
7.75
8/30/2017
9/1/2024
17,979,749
Red's All Natural, LLC
Franklin, TN
12.57
1/31/2023
1/31/2029
8,837,476
8,674,567
8,793,289
Centeotl Co-Invest B, LP Common Units
710,600
481,059
9,385,167
9,274,348
2.91
RIA Advisory Borrower, LLC
Coral Gables, FL
5/1/2023
8/2/2027
5,970,000
5,859,532
5,940,150
44,972
44,747
RIA Advisory Aggregator, LLC Class A Units
143,055
165,078
129,172
RIA Products Aggregator, LLC Class A Units
134,841
78,390
6,147,972
6,192,459
1.94
12
Rogers Mechanical Contractors, LLC
12.28
4/28/2021
9/9/2025
9,229,554
9,149,949
9,137,258
46,288
46,039
45,825
9,195,988
9,183,083
Sales Benchmark Index, LLC
11.59
1/7/2020
1/7/2025
12,481,823
12,405,969
12,419,414
3.90
SBI Holdings Investments LLC Class A Units
66,573
665,730
396,840
13,071,699
12,816,254
Service Minds Company, LLC
Bradenton, FL
11.37
2/7/2022
2/7/2028
5,317,593
5,236,106
5,104,889
1.60
10.90
80,008
76,808
11.19
99,009
98,161
95,049
5,414,275
5,276,746
1.65
SIB Holdings, LLC
Charleston, SC
11.81
10/29/2021
10/29/2026
12,545,260
12,378,593
12,294,355
3.86
843,422
826,813
826,554
7/20/2022
2,249,126
2,214,599
2,204,143
0.69
2,811,407
2,790,649
2,755,179
0.87
123,333
120,866
SIB Holdings, LLC Units
238,095
500,000
325,965
18,833,987
18,527,062
5.82
TAC LifePort Holdings, LLC
Woodland, WA
3/1/2021
546,543
537,049
685,572
The Hardenbergh Group, Inc.
Livonia, MI
11.74
8/7/2023
8/7/2028
10,501,898
10,245,607
10,245,606
3.22
BV HGI Holdings, L.P. Class A Units
434,504
10,680,111
10,680,110
3.36
Tilley Distribution, Inc.
Baltimore, MD
11.55
12/31/2026
98,491
97,404
95,536
Trade Education Acquisition, L.L.C.
12/28/2021
12/28/2027
Education
9,754,353
9,607,251
8,974,005
2.82
Trade Education Holdings, L.L.C. Class A Units
662,660
209,341
10,269,911
9,183,346
TradePending OpCo Aggregator, LLC
Carrboro, NC
3/2/2021
3/2/2026
9,651,515
9,547,158
9,555,000
3.00
8/4/2023
2,467,044
2,420,326
2,442,374
33,000
TradePending Holdings, LLC Series A Units
908,333
967,114
1,457,959
0.46
TradePending Holdings, LLC Series A-1 Units
132,783
260,254
384,242
13,228,185
13,872,575
4.36
Unicat Catalyst Holdings, LLC
(21)
Alvin, TX
4/27/2021
4/27/2026
7,078,125
6,997,458
6,724,219
2.11
Unicat Catalyst, LLC Class A Units
7,500
137,927
7,747,458
6,862,146
2.15
U.S. Auto Sales, Inc. et al
Lawrenceville, GA
USASF Blocker II LLC Units
6/8/2015
441
441,000
USASF Blocker III LLC 2018 Series Units
2/13/2018
50
50,000
USASF Blocker III LLC 2019 Series Units
12/27/2019
75,000
USASF Blocker IV LLC Units
5/27/2020
110
110,000
USASF Blocker IV LLC 2022 Series Units
7/28/2022
100
USASF Blocker V LLC Units
12/20/2022
200
USASF Blocker LLC Units
9,000
985,000
U.S. Expediters, LLC
Stafford, TX
12/22/2021
12/22/2026
15,746,595
15,528,259
15,667,862
4.93
Cathay Hypnos LLC Units
1,372,932
1,316,740
1,772,330
0.56
16,844,999
17,440,192
5.49
Venbrook Buyer, LLC
6.54
3/13/2020
3/13/2026
13,481,295
13,360,849
12,335,385
3.88
153,390
152,020
140,352
2,354,013
2,153,922
0.68
4,596,451
4,572,568
4,205,753
1.32
Venbrook Holdings, LLC Convertible Term Loan
(15)
10.00
12/20/2028
96,214
88,036
Venbrook Holdings, LLC Common Units
822,758
819,262
21,354,926
18,923,448
5.95
Whisps Holdings LP
Elgin, IL
4/18/2019
Class A-1 Units
3/6/2023
107,418
96,676
607,418
Xanitos, Inc.
Newtown Square, PA
6/25/2021
6/25/2026
12,512,000
12,362,165
12,386,880
3.89
81,675
2,204,354
2,189,987
2,182,310
Pure TopCo, LLC Class A Units
442,133
1,053,478
1,057,287
15,688,130
15,708,152
4.94
Total Non-controlled, non-affiliated investments
941,679,195
278.61
Net Investments
LIABILITIES IN EXCESS OF OTHER ASSETS
(568,212,368)
(178.61)
100.00
Unused
Unfunded
Commitment
Security
Fee
0.50%
June 5, 2028
May 7, 2026
March 31, 2028
1.00%
60,000
May 9, 2028
August 11, 2027
20,000
March 22, 2028
23,434
February 1, 2027
September 3, 2026
February 19, 2026
March 15, 2029
September 1, 2026
116,668
February 7, 2027
166,667
December 21, 2025
91,667
August 2, 2028
4,096,741
November 22, 2027
June 30, 2028
909,091
November 1, 2025
July 31, 2029
3,055,671
332,741
June 30, 2025
May 22, 2028
88,000
January 24, 2028
March 16, 2027
43,333
April 29, 2028
August 8, 2028
371,212
April 2, 2025
August 26, 2027
July 1, 2028
4,000
December 17, 2026
2,555,354
44,167
April 28, 2028
990,000
November 1, 2026
July 30, 2026
February 15, 2027
55,352
June 24, 2025
744,681
August 28, 2025
November 9, 2026
70,000
June 6, 2027
13,333
September 2, 2027
December 30, 2027
April 3, 2028
May 19, 2026
2,864,154
August 3, 2029
Revolver – Working Capital
1,763,033
August 30, 2024
October 12, 2027
66,667
2,000,000
November 15, 2025
1,318,143
July 1, 2024
August 31, 2027
57,500
December 30, 2026
576,923
November 3, 2026
55,028
August 2, 2027
83,333
0.75%
September 9, 2025
1,331,461
January 7, 2025
February 7, 2028
3,333
October 29, 2026
August 6, 2028
December 31, 2026
687,007
March 2, 2026
December 22, 2026
17,500
June 25, 2026
A
Abbreviation Legend
BSBY — Bloomberg Short-Term Bank Yield Index
LIBOR — London Interbank Offered Rate
PIK — Payment-In-Kind
SOFR — Secured Overnight Financing Rate
SONIA — Sterling Overnight Index Average
16
10.84
15,354,412
15,190,375
15,124,097
5.48
1,039,216
1,023,628
85,488
769,393
17,009,003
17,002,606
6.16
11.48
14,550,000
14,337,005
13,822,500
95,000
48,571
35,552
293,847
15,204,934
14,295,470
5.18
11.88
17,150,000
16,908,205
13,977,250
17,436,600
AIP ATCO Buyer, LLC
Sterling Heights, MI
11.31
5/17/2022
5/17/2028
99,750
97,906
99,251
10.93
147,906
149,001
11.23
3/5/2026
10,493,750
10,349,704
3.81
6,311,895
6,206,222
2.29
680,630
4,318,702
1.57
17,236,556
21,124,347
7.67
29,209
2,134,220
6,295,635
8,429,855
13.56
14,662,500
14,543,314
13,636,125
13.41
2,307,692
2,146,154
0.78
16,966,391
15,782,279
5.72
1,000,000
981,305
106,221
1,081,305
1,091,221
0.40
10.48
11,784,686
11,940,000
4.33
99,050
686,447
12,327,372
12,725,947
4.62
10.75
13,863,087
13,602,312
13,655,141
4.95
590,291
0.21
14,346,082
14,245,432
5.16
17
BDS Solutions Intermediateco, LLC
10.71
13,388,469
13,273,471
13,187,642
4.78
10.55
30,065
29,614
13,303,536
13,217,256
10.49
6,178,740
6,074,029
6,024,272
2.18
10.67
36,566
35,652
754,598
770,648
6,865,193
6,830,572
2.47
11.82
15,725,000
15,606,117
15,410,501
5.60
976,521
0.35
16,522,132
16,387,022
9.98
10,121,875
9,965,356
3.67
405,784
10,215,356
10,527,659
3.82
13,263,750
13,083,737
12,998,475
4.71
268,194
13,333,737
13,266,669
4.81
10.76
14,180,959
13,961,673
13,684,625
4.96
10.73
3,062,093
3,037,434
2,954,920
22.09%
218,292
17,220,037
16,857,837
6.11
11,248,696
11,103,143
10,967,479
3.98
39,000
403,084
11,664,882
11,409,567
4.14
4,987,500
4,888,742
1.77
5,174,456
Credit Connection, LLC
9,726,674
9,776,250
3.54
7,443,750
7,317,403
7,369,313
Series A Units
961,718
17,848,461
18,107,281
6.56
10.98
13,027,351
12,784,145
12,701,667
4.61
68,250
590,535
13,594,144
13,360,452
4.84
Data Centrum Communications, Inc.
13.29
5/15/2024
15,760,360
15,661,301
15,445,154
5.61
458,500
0.17
16,661,301
15,903,654
5.78
18
Douglas Products Group, LP
Liberty, MO
Partnership Interests
12/27/2018
322
695,072
1M LIBOR+
12.88
9,921,469
3.55
10.13
9,190,990
9,142,111
8,961,215
3.25
4/13/2023
6,134,219
6,124,342
2.22
706,459
514,396
7,314,230
7,355,074
7,874,359
7,750,451
5,866,397
2.13
15,642,093
10.38
1/31/2025
10,010,654
9,920,657
8,959,535
1,382,146
1,237,021
0.45
146,541
12,202,803
10,343,097
232,320
567,579
799,899
16,374,375
16,286,433
16,128,760
5.86
995,000
980,742
980,075
969,726
18,389,425
18,078,561
6.57
8,992,885
8,875,308
8,857,992
3.21
19,700
341,050
9,272,843
9,218,742
9,950,000
9,768,170
9,751,000
365,198
10,130,604
10,116,198
4,462,793
4,140,000
11.24
10/2/2024
12,523,234
12,472,183
12,398,002
4.50
2,539,470
2,514,075
0.91
1,455,955
0.53
16,978,786
16,368,032
5.94
19
9,975,000
9,785,984
9,825,375
3.56
10.91
24,753
24,625
286,065
444,511
10,096,802
10,294,511
3.73
9.63
97,814
98,254
10.37
7/1/2028
88,684
25,338
217,814
231,976
13,302,236
13,081,774
12,903,169
16,000
15,520
323,108
320,082
313,415
1,374,844
15,049,447
14,606,948
5.30
3,238,328
1.17
464,619
1,033,332
10.23
8,439,750
8,304,246
(6)(17)
447,183
429,507
796,939
8,733,753
9,236,689
9.09
13,260,842
11,801,635
4.28
10.19
83,125
82,356
81,463
765,249
14,126,954
12,648,347
4.59
9.71
15,832,478
15,724,809
15,357,505
5.58
1,095,930
1,083,042
1,063,052
16,807,851
16,420,557
5.97
195,412
615,657
5,835,000
5,769,877
2.12
8,206,709
8,115,519
2.98
3,073,431
3,035,678
1.11
191,375
16,921,074
17,306,515
6.28
20
5,294,704
5,219,611
4,916,760
4,818,103
1,089,478
1,071,127
309,575
733,149
0.27
12,919,782
12,151,565
4.41
San Francisco
12,764,441
11,168,886
4.05
149,640
13,897,017
11,318,526
4.10
9.92
16,800,000
16,708,750
16,464,001
5.98
12.36
9,624,052
9,701,250
1,480,623
1,492,500
11,104,675
11,193,750
4.06
10.72
0.57
1.45
2.02
7,568,289
7,446,619
7,416,923
2.69
32,666
302,593
7,854,952
7,752,182
13,587,067
13,340,843
13,179,455
398,677
298,376
13,739,520
13,477,831
4.89
98,331
85,367
91,659
284,998
275,280
4,529,217
4,393,340
1.59
9,962,730
9,873,093
9,863,103
3.58
16,219,667
15,984,825
15,651,980
5.69
37,500
36,188
700,989
16,955,658
16,389,157
21
11.73
99,095
106,132
12,511
300,430
317,731
11.33
8,552,022
8,487,053
8,423,742
5,392,937
5,351,968
5,312,043
1.93
314,486
14,279,779
14,364,757
5,000,000
4,903,726
1.78
5,216,979
13.23
7,536,527
7,386,550
536,120
8,331,529
7,922,670
(11)(15)
12,524,972
8,745,750
3.17
7,704,685
5,382,000
1.95
20,229,657
14,127,750
5.12
13.12
1/29/2026
11,562,548
11,403,406
11,215,672
11.75
5,638,571
5,568,680
4,736,400
1.72
16,972,086
15,952,072
5.79
9,848,290
9,781,484
9,700,566
4,180,294
4,133,615
4,117,590
1.49
1,582,534
14,887,902
15,400,690
12,893,258
12,638,571
4.58
13,245,313
4.80
1,686,647
0.61
22
14,064,493
13,964,812
13,923,848
5.05
1,844,524
1,831,451
1,826,079
0.66
972,500
962,775
449,270
16,768,763
17,161,972
6.22
9,775,500
9,819,317
9,808,166
16,579,758
16,304,977
15,999,467
5.81
311,668
16,813,493
16,311,135
5.92
9.64
14,278,846
14,221,712
2,773,121
1.01
17,051,967
6.19
11.70
10,001,068
9,884,999
9,851,052
3.57
49,643
49,250
9,934,642
9,900,302
3.59
12,366,809
12,169,777
390,822
13,032,539
12,560,599
9.29
5,357,887
5,264,150
5,223,940
9.44
29,250
32,081
31,791
31,279
5,325,941
5,284,469
1.91
11.01
12,789,331
12,584,996
12,405,651
859,747
842,658
833,955
2,292,657
2,250,559
2,223,877
0.81
2,865,822
2,840,406
2,779,847
70,754
68,631
342,821
19,089,373
18,654,782
6.76
759,769
10.14
99,245
97,936
95,771
17,391
16,782
115,327
112,553
23
10.63
10,496,533
10,315,261
9,919,224
3.60
10.52
75,600
503,936
11,057,921
10,498,760
TradePending, LLC
9,725,758
9,592,801
9,531,243
3.46
829,167
868,750
1,117,989
10,461,551
10,649,232
3.87
7,218,750
7,116,275
6,821,719
129,248
7,866,275
6,950,967
2.52
53,040
79,560
330,000
300,000
600,000
1,362,600
15,866,798
15,603,833
15,866,799
5.76
2,702,795
16,920,573
18,569,594
6.74
5.73
12,872,663
12,719,565
12,615,210
146,465
144,723
143,536
2,231,119
2,186,497
0.79
4,388,645
4,358,279
4,300,872
Venbrook Holdings, LLC Term Loan
(16)
89,284
87,498
121,938
20,362,232
19,455,551
7.04
Vortex Companies, LLC
9.50
14.18
6/21/2026
9,859,282
9,850,000
12,608,000
12,421,258
12,166,720
77,200
2,221,181
2,203,262
2,143,440
844,147
15,757,998
15,231,507
5.53
875,823,177
306.31
(563,881,593)
(206.31)
24
259,804
May 17, 2028
March 5, 2026
ArborWorks Acquisition LLC (a)
1,153,846
69,935
63,434
3,750,000
July 29, 2027
April 13, 2023
February 8, 2024
112,045
October 2, 2024
84,000
2,475,000
16,667
553,517
25
62,500
May 24, 2027
67,677
29,246
82,609
December 28, 2027
April 27, 2026
26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Stellus Capital Investment Corporation (“we”, “us”, “our” and the “Company”) was formed as a Maryland corporation on May 18, 2012 (“Inception”) and is an externally managed, closed-end, non-diversified investment management company. The Company is applying the guidance of Accounting Standards Codification (“ASC”) Topic 946, Financial Services Investment Companies (“ASC Topic 946”). The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), for U.S. federal income tax purposes. The Company’s investment activities are managed by our investment adviser, Stellus Capital Management, LLC (“Stellus Capital” or the “Advisor”).
As of September 30, 2023, the Company had issued a total of 24,125,642 shares and raised $352,021,616 in gross proceeds since Inception, incurring $11,022,607 in offering expenses and sales load fees. Additionally, the Company has received $672,917 in offering expenses reimbursements from the Advisor for net proceeds from offerings of $341,671,926. The Company’s shares are currently listed on the New York Stock Exchange under the symbol “SCM”. See Note 4 for further details.
The Company has established the following wholly owned subsidiaries: SCIC — Consolidated Blocker, Inc., SCIC — ICD Blocker 1, Inc., SCIC — Invincible Blocker 1, Inc., SCIC — SKP Blocker 1, Inc., SCIC — APE Blocker 1, Inc., SCIC — Venbrook Blocker, Inc., SCIC — CC Blocker 1, Inc., SCIC — ERC Blocker 1, Inc., and SCIC — Hollander Blocker 1, Inc., which are structured as Delaware entities, to hold equity or equity-like investments in portfolio companies organized as limited liability companies, or LLCs (or other forms of pass-through entities) (collectively, the “Taxable Subsidiaries”). The Taxable Subsidiaries are consolidated for U.S. generally accepted accounting principles (“U.S. GAAP”) reporting purposes, and the portfolio investments held by them are included in the consolidated financial statements.
On June 14, 2013, the Company formed Stellus Capital SBIC, LP (the “SBIC subsidiary”), a Delaware limited partnership, and its general partner, Stellus Capital SBIC GP, LLC, a Delaware limited liability company, as wholly owned subsidiaries of the Company. On June 20, 2014, the SBIC subsidiary received a license from the U.S. Small Business Administration (“SBA”) to operate as a Small Business Investment Company (“SBIC”) under Section 301(c) of the Small Business Investment Company Act of 1958, as amended (the “SBIC Act”). The SBIC subsidiary and its general partner are consolidated for U.S. GAAP reporting purposes, and the portfolio investments held by it are included in the consolidated financial statements.
On November 29, 2018, the Company formed Stellus Capital SBIC II, LP (the “SBIC II subsidiary”), a Delaware limited partnership. On August 14, 2019, the SBIC II subsidiary received a license from the SBA to operate as an SBIC under Section 301(c) of the SBIC Act. The SBIC II subsidiary is consolidated for U.S. GAAP reporting purposes, and the portfolio investments held by it are included in the consolidated financial statements.
The SBIC licenses allow the SBIC subsidiary and SBIC II subsidiary (together, “the SBIC subsidiaries”) to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten-year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with 10-year maturities. The SBA, as a creditor, will have a superior claim to the SBIC subsidiaries’ assets over the Company’s stockholders in the event the Company liquidates one or both of the SBIC subsidiaries or the SBA exercises its remedies under the SBA-guaranteed debentures issued by the SBIC subsidiaries upon an event of default. For the SBIC subsidiary, SBA regulations currently limit the amount that a single licensee may borrow to a maximum of $150,000,000 when it has at least $75,000,000 in regulatory capital, as such term is defined by the SBA, receives a capital commitment from the SBA and has been through an examination by the SBA subsequent to licensing. For the SBIC II subsidiary, SBA regulations limit these amounts to $175,000,000 of borrowings when it has at least $87,500,000 of regulatory capital.
As of both September 30, 2023 and December 31, 2022, the SBIC subsidiary had $75,000,000 in regulatory capital. As of both September 30, 2023 and December 31, 2022, the SBIC II subsidiary had $87,500,000 in regulatory capital.
As of both September 30, 2023 and December 31, 2022, the SBIC subsidiary had $150,000,000 of SBA-guaranteed debentures outstanding. As of September 30, 2023 and December 31, 2022, the SBIC II subsidiary had $175,000,000 and $163,600,000 of SBA-guaranteed debentures outstanding, respectively. See footnote (4) and (5) of the Consolidated Schedule of Investments for additional information regarding the treatment of investments in the SBIC subsidiaries with respect to the Credit Facility (as defined in Note 9).
As a BDC, the Company is required to comply with certain regulatory requirements. On March 23, 2018, the Small Business Credit Availability Act (the “SBCAA”) was signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The SBCAA included changes to the 1940 Act to allow BDCs to decrease their asset coverage requirement to 150% from 200% subject to certain conditions.
On April 4, 2018, the Company’s board of directors (the “Board”), including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. At the Company’s 2018 annual meeting of stockholders, our stockholders also approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the asset coverage ratio test applicable to the Company was decreased from 200% to 150%, effective June 29, 2018. The amount of leverage that we employ at any time depends on our assessment of the market and other factors at the time of any proposed borrowing. As of September 30, 2023, our asset coverage ratio was 221%.
The Company’s investment objective is to maximize the total return to its stockholders in the form of current income and capital appreciation through debt and related equity investments in middle-market companies. The Company seeks to achieve its investment objective by originating and investing primarily in private U.S. middle-market companies (typically those with $5,000,000 to $50,000,000 of EBITDA (earnings before interest, taxes, depreciation and amortization)) through first lien, second lien, unitranche and unsecured debt financing, with corresponding equity co-investments. The Company sources investments primarily through the extensive network of relationships that the principals of Stellus Capital have developed with financial sponsor firms, financial institutions, middle-market companies, management teams and other professional intermediaries.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared on the accrual basis of accounting in conformity with generally accepted accounting principles in the U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, certain disclosures accompanying the annual financial statements prepared in accordance with U.S. GAAP are omitted. The unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.
In the opinion of management, the unaudited consolidated financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of the financial statements for the interim periods included herein. The results of operations for the three and nine months ended September 30, 2023 and September 30, 2022 are not necessarily indicative of the operating results to be expected for the full year. Also, the unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2022.
In accordance with Regulation S-X under the Exchange Act, the Company does not consolidate portfolio company investments. The accounting records of the Company are maintained in U.S. dollars.
28
Economic Developments
Economic activity has continued to accelerate across sectors and regions. Nonetheless, we have observed and continue to observe supply chain interruptions, labor resource shortages, commodity inflation, rising interest rates, bank impairments and failures, economic sanctions in response to international conflicts and instances of geopolitical, economic and financial market instability in the United States and abroad. One or more of these factors may contribute to increased market volatility and may have long- and short-term effects in the United States and worldwide financial markets.
Portfolio Investment Classification
The Company classifies its portfolio investments in accordance with the requirements of the 1940 Act as follows: (a) “Control Investments” are defined as investments in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation, (b) “Affiliate Investments” are defined as investments in which the Company owns between 5% and 25% of the voting securities and does not have rights to maintain greater than 50% of the board representation, and (c) “Non-controlled, non-affiliate investments” are defined as investments that are neither Control Investments or Affiliate Investments.
Cash and Cash Equivalents
As of September 30, 2023, cash balances totaling $389,676, including foreign currency of $276 (acquisition cost of $288), exceeded Federal Deposit Insurance Corporation insurance protection levels of $250,000 by $139,676. In addition, as of September 30, 2023, the Company held $18,821,045 in cash equivalents, which are carried at cost, which approximates fair value. All of the Company’s cash deposits are held at large established high credit quality financial institutions and management believes that risk of loss associated with any uninsured balances is remote.
Cash consists of bank demand deposits. We deem certain U.S. Treasury Bills and other high-quality, short-term debt securities as cash equivalents.
Fair Value Measurements
We account for all of our financial instruments at fair value in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework used to measure fair value, and requires disclosures for fair value measurements, including the categorization of financial instruments into a three-level hierarchy based on the transparency of valuation inputs. ASC Topic 820 requires disclosure of the fair value of financial instruments for which it is practical to estimate such value. We believe that the carrying amounts of our financial instruments such as cash, receivables and payables approximate the fair value of these items due to the short maturity of these instruments. This is considered a Level 1 valuation technique.
The Credit Facility, SBA-guaranteed debentures, and Notes Payable are carried at amortized cost in the Consolidated Statements of Assets and Liabilities. As of September 30, 2023, the estimated fair value of the Credit Facility approximates the carrying value because the interest rates adjust to the current market interest rate (Level 3 input). The estimated fair value of the SBA-guaranteed debentures and Notes Payable was determined by discounting projected remaining payments using market interest rates for borrowings of the Company and entities with similar credit risks at the measurement date. At the measurement date, the estimated fair values of the SBA-guaranteed debentures and Notes Payable as prepared for disclosure purposes was $291,023,000 and $89,061,000, respectively. See Note 6 to the consolidated financial statements for further discussion regarding the fair value measurements and hierarchy.
Consolidation
As permitted under Regulation S-X under the Exchange Act and ASC Topic 946, we generally do not consolidate our investment in a portfolio company other than an investment company subsidiary. Accordingly, we consolidated the results of the SBIC subsidiaries and the Taxable Subsidiaries. All intercompany balances have been eliminated upon consolidation.
Use of Estimates
The preparation of the Statements of Assets and Liabilities in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially. Additionally, as explained in Note 1 contained herein, the Consolidated Financial Statements includes investments in the portfolio whose values have been estimated by the Company, pursuant to procedures established by our Board, in the absence of readily ascertainable market values. Because of the inherent uncertainty of the investment portfolio valuations, those estimated values may differ materially from the values that would have been determined had a ready market for the securities existed.
Deferred Financing Costs
Deferred financing costs, prepaid loan fees on SBA-guaranteed debentures and prepaid loan structure fees consist of fees and expenses paid in connection with the closing of our Credit Facility, Notes Payable and SBA-guaranteed debentures and are capitalized at the time of payment. These costs are amortized using the straight line method over the term of the respective instrument and presented as an offset to the corresponding debt on the Consolidated Statements of Assets and Liabilities.
Offering Costs
Deferred offering costs consist of fees and expenses incurred in connection with the offer and sale of the Company’s common stock, including legal, accounting, printing fees and other related expenses, as well as costs incurred in connection with the filing of a shelf registration statement. These costs are capitalized when incurred and recognized as a reduction of offering proceeds when the offering is consummated and shown on the Consolidated Statements of Changes in Net Assets and Liabilities as a reduction to Paid-in-capital.
In December 2020, the U.S. Securities and Exchange Commission (the “SEC”) adopted a new rule providing a framework for fund valuation practices. Rule 2a-5 under the 1940 Act (“Rule 2a-5”) establishes requirements for determining fair value in good faith for purposes of the 1940 Act. Rule 2a-5 permits boards, subject to board oversight and certain other conditions, to designate certain parties to perform fair value determinations. Rule 2a-5 also defines when market quotations are “readily available” for purposes of the 1940 Act and the threshold for determining whether a fund must determine the fair value of a security. The SEC also adopted new Rule 31a-4 under the 1940 Act (“Rule 31a-4”), which provides the recordkeeping requirements associated with fair value determinations. Finally, the SEC rescinded previously issued guidance on related issues, including the role of the board in determining fair value and the accounting and auditing of fund investments. Rule 2a-5 and Rule 31a-4 became effective on March 8, 2021, and had a compliance date of September 8, 2022. While our Board has not elected to designate a valuation designee, the Company has adopted certain revisions to its valuation policies and procedures in order to comply with the applicable requirements of Rule 2a-5 and Rule 31a-4.
As a BDC, the Company will generally invest in illiquid loans and securities including debt and equity securities of private middle-market companies. Section 2(a)(41) of the 1940 Act requires that a BDC value its assets as follows: (i) the third party price for securities for which a quotation is readily available; and (ii) for all other securities and assets, fair value, as determined in good faith by a BDC's Board. Under procedures established by our Board, the Company intends to value investments for which market quotations are readily available at such market quotations. The Company will obtain these market values from an independent pricing service or at the midpoint of the bid and ask prices obtained from at least two brokers or dealers (if available, otherwise by a principal market maker or a primary market dealer). Debt and equity securities that are not publicly traded or whose market prices are not readily available will be valued at fair value as determined in good faith by our Board. Such determination of fair values may involve subjective judgments and estimates. The Company also engages independent valuation providers to review the valuation of each portfolio investment that does not have a readily available market quotation at least twice annually.
Debt and equity investments purchased within approximately 90 days of the valuation date will be valued at cost, plus accreted discount, or minus amortized premium, which approximates fair value. With respect to unquoted securities, our Board will value each
30
investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies that are public and other factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Board will use the pricing indicated by the external event to corroborate and/or assist us in our valuation. Because the Company expects that there will not be a readily available market quotation for many of the investments in its portfolio, the Company expects to value most of its portfolio investments at fair value as determined in good faith by the Board using a documented valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.
In following these approaches, the types of factors that will be taken into account in fair value pricing investments will include, as relevant, but not be limited to:
Revenue Recognition
We record interest income on an accrual basis to the extent such interest is deemed collectible. Payment-in-kind (“PIK”) interest represents contractual interest accrued and added to the loan balance that generally becomes due at maturity. We will not accrue any form of interest on loans and debt securities if we have reason to doubt our ability to collect such interest. Loan origination fees, original issue discount and market discount or premium are capitalized, and we then accrete or amortize such amounts using the effective interest method as interest income. Upon the prepayment of a loan or debt security, any unamortized loan origination fee is recorded as interest income. We record prepayment premiums on loans and debt securities as other income. Dividend income, if any, will be recognized on the declaration date.
31
A presentation of the interest income we have earned from portfolio companies for the three and nine months ended September 30, 2023 and 2022 is as follows:
For the three months ended
For the nine months ended
Loan interest
24,266,242
18,194,230
69,665,939
46,926,570
PIK income
827,678
356,527
2,732,530
1,010,061
Fee amortization income(1)
745,222
769,272
2,228,069
2,070,733
Fee income acceleration(2)
384,844
297,439
668,947
385,073
Total Interest Income
To maintain our treatment as a RIC, substantially all of this income must be paid to stockholders in the form of distributions, even if we have not collected any cash.
Management considers portfolio company specific circumstances as well as other economic factors in determining collectability of interest income. As of September 30, 2023, we had five loans on non-accrual status, which represented approximately 7.6% of our loan portfolio at cost and 1.6% at fair value. As of December 31, 2022, we had three loans on non-accrual status, which represented approximately 5.2% of our loan portfolio at cost and 2.3% at fair value. As of September 30, 2023 and December 31, 2022, $11,382,360 and $4,828,880, respectively, of income from investments on non-accrual has not been accrued. If a loan or debt security’s status significantly improves regarding the debtor’s ability to service the debt or other obligations, or if a loan or debt security is sold or written off, we will remove it from non-accrual status.
Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation
Realized gains or losses are measured by the difference between the net proceeds from the repayment, sale or disposition and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. 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.
Investment Transaction Costs
Costs that are material and associated with an investment transaction, including legal expenses, are included in the cost basis of purchases and deducted from the proceeds of sales unless such costs are reimbursed by the borrower.
Receivables and Payables for Unsettled Securities Transaction
The Company records all investments on a trade date basis.
U.S. Federal Income Taxes
The Company has elected, qualified, and intends to continue to qualify annually to be treated as a RIC under Subchapter M of the Code, and to operate in a manner to qualify for the tax treatment applicable to RICs. To qualify for tax treatment as a RIC, among other things, the Company is required to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. 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 consolidated financial statements of the Company.
32
To avoid a 4% U.S federal excise tax on undistributed earnings, the Company is required to distribute each calendar year the sum of (i) 98% of its ordinary income for such calendar year (ii) 98.2% of its net capital gains for the one-year period ending December 31 (iii) any income recognized, but not distributed, in preceding years and on which the Company paid no federal income tax or the Excise Tax Avoidance Requirement. For this purpose, however, any net ordinary income or capital gain net income retained by the Company that is subject to corporate income tax for the tax year ending in that calendar year will be considered to have been distributed by year end (or earlier if estimated taxes are paid). The Company, at its discretion, may choose not to distribute all of its taxable income for the calendar year and pay a non-deductible 4% excise tax on this income. If the Company chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to stockholders. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes on estimated excess taxable income as taxable income is earned. Income tax expense for the three and nine months ended September 30, 2023 of $335,508 and $1,082,057, respectively, was mostly related to excise and franchise taxes. Income tax expense for the three and nine months ended September 30, 2022 of $361,115 and $1,066,768, respectively, was mostly related to excise and franchise taxes.
The Company evaluates tax positions taken or expected to be taken while preparing its tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the applicable period. As of September 30, 2023 and December 31, 2022, the Company had not recorded a liability for any unrecognized tax positions. Management’s evaluation of uncertain tax positions may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof. The Company’s policy is to include interest and penalties related to income taxes, if applicable, in general and administrative expenses. Any expenses for the three and nine months ended September 30, 2023 and 2022 were de minimis.
The Taxable Subsidiaries are direct wholly-owned subsidiaries of the Company that have elected to be taxable entities. The Taxable Subsidiaries permit the Company to hold equity investments in portfolio companies that are “pass through” entities for tax purposes and continue to comply with the “source-of-income” requirements contained in RIC tax provisions of the Code. The Taxable Subsidiaries are not consolidated with the Company for income tax purposes and may generate income tax expense, benefit, and the related tax assets and liabilities, as a result of their ownership of certain portfolio investments. The income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in the Company’s consolidated financial statements.
The Taxable Subsidiaries use the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory tax rates in effect for the year in which the temporary differences are expected to reverse. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. Taxable income generally excludes net unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized.
For the three and nine months ended September 30, 2023, the Company recorded deferred income tax provision of $312 and $144,425, respectively, related to the Taxable Subsidiaries. For the three and nine months ended September 30, 2022, the Company recorded deferred income tax benefit (provision) of $30,535 and ($151,278), respectively, related to the Taxable Subsidiaries. In addition, as of September 30, 2023 and December 31, 2022, the Company had a deferred tax liability of $206,361 and $61,936, respectively.
Earnings per Share
Basic per share calculations are computed utilizing the weighted average number of shares of the Company’s common stock outstanding for the period. The Company has no common stock equivalents. As a result, there is no difference between diluted earnings per share and basic per share amounts.
33
Paid In Capital
The Company records the proceeds from the sale of shares of its common stock on a net basis to (i) capital stock and (ii) paid in capital in excess of par value, excluding all commissions and marketing support fees.
Distributable (Loss) Earnings
The components that make up distributable (loss) earnings on the Statements of Assets and Liabilities as of September 30, 2023 and December 31, 2022 are as follows:
Accumulated net realized gain from investments, net of cumulative dividends of $29,361,648 for both periods
2,927,719
2,675,719
Net unrealized depreciation on non-controlled, non-affiliated investments and cash equivalents, net of deferred tax liability of $206,361 and $61,936, respectively
(54,219,416)
(29,736,797)
Net unrealized (depreciation) appreciation on foreign currency translations
(15,204)
6,040
Accumulated undistributed net investment income
32,119,291
27,697,264
Recently Issued Accounting Standards
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform. The amendments in ASU 2020-04 provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The standard is effective as of March 12, 2020 through December 31, 2022. The Company has agreements that have the London Interbank Offered Rate (“LIBOR”) as a reference rate with certain portfolio companies and with certain lenders. Many of these agreements include language for choosing an alternative successor rate if LIBOR reference is no longer considered to be appropriate. Contract modifications are required to be evaluated in determining whether the modifications result in the establishment of new contracts or the continuation of existing contracts. The Company adopted this amendment in March 2020 and plans to apply the amendments in this update to account for contract modifications as contracts are amended to include a new reference rate or when LIBOR reference is no longer used. The Company did not utilize the optional expedients and exceptions provided by ASU 2020-04 during the three and nine months ended September 30, 2023.
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. We believe the impact of the recently issued standards and any that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.
NOTE 2 — RELATED PARTY ARRANGEMENTS
Investment Advisory Agreement
The Company has entered into an investment advisory agreement with Stellus Capital pursuant to which Stellus Capital serves as its investment adviser. Pursuant to this agreement, the Company has agreed to pay to Stellus Capital an annual base management fee of 1.75% of gross assets, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents, and an incentive fee.
For the three and nine months ended September 30, 2023, the Company recorded an expense for base management fees of $3,933,121 and $11,533,811, respectively. For the three and nine months ended September 30, 2022, the Company recorded an expense for base management fees of $3,827,669 and $11,025,435, respectively. As of September 30, 2023 and December 31, 2022, $3,933,121 and $7,150,407 of such management fess, respectively, were payable to Stellus Capital.
The incentive fee has two components, the investment income incentive fee and the capital gains incentive fee, as follows:
34
Investment Income Incentive Fee
The investment income component (“Income Incentive Fee”) is calculated, and payable to the Advisor, quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter, subject to a cumulative total return requirement and to deferral of non-cash amounts. The pre-incentive fee net investment income, which is expressed as a rate of return on the value of the Company’s net assets attributable to the Company’s common stock, for the immediately preceding calendar quarter, will have a 2.0% (which is 8.0% annualized) hurdle rate (also referred to as the “Hurdle”). Pre-incentive fee net investment income means interest income, dividend income and any other income accrued during the calendar quarter, minus the Company’s operating expenses for the quarter excluding the incentive fee. Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that the Company has not yet received in cash. The Advisor receives no incentive fee for any calendar quarter in which the Company’s pre-incentive fee net investment income does not exceed the Hurdle. Subject to the cumulative total return requirement described below, the Advisor receives 100% of the Company’s pre-incentive fee net investment income for any calendar quarter with respect to that portion of the pre-incentive net investment income for such quarter, if any, that exceeds the Hurdle but is less than 2.5% (which is 10.0% annualized) of net assets (also referred to as the “Catch-up”) and 20.0% of the Company’s pre-incentive fee net investment income for such calendar quarter, if any, greater than 2.5% (10.0% annualized) of net assets.
The foregoing Income Incentive Fee is subject to a total return requirement, which provides that no Income Incentive Fee in respect of the Company’s pre-incentive fee net investment income is payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding calendar quarters exceeds the cumulative Income Incentive Fees accrued and/or paid for the 11 preceding quarters. In other words, any Income Incentive Fee that is payable in a calendar quarter is limited to the lesser of (i) 20% of the amount by which the Company’s pre-incentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, subject to the Catch-up, and (ii) (x) 20% of the cumulative net increase in net assets resulting from operations for the then current and 11 preceding quarters minus (y) the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the amount, if positive, of the sum of pre-incentive fee net investment income, realized gains and losses and unrealized appreciation and depreciation of the Company for the then current and 11 preceding calendar quarters. In addition, the Advisor is not paid the portion of such Income Incentive Fee that is attributable to deferred interest until the Company actually receives such interest in cash.
For the three and nine months ended September 30, 2023, the Company incurred $2,705,200 and $7,433,039 of Income Incentive Fees, respectively. For both the three and nine months ended September 30, 2022, the Company incurred $1,635,641 of Income Incentive Fees. As of September 30, 2023 and December 31, 2022, $3,058,550 and $2,464,408, respectively, of such Income Incentive Fees were payable to the Advisor, of which $2,622,778 and $2,083,928, respectively, are currently payable (as explained below). As of September 30, 2023 and December 31, 2022, $435,772 and $380,480, respectively, of Income Incentive Fees incurred but not paid by the Company were generated from deferred interest (i.e. PIK, certain discount accretion and deferred interest) and are not payable until such amounts are received by the Company in cash.
Capital Gains Incentive Fee
The Company also pays the Advisor an incentive fee based on capital gains (the “Capital Gains Incentive Fee”). The Capital Gains Incentive Fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment management agreement, as of the termination date). The Capital Gains Incentive Fee is equal to 20.0% of the Company’s cumulative aggregate realized capital gains from Inception through the end of that calendar year, computed net of the cumulative aggregate realized capital losses and cumulative aggregate unrealized capital depreciation through the end of such year. The aggregate amount of any previously paid Capital Gain Incentive Fees is subtracted from such Capital Gain Incentive Fees calculated.
U.S. GAAP requires that the Capital Gains Incentive Fee accrual considers the cumulative aggregate realized gains and losses and unrealized capital appreciation or depreciation of investments and other financial instruments in the calculation, as an incentive fee would be payable if such realized gains and losses and unrealized capital appreciation or depreciation were realized, even though such realized gains and losses and unrealized capital appreciation or depreciation is not permitted to be considered in calculating the Capital Gains Incentive Fee actually payable under the investment advisory agreement. There can be no assurance that unrealized appreciation or
35
depreciation will be realized in the future. Accordingly, such fees, as calculated and accrued, may not necessarily be payable under the investment advisory agreement, and may never be paid based upon the computation of incentive fees in subsequent periods.
For the three months ended September 30, 2023, the Company did not incur any Capital Gains Incentive Fees. For the nine months ended September 30, 2023, the Company reversed $569,528 related to the Capital Gains Incentive Fee. For the three and nine months ended September 30, 2022, the Company reversed $646,757 and $1,672,549, respectively, related to the Capital Gains Incentive Fee. As of September 30, 2023 and December 31, 2022, $0 and $569,528, respectively, of Capital Gains Incentive Fees were accrued but not currently payable to the Advisor.
The following tables summarize the components of the incentive fees discussed above:
Investment income incentive fees incurred
Capital gains incentive fees reversed
Incentive fees expense (reversal)
988,884
6,863,511
(36,908)
Investment income incentive fee currently payable
2,622,778
2,083,928
Investment income incentive fee deferred
435,772
380,480
Capital gains incentive fee deferred
Incentive fee payable
3,033,936
Director Fees
For the three and nine months ended September 30, 2023, the Company recorded an expense relating to independent director fees of $93,250 and $303,750, respectively. For the three and nine months ended September 30, 2022, the Company recorded an expense relating to independent director fees of $83,500 and $254,500, respectively. As of both September 30, 2023 and December 31, 2022, the Company had no unpaid independent director fees.
Co-Investment Pursuant to SEC Order
On October 23, 2013, the Company received an exemptive order as superseded by a new exemptive relief order on December 18, 2018 (the “Prior Order”) from the SEC to co-invest with private funds managed by Stellus Capital where doing so is consistent with the Company’s investment strategy as well as applicable law (including the terms and conditions of the exemptive order issued by the SEC). On May 9, 2022, the Company received a new exemptive order (the “Order”) that superseded the Prior Order and permits the Company greater flexibility to enter into co-investment transactions. The Order expands on the Prior Order and allows the Company to co-invest with additional types of private funds, other BDCs, and registered investment companies managed by Stellus Capital or an adviser that is controlled, controlling, or under common control with Stellus Capital, subject to the conditions included therein. Additionally, the Order provided added relief which allows the Company, subject to the satisfaction of certain conditions, to co-invest in existing portfolio companies with certain affiliates that are private funds if such private funds did not have an existing co-investment in such existing portfolio company. Pursuant to the Order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Company’s independent directors must make certain conclusions in connection with a co-investment transaction, including (1) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to the Company and its stockholders and do not involve overreaching of the Company or its stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of the Company’s stockholders and is consistent with its investment objectives and strategies. The Company co-invests, subject to the conditions in the Order, with private credit funds and a BDC managed by Stellus Capital or its affiliate that have an investment strategy that is similar or identical to the Company’s investment strategy, and the Company may co-invest with other BDCs, and registered investment companies managed by Stellus Capital or an adviser that is controlled, controlling, or under common control with Stellus Capital in the future. The Company believes that such co-investments may afford it additional investment opportunities and an ability to achieve greater diversification.
36
Administrative Agent
The Company serves as the administrative agent on certain investment transactions, including co-investments with its affiliates under the Order. As of both September 30, 2023 and December 31, 2022, there were no payables due to other investment funds related to interest paid by a borrower to the Company as administrative agent. Any such amount would be included in “Other accrued expenses and liabilities” on the Consolidated Statements of Assets and Liabilities. Additionally, as of September 30, 2023 and December 31, 2022, there was $0 and $1,060,321, respectively, due to related parties related to interest paid by a borrower to the Company as administrative agent which is included in “Related party payable” on the Consolidated Statement of Assets and Liabilities.
License Agreement
The Company has entered into a license agreement with Stellus Capital under which Stellus Capital has agreed to grant the Company a non-exclusive, royalty-free license to use the name “Stellus Capital.” Under this agreement, the Company has a right to use the “Stellus Capital” name for so long as Stellus Capital or one of its affiliates remains its investment adviser. Other than with respect to this limited license, the Company has no legal right to the “Stellus Capital” name. This license agreement will remain in effect for so long as the investment advisory agreement with Stellus Capital is in effect.
Administration Agreement
The Company entered into an administration agreement with Stellus Capital pursuant to which Stellus Capital will furnish the Company with office facilities and equipment and will provide the Company with the clerical, bookkeeping, recordkeeping and other administrative services necessary to conduct day-to-day operations. Under this administration agreement, Stellus Capital will perform, or oversee the performance of, its required administrative services, which includes, among other things, being responsible for the financial records which the Company is required to maintain and preparing reports to its stockholders and reports filed with the SEC.
For the three and nine months ended September 30, 2023, the Company recorded expenses of $389,595 and $1,163,441, respectively, related to the administration agreement and are included in “Administrative services expenses” on our Consolidated Statements of Operations. For the three and nine months ended September 30, 2022, the Company recorded expenses of $369,209 and $1,162,527, respectively, related to the administration agreement and are included in “Administrative services expenses” on our Consolidated Statements of Operations. As of September 30, 2023 and December 31, 2022, $389,595 and $343,817, respectively, remained payable to Stellus Capital related to the administration agreement and were included in administrative services payable on our Consolidated Statements of Assets and Liabilities.
Indemnifications
The investment advisory agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations under the investment advisory agreement, Stellus Capital and its officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of Stellus Capital’s services under the investment advisory agreement or otherwise as our investment adviser.
The Company has also entered into indemnification agreements with its directors. The indemnification agreements are intended to provide the Company’s directors the maximum indemnification permitted under Maryland law and the 1940 Act. Each indemnification agreement provides that the Company shall indemnify the director who is a party to the agreement (an “Indemnitee”), including the advancement of legal expenses, if, by reason of his or her corporate status, the Indemnitee is, or is threatened to be, made a party to or a witness in any threatened, pending, or completed proceeding, other than a proceeding by or in the right of the Company.
37
NOTE 3 — DISTRIBUTIONS
Distributions are generally declared by the Company’s Board each calendar quarter and recognized as distribution liabilities on the declaration date. The stockholder distributions, if any, will be determined by the Board. Any distribution to stockholders are declared out of assets legally available for distribution.
For the three and nine months ended September 30, 2023, the Company declared aggregate distributions of $0.40 and $1.20 per share on its common stock, respectively. For the three and nine months ended September 30, 2022, the Company declared aggregate distributions of $0.34 and $0.96 per share on its common stock, respectively. The Company has declared aggregate distributions of $14.55 per share on its common stock since Inception:
Date Declared
Record Date
Payment Date
Per Share(1)
Fiscal 2012
Fiscal 2013
Fiscal 2014
Fiscal 2015
Fiscal 2016
Fiscal 2017
Various
Fiscal 2018
Fiscal 2019
Fiscal 2020
1.15
Fiscal 2021
1.14
Fiscal 2022
1.30
Fiscal 2023
January 11, 2023
January 31, 2023
February 15, 2023
0.1333
February 28, 2023
March 15, 2023
March 31, 2023
April 14, 2023
April 19, 2023
May 1, 2023
May 15, 2023
May 31, 2023
June 15, 2023
June 30, 2023
July 14, 2023
July 31, 2023
August 15, 2023
August 31, 2023
September 15, 2023
September 29, 2023
October 13, 2023
14.55
The Company has adopted an “opt out” dividend reinvestment plan (“DRIP”) pursuant to which a stockholder whose shares are held in his own name will receive distributions in shares of the Company’s common stock under the Company’s DRIP unless it elects to receive distributions in cash. Stockholders whose shares are held in the name of a broker or the nominee of a broker may have distributions reinvested only if such service is provided by the broker or the nominee, or if the broker of the nominee permits participation in the Company’s DRIP.
Although distributions paid in the form of additional shares of the Company’s common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, investors participating in the Company’s DRIP will not receive any corresponding cash distributions with which to pay any such applicable taxes. Any distributions reinvested through the issuance of shares through the Company’s DRIP will increase the Company’s gross assets on which the base management fee and the incentive fee are determined and paid to Stellus Capital. The Company did not issue shares through the DRIP during either of the three and nine months ended September 30, 2023 or 2022.
38
NOTE 4 — EQUITY OFFERINGS AND RELATED EXPENSES
The table below illustrates the number of common stock shares the Company issued since Inception through various equity offerings and pursuant to the Company’s DRIP.
Average
Number of
Gross
Underwriting
Offering
Fees Covered
Issuance of Common Stock
Shares
Proceeds(1)(2)
fees
Expenses
by Advisor
Proceeds(3)
Price
Year ended December 31, 2012
12,035,023
180,522,093
4,959,720
835,500
174,726,873
14.90
Year ended December 31, 2013
63,998
899,964
14.06
Year ended December 31, 2014
380,936
5,485,780
75,510
29,904
5,380,366
14.47
Year ended December 31, 2017
3,465,922
48,741,406
1,358,880
307,021
47,075,505
Year ended December 31, 2018
7,931
93,737
11.85
Year ended December 31, 2019
3,177,936
45,862,995
1,015,127
559,261
37,546
44,326,153
14.43
Year ended December 31, 2020
354,257
5,023,843
5,680
84,592
66,423
4,999,994
14.40
Year ended December 31, 2021
31,592
449,515
6,744
53,327
4,255
393,699
14.23
Year ended December 31, 2022
149,174
2,070,935
31,066
530,842
87,605
1,596,632
13.88
Three months ended March 31, 2023
8,418,160
126,303
70,255
68,967
Three months ended June 30, 2023
32,553,697
488,418
52,316
408,121
14.10
Three months ended September 30, 2023
21,899,491
328,527
103,614
13.97
352,021,616
8,395,975
2,626,632
672,917
341,671,926
On November 16, 2021, the Company entered into an equity distribution agreement, as amended and restated on August 29, 2022 (the “2021 Equity Distribution Agreement”) with Keefe Bruyette & Woods, Inc. and Raymond James & Associates, Inc., as sales agents and/or principal thereunder. Under the Equity Distribution Agreement, the Company was permitted to issue and sell, from time to time, up to $50,000,000 in aggregate offering price of shares of common stock, par value $0.001 per share, with the intention to use the net proceeds from this at-the-market sales program to repay certain outstanding indebtedness and make investments in portfolio companies in accordance with its investment objective and strategies.
On August 11, 2023, the Company entered into an equity distribution agreement (the “2023 Equity Distribution Agreement” and together with the 2021 Equity Distribution Agreement, the "Equity Distribution Agreements") with Keefe Bruyette & Woods, Inc. and Raymond James & Associates, Inc., as sales agents and/or principal thereunder. Under the Equity Distribution Agreement, the Company may issue and sell, from time to time, up to $100,000,000 in aggregate offering price of shares of common stock, par value $0.001 per share, with the intention to use the net proceeds from this at-the-market sales program to repay certain outstanding indebtedness and make investments in portfolio companies in accordance with its investment objective and strategies. Upon execution of the 2023 Equity Distribution Agreement, the Company no longer sold any shares under the 2021 Equity Distribution Agreement. The Company refers to its issuance and sale of shares under the Equity Distribution Agreements as the "ATM Program".
The Company issued 1,567,738 shares during the three months ended September 30, 2023 under the ATM Program, for gross proceeds of $21,899,491 and underwriting fees and other expenses of $432,141. The average per share offering price of shares issued in the ATM Program during the three months ended September 30, 2023 was $13.97. The Company issued 4,458,873 shares during the nine months ended September 30, 2023 under the ATM Program, for gross proceeds of $62,871,348 and underwriting fees and other expenses of $1,169,433. The average per share offering price of shares issued under the ATM Program during the nine months ended September 30, 2023 was $14.10. The Advisor agreed to reimburse the Company for underwriting fees to the extent the per share price of the shares to the public, less underwriting fees, was less than net asset value per share. For the three months ended September 30, 2023, the Advisor did not
39
reimburse any underwriting fees. For the nine months ended September 30, 2023, the Advisor reimbursed the Company $477,088, which resulted in net proceeds of $62,179,003, or $14.00 per share, excluding the impact of offering expenses.
The Company issued 0 shares of common stock through the DRIP for both the three and nine months ended September 30, 2023 and 2022.
NOTE 5 — NET (DECREASE) INCREASE IN NET ASSETS PER COMMON SHARE
The following information sets forth the computation of net (decrease) increase in net assets resulting from operations per common share for the three and nine months ended September 30, 2023 and September 30, 2022.
Net (decrease) increase in net assets resulting from operations
Weighted average common shares
Net (decrease) increase in net assets resulting from operations per share
NOTE 6 — PORTFOLIO INVESTMENTS AND FAIR VALUE
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Company discloses the fair value of its investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:
Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 — Quoted prices in markets that are not considered to be active or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by management.
The Company considers whether the volume and level of activity for the asset or liability have significantly decreased and identifies transactions that are not orderly in determining fair value. Accordingly, if the Company determines that either the volume and/or level of activity for an asset or liability has significantly decreased (from normal conditions for that asset or liability) or price quotations or observable inputs are not associated with orderly transactions, increased analysis and management judgment will be required to estimate fair value. Valuation techniques such as an income approach might be appropriate to supplement or replace a market approach in those circumstances.
40
At September 30, 2023, the Company had investments in 96 portfolio companies. The total cost and fair value of the investments were $941,679,195 and $886,338,148, respectively. The composition of our investments as of September 30, 2023 is as follows:
Fair Value
Senior Secured – First Lien(1)
818,753,394
793,131,815
Senior Secured – Second Lien
60,218,330
21,935,000
Unsecured Debt
5,922,437
5,675,605
56,785,034
65,595,728
Total Investments
At December 31, 2022, the Company had investments in 85 portfolio companies. The total cost and fair value of the investments were $875,823,177 and $844,733,638, respectively. The composition of our investments as of December 31, 2022 was as follows:
750,527,999
735,555,508
69,989,477
45,304,300
5,657,964
4,823,898
49,647,737
59,049,932
The Company’s investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of September 30, 2023 and December 31, 2022, the Company had 58 and 52 of such investments with aggregate unfunded commitments of $29,136,909 and $27,824,917, respectively. The Company maintains sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded loan commitments should the need arise.
The aggregate gross unrealized appreciation and depreciation and the aggregate cost and fair value of the Company’s portfolio company securities as of September 30, 2023 and December 31, 2022 were as follows:
Aggregate cost of portfolio company securities
Gross unrealized appreciation of portfolio company securities
35,791,279
28,927,746
Gross unrealized depreciation of portfolio company securities
(89,804,334)
(58,602,607)
Gross unrealized appreciation on foreign currency translations of portfolio company securities
5,881
Gross unrealized depreciation on foreign currency translations of portfolio company securities
(1,333,873)
(1,414,678)
Aggregate fair value of portfolio company securities
41
The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of September 30, 2023 are as follows:
Quoted Prices
in Active
Markets
Significant Other
Significant
for Identical
Observable
Unobservable
Securities
Inputs
(Level 1)
(Level 2)
(Level 3)
Senior Secured – First Lien
The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of December 31, 2022 are as follows:
The aggregate values of Level 3 portfolio investments change during the nine months ended September 30, 2023 are as follows:
Senior Secured
Loans-First
Loans-Second
Lien
Debt
Fair value at beginning of period
132,330,331
7,320,091
139,650,422
Payment-in-kind interest
2,268,148
464,382
Sales and redemptions
(68,327,719)
(9,882,105)
(211,627)
(840,267)
(79,261,718)
Realized (losses) gains
(870)
657,471
656,601
Change in unrealized (depreciation) appreciation included in earnings(1)
(10,737,043)
(13,598,151)
587,234
(590,235)
Change in unrealized appreciation (depreciation) on foreign currency included in earnings
87,951
(1,264)
86,687
1,955,509
110,956
11,718
2,078,183
Fair value at end of period
There were no Level 3 transfers during the nine months ended September 30, 2023.
42
The aggregate values of Level 3 portfolio investments change during the year ended December 31, 2022 are as follows:
646,352,935
56,733,110
4,883,854
64,903,427
772,873,326
196,925,873
4,900,000
83,511
9,101,485
211,010,869
826,816
530,361
1,357,177
(98,160,329)
(10,809,276)
(18,873,195)
(127,842,800)
(3,929,334)
(4,109,525)
11,811,371
3,772,512
Change in unrealized depreciation included in earnings(1)
(7,342,462)
(1,611,688)
(687,778)
(7,900,302)
(17,542,230)
Change in unrealized (depreciation) appreciation on foreign currency included in earnings
(1,421,824)
7,146
2,303,833
201,679
13,950
2,519,462
There were no Level 3 transfers during the twelve months ended December 31, 2022.
43
The following is a summary of geographical concentration of our investment portfolio as of September 30, 2023:
% of Total
California
198,435,914
184,402,328
20.79
Texas
201,784,259
177,626,821
20.03
Florida
92,485,850
91,929,779
10.36
Pennsylvania
48,566,621
48,739,983
Illinois
58,569,341
48,563,654
Arizona
44,824,896
47,215,376
5.33
Ohio
33,229,064
35,678,523
4.03
Wisconsin
27,419,166
25,307,562
2.86
Washington
24,330,488
24,469,868
South Carolina
23,788,284
23,542,129
Colorado
20,000,928
19,434,544
2.19
Georgia
10,180,988
18,885,059
16,709,852
16,680,941
1.88
District of Columbia
1.69
Indiana
North Carolina
New Jersey
11,207,366
11,664,087
Michigan
1.20
Massachusetts
Tennessee
1.05
Missouri
1.02
Idaho
Canada
0.99
New York
5,458,393
5,654,248
Minnesota
0.63
United Kingdom
20,684,934
44
The following is a summary of geographical concentration of our investment portfolio as of December 31, 2022:
at fair value
191,422,143
171,165,597
20.26
167,833,384
165,340,017
19.57
60,593,839
59,421,775
7.03
64,421,998
53,218,615
6.30
43,129,283
44,277,625
5.24
42,899,504
41,889,344
34,223,452
37,333,236
4.42
28,978,375
28,480,471
3.37
25,395,054
25,140,343
27,533,402
24,271,761
2.50
10,919,642
19,692,757
2.33
2.21
16,824,077
16,576,554
1.96
20,530,087
14,445,481
1.26
9,656,287
5,096,152
5,096,008
45
The following is a summary of industry concentration of our investment portfolio as of September 30, 2023:
194,990,932
205,918,323
23.24
101,206,823
103,092,547
11.63
58,800,939
53,974,812
6.09
51,932,243
51,454,412
53,777,908
47,396,634
43,077,877
44,406,932
40,113,229
40,956,717
38,356,963
39,217,942
37,303,170
38,576,803
4.35
50,310,688
32,337,514
3.65
30,622,390
30,577,354
3.45
47,005,893
24,062,870
2.71
35,547,983
23,613,946
17,988,173
20,946,799
18,354,804
17,040,958
1.27
1.13
1.04
5,649,003
5,741,030
0.65
1,554,039
5,555,214
46
The following is a summary of industry concentration of our investment portfolio as of December 31, 2022:
207,234,534
218,866,572
25.91
86,469,854
88,103,319
10.43
52,830,447
52,525,839
54,683,102
51,280,593
6.07
45,601,928
44,529,176
5.27
48,137,394
39,526,086
37,582,855
37,975,255
33,538,647
33,801,951
34,000,918
32,755,054
26,948,135
26,406,849
3.13
27,771,798
26,247,936
43,302,101
24,616,706
2.92
18,615,052
21,445,307
2.54
18,487,206
17,903,999
2.03
11,252,581
11,342,751
1.34
1.16
5,517,409
5,534,710
1,568,900
4,082,579
47
The following provides quantitative information about Level 3 fair value measurements as of September 30, 2023:
Description:
Valuation Technique
Unobservable Inputs
Range (Average)(1)(3)
First lien debt
Income/Market
HY credit spreads,
-3.40% to 7.20% (-0.43%)
approach(2)
Risk free rates
0.00% to 3.97% (0.98%)
Market multiples
5.0x to 17.0x (10.5x)(4)
Second lien debt
-0.74% to 7.97% (1.56%)
0.27% to 1.13% (0.57%)
5.7x to 10.8x (7.8x)(4)
Unsecured debt
4.57% to 4.57% (4.57%)
4.39% to 4.39% (4.39%)
9.3x to 9.3x (9.3x)(4)
Equity investments
Market approach(5)
Underwriting multiple/
EBITDA Multiple
1.4x to 24.4x (12.5x)
Total Long Term Level 3 Investments
The following provides quantitative information about Level 3 fair value measurements as of December 31, 2022:
48
-2.29% to 6.53% (1.52%)
-1.43% to 4.31% (2.31%)
4.5x to 19.3x (10.1x)(4)
-0.17% to 5.18% (2.39%)
-0.02% to 3.91% (1.94%)
5.6x to 15.1x (11.4x)(4)
7.97% to 7.97% 7.97%)
3.63% to 3.63% (3.63%)
9.1x to 9.1x (9.1x)(4)
1.3x to 24.8x (11.7x)
NOTE 7 — COMMITMENTS AND CONTINGENCIES
The Company is currently not 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 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 business, financial condition or results of operations.
As of September 30, 2023, the Company had $28,837,731, in unfunded debt commitments and $299,538 in unfunded equity commitments to 58 existing portfolio companies. As of December 31, 2022, the Company had $27,522,100 in unfunded debt commitments and $302,817 in unfunded equity commitments to 52 existing portfolio companies. As of September 30, 2023, the Company had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded loan commitments should the need arise.
49
NOTE 8 — FINANCIAL HIGHLIGHTS
Per Share Data:(1)
Net asset value at beginning of period
14.61
Change in unrealized depreciation on investments
(1.14)
(0.66)
Net realized gain
Provision for taxes on net unrealized appreciation on investments
(0.01)
Total from operations
Sales load
(0.04)
Offering costs
Stockholder distributions from:
(1.22)
(0.96)
Accretive effect of stock offerings (issuing shares above net asset value per share)
Other(6)
Net asset value at end of period
Per share market value at end of period
14.07
Total return based on market value(2)
10.4
(2.3)
Weighted average shares outstanding for the period
Ratio/Supplemental Data:(1)
Net assets at end of period
Weighted average net assets
294,999,242
283,289,645
Annualized ratio of gross operating expenses to net assets(5)
21.59
15.57
Annualized ratio of interest expense and other fees to net assets
10.89
7.96
Annualized ratio of net investment income to net assets(5)
13.73
8.91
Portfolio turnover(3)
12.11
8.92
100,000,000
162,306,499
199,033,419
325,000,000
306,000,000
Asset coverage ratio(4)
x
NOTE 9 — CREDIT FACILITY
On October 11, 2017, the Company entered into a senior secured revolving credit agreement, as amended, dated as of October 10, 2017, that was amended and restated on December 21, 2021, February 28, 2022 and May 13, 2022, with Zions Bancorporation, N.A., dba Amegy Bank and various other lenders (the “Credit Facility”).
The Credit Facility provides for borrowings up to a maximum of $265,000,000 on a committed basis with an accordion feature that allows the Company to increase the aggregate commitments up to $280,000,000, subject to new or existing lenders agreeing to participate in the increase and other customary conditions.
Pursuant to the Third Amendment and Commitment Increase to Amended and Restated Senior Secured Revolving Credit Agreement, the Credit Facility will bear interest, subject to the Company’s election, on a per annum basis equal to (i) term SOFR plus 2.50% (or 2.75% during certain periods in which the Company’s asset coverage ratio is equal to or below 1.90 to 1.00) plus a SOFR credit spread adjustment (0.10% for one-month term SOFR and 0.15% for three-month term SOFR), with a 0.25% SOFR floor, or (ii) 1.50% (or 1.75% during certain periods in which the Company’s asset coverage ratio is equal to or below 1.90 to 1.00) plus an alternate base rate based on the highest of the prime rate (subject to a 3% floor), Federal Funds Rate plus 0.50% and one month term SOFR plus 1.00%. The Company pays unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility. Interest is payable monthly or quarterly in arrears. The commitment to fund the revolver expires on September 18, 2024, after which the Company may no longer borrow under the Credit Facility and must begin repaying principal equal to 1/12 of the aggregate amount outstanding under the Credit Facility each month. Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on September 18, 2025.
The Company’s obligations to the lenders are secured by a first priority security interest in its portfolio of securities and cash not held at the SBIC subsidiaries, but excluding short term investments. The Credit Facility contains certain covenants, including but not limited to: (i) maintaining a minimum liquidity test of at least $10,000,000, including cash, liquid investments and undrawn availability, (ii) maintaining an asset coverage ratio of at least 1.67 to 1.00, (iii) maintaining a minimum stockholder’s equity, and (iv) maintaining a minimum interest coverage ratio of at least 2.00 to 1.00. As of September 30, 2023 and December 31, 2022, the Company was in compliance with these covenants.
As of September 30, 2023 and December 31, 2022, $162,306,499 and $199,200,425, respectively, was outstanding under the Credit Facility. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value. The fair value of the Credit Facility is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Credit Facility is estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. The Company has incurred costs of $3,967,284 in connection with the current Credit Facility, which are being amortized over the life of the facility. Additionally, $341,979 of costs from a prior credit facility will continue to be amortized over the life of the Credit Facility. As of September 30, 2023 and December 31, 2022, $1,113,887 and $1,515,144 of such prepaid loan structure fees and administration fees had yet to be amortized, respectively. These prepaid loan fees are presented on our Consolidated Statements of Assets and Liabilities as a deduction from the debt liability.
The following is a summary of the Credit Facility, net of prepaid loan structure fees:
199,200,425
Prepaid loan structure fees
(1,113,887)
(1,515,144)
Credit Facility payable, net of prepaid loan structure fees
Interest is paid monthly or quarterly in arrears. The following table summarizes the interest expense and amortized loan fees on the Credit Facility for the three and nine months ended September 30, 2023 and 2022:
Interest expense
3,697,085
2,575,787
11,263,132
5,800,223
Loan fee amortization
147,014
148,121
Total interest and financing expenses
3,844,099
2,723,908
11,699,389
6,220,579
Weighted average interest rate
8.2
4.9
7.8
3.8
Effective interest rate (including fee amortization)
8.6
5.2
8.1
4.1
Average debt outstanding
178,024,719
207,437,767
193,547,859
201,712,826
Cash paid for interest and unused fees
3,538,976
2,548,660
11,125,494
5,772,502
51
NOTE 10 — SBA-GUARANTEED DEBENTURES
Due to the SBIC subsidiaries’ status as licensed SBICs, the Company has the ability to issue debentures guaranteed by the SBA at favorable interest rates. Under the regulations applicable to SBIC funds, a single licensee can have outstanding debentures guaranteed by the SBA subject to a regulatory leverage limit, up to two times the amount of “regulatory capital”, as such term is defined by the SBA. As of both September 30, 2023 and December 31, 2022, the SBIC subsidiary had $75,000,000 in regulatory capital, as such term is defined by the SBA, and $150,000,000 of SBA-guaranteed debentures outstanding.
As of both September 30, 2023 and December 31, 2022, the SBIC II subsidiary had $87,500,000 in regulatory capital. As of September 30, 2023 and December 31, 2022, the SBIC II subsidiary had $175,000,000 and $163,600,000 of SBA-guaranteed debentures outstanding, respectively.
On August 12, 2014, the Company obtained exemptive relief from the SEC to permit it to exclude the debt of the SBIC subsidiaries guaranteed by the SBA from its asset coverage test under the 1940 Act. The exemptive relief provides the Company with increased flexibility under the asset coverage test by permitting it to borrow up to $325,000,000 more than it would otherwise be able to absent the receipt of this exemptive relief.
On a stand-alone basis, the SBIC subsidiaries held $489,210,263 and $470,659,123 in assets at September 30, 2023 and December 31, 2022, respectively, which accounted for approximately 54.2% and 52.4% of the Company’s total consolidated assets, respectively.
Debentures guaranteed by the SBA have fixed interest rates that equal prevailing 10-year U.S. Treasury Note rates plus a market spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the debentures is not required to be paid before maturity, but may be pre-paid at any time with no prepayment penalty. SBA-guaranteed debentures drawn before October 1, 2019 incur upfront fees of 3.425%, which consists of a 1.00% commitment fee and a 2.425% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. SBA-guaranteed debentures drawn after October 1, 2019 incur upfront fees of 3.435%, which consists of a 1.00% commitment fee and a 2.435% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. Once pooled, which occurs in March and September of each applicable year, the SBA-guaranteed debentures bear interest at a fixed rate that is set to the current 10-year treasury rate plus a spread at each pooling date.
The following table summarizes the SBIC subsidiaries’ aggregate SBA-guaranteed debentures outstanding as of September 30, 2023:
Issuance Date
Licensee
Maturity Date
Debenture Amount
Interest Rate
SBA Annual Charge
October 14, 2014
SBIC I
March 1, 2025
6,500,000
October 17, 2014
December 24, 2014
3,250,000
June 29, 2015
September 1, 2025
October 22, 2015
March 1, 2026
2.51
0.74
November 10, 2015
8,800,000
November 18, 2015
November 25, 2015
December 16, 2015
2,200,000
December 29, 2015
9,700,000
November 28, 2017
March 1, 2028
25,000,000
3.19
April 27, 2018
September 1, 2028
40,000,000
July 30, 2018
17,500,000
September 25, 2018
March 1, 2029
2,500,000
Total SBIC I Subsidiary SBA-guaranteed Debentures
150,000,000
52
October 17, 2019
SBIC II
March 1, 2030
6,000,000
2.08
November 15, 2019
December 17, 2020
March 1, 2031
9,000,000
February 16, 2021
13,500,000
February 26, 2021
March 2, 2021
April 21, 2021
September 1, 2031
May 14, 2021
6,700,000
May 28, 2021
7,300,000
July 23, 2021
16,000,000
February 25, 2022
March 1, 2032
March 29, 2022
September 1, 2032
4.26
April 1, 2022
6,670,000
April 12, 2022
6,665,000
April 21, 2022
June 30, 2022
3,600,000
July 28, 2022
6,400,000
September 9, 2022
March 1, 2033
5.17
November 9, 2022
7,600,000
August 8, 2023
September 1, 2033
9,120,000
September 19, 2023
March 1, 2034
2,280,000
6.04
% (1)
Total SBIC II Subsidiary SBA-guaranteed Debentures
175,000,000
Total SBA-guaranteed Debentures
As of September 30, 2023 and December 31, 2022, the SBA-guaranteed debentures would be deemed to be Level 3, as defined in Note 6.
As of September 30, 2023 and December 31, 2022, the Company has incurred $11,148,750 and $10,871,160, respectively, in financing costs related to the SBA-guaranteed debentures since receiving its licenses, which were recorded as prepaid loan fees. As of September 30, 2023 and December 31, 2022, $5,044,148 and $5,704,805 of prepaid financing costs had yet to be amortized, respectively. These prepaid loan fees are presented on the Consolidated Statements of Assets and Liabilities as a deduction from the debt liability.
The following is a summary of the SBA-guaranteed debentures, net of prepaid loan fees:
SBA debentures payable
313,600,000
Prepaid loan fees
(5,044,148)
(5,704,805)
SBA Debentures, net of prepaid loan fees
53
The following table summarizes the interest expense and amortized fees on the SBA-guaranteed debentures for the three and nine months ended September 30, 2023 and 2022:
2,559,727
2,076,751
7,403,454
5,743,011
Debenture fee amortization
313,889
316,274
2,873,616
2,393,025
8,341,701
6,648,305
3.1
2.8
2.7
3.5
3.2
323,017,391
299,556,522
316,773,626
280,681,996
Cash paid for interest
4,965,850
3,955,224
9,646,849
7,360,295
NOTE 11 — NOTES
On January 14, 2021, the Company issued $100,000,000 in aggregate principal amount of 4.875% fixed-rate notes due 2026 (the “Notes Payable”). The Notes Payable will mature on March 30, 2026 and may be redeemed in whole or in part at any time or from time to time at our option on or after December 31, 2025, at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest on the Notes Payable is payable semi-annually beginning September 30, 2022. As of both September 30, 2023 and December 31, 2022, the aggregate carrying amount of the Notes Payable was approximately $100,000,000. The Notes Payable are institutional, non-traded notes.
In connection with the issuance and maintenance of the Notes Payable, the Company incurred $2,327,835 of fees which are being amortized over the term of the Notes Payable. As of September 30, 2023 and December 31, 2022, $1,116,186 and $1,450,308 of prepaid financing costs had yet to be amortized, respectively. These financing costs are presented on the Consolidated Statements of Assets and Liabilities as a deduction from the debt liability.
The following table summarizes the interest expense and deferred financing costs on the Notes Payable for the three and nine months ended September 30, 2023 and 2022:
1,218,750
3,662,250
3,656,250
Deferred financing costs
112,598
339,122
1,331,348
3,996,372
3,995,372
4.8
5.3
2,437,500
4,881,000
4,880,000
The following is a summary of the Notes Payable Payable, net of deferred financing costs:
(1,116,186)
(1,450,308)
Notes payable, net of deferred financing costs
The indenture and supplements thereto relating to the Notes Payable contain certain covenants, including but not limited to (i) a requirement that the Company comply with the asset coverage requirements of the 1940 Act or any successor provisions, and (ii) a requirement to provide financial information to the holders of the notes and the trustee under the indenture if the Company should no
54
longer be subject to the reporting requirements under the Exchange Act. As of September 30, 2023 and 2022, the Company was in compliance with these covenants.
NOTE 12 — 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 described below.
Investment Portfolio
The Company invested in the following portfolio companies subsequent to September 30, 2023:
Activity Type
Company Name
Company Description
Investment Amount
Instrument Type
Add-On Investment
October 3, 2023
EH Real Estate Services, LLC*
Offers residential property brokerage, title & settlement, and property and casualty insurance brokerage services to home buyers and sellers
2,281,116
Revolver Commitment(a)
October 11, 2023
Impact Home Services LLC*
Residential, garage door, electrical, and plumbing services provider
539,718
13,398
October 16, 2023
Equine Network, LLC*
Provider of content, information, tech-enabled services, and hosts competitions for the U.S. equine industry
955,516
October 19, 2023
ArborWorks Acquisition LLC*
A professional tree care firm
230,769
October 31, 2023
2X LLC*
Provider of outsourced digital B2B marketing-as-a-service
1,448,388
* Existing portfolio company
(a) The Company has full discretion to fund this revolver commitment
The Company realized the following portfolio company subsequent to September 30, 2023:
Proceeds Received
Realized Loss
Full Realization
October 24, 2023
Interstate Waste Services, Inc.*
Provider of non-hazardous waste management, collection, and recycling services
389,496
(556,629)
Credit Facility
The outstanding balance under the Credit Facility as of November 7, 2023 was $163,000,000.
Dividends Declared
On October 5, 2023, the Board declared a regular monthly dividend for each of October 2023, November 2023, and December 2023 as follows:
Ex-Dividend
Record
Payment
Amount per
Declared
Share
10/5/2023
10/30/2023
10/31/2023
11/15/2023
11/29/2023
11/30/2023
12/15/2023
12/18/2023
12/29/2023
55
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or Stellus Capital Investment Corporation’s (“we”, “us”, “our” and the “Company”) future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:
Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words.
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or U.S. Securities and Exchange Commission (“SEC”) rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Overview
We were organized as a Maryland corporation on May 18, 2012, and formally commenced operations on November 7, 2012. Our investment objective is to maximize the total return to our stockholders in the form of current income and capital appreciation through debt and related equity investments in middle-market companies.
We are an externally managed, non-diversified, closed-end investment company that has elected to be regulated as a BDC under the Investment Company Act of 1940, as amended (the “1940 Act”). Our investment activities are managed by our investment adviser, Stellus Capital.
As a BDC, we are required to comply with certain regulatory requirements. For instance, as a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets. Qualifying assets include investments in “eligible portfolio companies.” (as defined in the 1940 Act). Under the relevant SEC rules, the term “eligible portfolio company” includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and certain public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal place of business in the United States.
We have elected, qualified, and intend to continue to qualify annually to be treated for tax purposes as a RIC under Subchapter M of the internal Revenue Code of 1986, as amended (the “Code”). To maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. As of September 30, 2023, we were in compliance with the RIC requirements. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any income we distribute to our stockholders.
On March 23, 2018, the Small Business Credit Availability Act (the “SBCAA”) was signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The SBCAA included changes to the 1940 Act to allow BDCs to decrease their asset coverage requirement to 150% from 200% subject to certain circumstances.
On April 4, 2018, the board of directors of the Company (the “Board”), including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. At our 2018 annual meeting of stockholders our stockholders also approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the asset coverage ratio applicable to us was decreased from 200% to 150%, effective June 29, 2018, which effectively increased the amount of leverage we may incur. As of September 30, 2023, our asset coverage ratio was 221%. The amount of leverage that we employ at any time depends on our assessment of the market and other factors at the time of any proposed borrowing.
57
Portfolio Composition and Investment Activity
Portfolio Composition
We originate and invest primarily in privately-held middle-market companies (typically those with $5.0 million to $50.0 million of EBITDA (earnings before interest, taxes, depreciation and amortization)) through first lien (including unitranche), second lien, and unsecured debt financing, often times with a corresponding equity investment.
As of September 30, 2023, we had $886.3 million (at fair value) invested in 96 portfolio companies. As of September 30, 2023, our portfolio included approximately 90% of first lien debt, 2% of second lien debt, 1% of unsecured debt and 7% of equity investments at fair value. The composition of our investments at cost and fair value as of September 30, 2023 was as follows:
As of December 31, 2022, we had $844.7 million (at fair value) invested in 85 portfolio companies. As of December 31, 2022, our portfolio included approximately 87% of first lien debt, 5% of second lien debt, 1% of unsecured debt and 7% of equity investments at fair value. The composition of our investments at cost and fair value as of December 31, 2022 was as follows:
Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms and conditions of the underlying loan agreements. As of September 30, 2023 and December 31, 2022, we had unfunded commitments of $29.1 million and $27.8 million, respectively, to provide financing to 58 and 52 portfolio companies, respectively. As of September 30, 2023, we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility (as defined below)) to fund such unfunded commitments should the need arise.
59
60
61
At September 30, 2023, our average portfolio company investment at amortized cost and fair value was approximately $9.8 million and $9.2 million, respectively, and our largest portfolio company investment at amortized cost and fair value was $21.4 million and $18.9 million, respectively. At December 31, 2022, our average portfolio company investment at amortized cost and fair value was approximately $10.3 million and $9.9 million, respectively, and our largest portfolio company investment at amortized cost and fair value was approximately $21.3 million and $20.5 million, respectively.
At both September 30, 2023 and December 31, 2022, 98% of our debt investments bore interest based on floating rates (subject to interest rate floors) and 2% bore interest at fixed rates.
The weighted average yield on all of our debt investments as of September 30, 2023 and December 31, 2022 was approximately 11.5% and 11.1%, respectively. The weighted average yield on all of our investments, including non-income producing equity positions, as of September 30, 2023 and December 31, 2022 was approximately 10.8% and 10.4%, respectively. The weighted average yield was computed using the effective interest rates for all of our debt investments, including accretion of original issue discount. The weighted average yield of our debt investments is not the same as a return on investment for our stockholders, but rather relates to a portion of our investment portfolio and is calculated before the payment of all of our subsidiaries’ fees and expenses.
As of September 30, 2023 and December 31, 2022, we had cash and cash equivalents of $19.2 million and $48.0 million, respectively.
62
Investment Activity
During the nine months ended September 30, 2023, we made an aggregate of $140.7 million of investments in 17 new portfolio companies and 18 existing portfolio companies. During the nine months ended September 30, 2023, we received an aggregate of $80.1 million in proceeds from repayments of our investments.
Our level of investment activity can vary substantially from period to period depending on many factors, including the amount of debt and equity capital to middle-market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.
Asset Quality
In addition to various risk management and monitoring tools, Stellus Capital uses an investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in our portfolio. This investment rating system uses a five-level numeric scale. The following is a description of the conditions associated with each investment category:
As of September 30, 2023
As of December 31, 2022
(dollars in millions)
Portfolio
Investment Category
Companies(1)
Companies
216.1
146.6
540.8
553.2
66
108.4
120.7
21.0
18.3
5.9
886.3
98
844.7
85
Loans and Debt Securities on Non-Accrual Status
We will not accrue interest on loans and debt securities if we have reason to doubt our ability to collect such interest. As of September 30, 2023, we had loans to five portfolio companies that were on non-accrual status, which represented approximately 7.6% of our loan portfolio at cost and 1.6% at fair value. As of December 31, 2022, we had loans to three portfolio companies that were on non-accrual status, which represented approximately 5.2% of our loan portfolio at cost and 2.3% at fair value. As of September 30, 2023 and December 31, 2022, $11.4 million and $4.8 million of income from investments on non-accrual has not been accrued, respectively.
63
Results of Operations
An important measure of our financial performance is net increase (decrease) in net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income (loss) is the difference between our income from interest, dividends, fees and other investment income and our operating expenses including interest on borrowed funds. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio.
Comparison of the three and nine months ended September 30, 2023 and 2022
Revenues
We generate revenue in the form of interest income on debt investments and capital gains and distributions, if any, on investment securities that we may acquire in portfolio companies. Our debt investments typically have a term of five to seven years and bear interest primarily at floating rates. Interest on our debt securities is generally payable quarterly. Payments of principal on our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments may pay interest in-kind, or PIK interest. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect that the total dollar amount of interest and any dividend income that we earn will increase as the size of our investment portfolio increases. In addition, we may generate revenue in the form of prepayment fees, commitment, loan origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees.
The following shows the breakdown of investment income for the three and nine months ended September 30, 2023 and 2022 (in millions).
Interest income(1)
25.0
19.0
71.9
49.0
PIK interest
0.8
0.3
1.0
Miscellaneous fees(1)
1.3
1.7
27.2
20.1
77.8
51.7
The increase in interest income from the respective periods was due primarily to growth in the overall investment portfolio and rising interest rates.
Our primary operating expenses include the payment of fees to Stellus Capital under the investment advisory agreement, our allocable portion of overhead expenses under the administration agreement and other operating costs described below. We bear all other out-of-pocket costs and expenses of our operations and transactions, which may include:
64
The following shows the breakdown of operating expenses for the three and nine months ended September 30, 2023 and 2022 (in millions).
Operating Expenses
3.9
11.5
11.0
0.1
0.5
1.4
1.6
7.4
(0.6)
(1.7)
0.9
0.2
0.4
8.0
6.5
24.0
16.9
1.1
16.3
13.0
47.5
32.9
65
The increase in operating expenses for the three and nine months ended September 30, 2023 as compared to the three and nine months ended September 30, 2022 was due to (1) higher interest expense as a result of higher outstanding balances on our SBA-guaranteed debentures, as well as rising interest rates, (2) higher management fees due to a larger investment portfolio and (3) higher incentive fees due to portfolio performance, offset by the capital gains incentive fee reversal.
For the three months ended September 30, 2023, net investment income was $10.8 million, or $0.47 per common share (based on 22,824,221 weighted average shares outstanding for the three months ended September 30, 2023).
For the three months ended September 30, 2022, net investment income was $7.2 million, or $0.37 per common share (based on 19,545,935 weighted average shares outstanding for the three months ended September 30, 2022).
For the nine months ended September 30, 2023, net investment income was $30.3 million, or $1.42 per common share (based on 21,289,880 weighted average shares outstanding for the nine months ended September 30, 2023).
For the nine months ended September 30, 2022, net investment income was $18.9 million, or $0.97 per common share (based on 19,535,708 weighted average shares outstanding for the nine months ended September 30, 2022).
The increase in net investment income over the respective periods was due to higher investment income as a result of a larger investment portfolio and rising interest rates, offset by the increase in expenses as explained in the “Expenses” section above.
Net Realized Gains and Losses
We measure realized gains or losses by the difference between the net proceeds from the repayment, sale or other disposition and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized.
Proceeds from repayments of investments and amortization of certain other investments for the three months ended September 30, 2023 totaled $34.8 million and net realized gains totaled $0.6 million.
Proceeds from repayments of investments and amortization of certain other investments for the three months ended September 30, 2022 totaled $16.2 million and net realized gains totaled $1.6 million.
Proceeds from repayments of investments and amortization of certain other investments for the nine months ended September 30, 2023 totaled $80.1 million and net realized gains totaled $0.2 million.
Proceeds from repayments of investments and amortization of certain other investments for the nine months ended September 30, 2022 totaled $74.4 million and net realized gains totaled $4.7 million.
Net Change in Unrealized Appreciation (Depreciation) of Investments
Net change in unrealized appreciation (depreciation) primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded appreciation or depreciation when gains or losses are realized.
Net change in unrealized depreciation on investments and cash equivalents for the three months ended September 30, 2023 and 2022 totaled ($13.8) million and ($4.8) million, respectively.
Net change in unrealized depreciation on investments and cash equivalents for the nine months ended September 30, 2023 and 2022 totaled ($24.3) million and ($12.8) million, respectively.
The change in unrealized depreciation over the respective periods was due to company-specific investment write-downs, offset by company-specific write-ups.
Benefit (Provision) for Taxes on Unrealized Depreciation (Appreciation) on Investments
We have direct wholly owned subsidiaries that have elected to be taxable entities (the “Taxable Subsidiaries”). The Taxable Subsidiaries permit us to hold equity investments in portfolio companies which are “pass through” entities for U.S. federal income tax purposes and continue to comply with the “source income” requirements contained in RIC tax provisions of the Code. The Taxable Subsidiaries are not consolidated with us for U.S. federal income tax purposes and may generate U.S. federal income tax expense, benefit, and the related tax assets and liabilities, as a result of their ownership of certain portfolio investments. The U.S. federal income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in our consolidated financial statements. For the three months ended September 30, 2023 and 2022, we recognized a (provision) benfit for income tax on unrealized investments of ($0.3) thousand and $30.5 thousand for the Taxable Subsidiaries, respectively. For the nine months ended September 30, 2023 and 2022, we recognized a provision for income tax on unrealized investments of ($144.4) thousand and ($151.3) thousand for the Taxable Subsidiaries, respectively. As of September 30, 2023 and December 31, 2022, there was $206.4 thousand and $61.9 thousand of deferred tax liabilities on the Consolidated Statements of Assets and Liabilities, respectively.
Net Increase (Decrease) in Net Assets Resulting from Operations
For the three months ended September 30, 2023, net decrease in net assets resulting from operations totaled ($2.4) million, or ($0.11) per common share (based on 22,824,221 weighted average shares outstanding for the three months ended September 30, 2023).
For the three months ended September 30, 2022, net increase in net assets resulting from operations totaled $4.0 million, or $0.20 per common share (based on 19,545,935 weighted average shares outstanding for the three months ended September 30, 2022).
For the nine months ended September 30, 2023, net increase in net assets resulting from operations totaled $6.0 million, or $0.28 per common share (based on 21,289,880 weighted average shares outstanding for the nine months ended September 30, 2023).
For the nine months ended September 30, 2022, net increase in net assets resulting from operations totaled $10.5 million, or $0.54 per common share (based on 19,535,708 weighted average shares outstanding for the nine months ended September 30, 2022).
The net decrease in net assets between the respective periods was due to higher by unrealized depreciation recognized, offset by increase net investment income in the current year. The net increase in net assets between the respective periods was due to higher net investment income, offset by unrealized depreciation recognized in the current year.
Financial Condition, Liquidity and Capital Resources
Cash Flows from Operating and Financing Activities
Our operating activities used net cash of $42.4 million for the nine months ended September 30, 2023, primarily in connection with the purchase of portfolio investments, offset by sales and repayments of portfolio investments. Our financing activities for the nine months ended September 30, 2023 used cash of $13.6 million primarily from proceeds from the issuance of common stock, offset by net paydowns on our Credit Facility.
Our operating activities used net cash of $92.6 million for the nine months ended September 30, 2022, primarily in connection with the purchase of portfolio investments, offset by sales and repayments of portfolio investments. Our financing activities for the nine months ended September 30, 2022 provided cash of $60.9 million primarily from proceeds from SBA-guaranteed debentures and net borrowings on our Credit Facility.
Liquidity and Capital Resources
Our liquidity and capital resources are derived from the Credit Facility, Notes Payable, SBA-guaranteed debentures and cash flows from operations, including investment sales and repayments, the ATM Program, and income earned. Our primary use of funds from operations includes investments in portfolio companies and other operating expenses we incur, as well as the payment of dividends to the holders of our common stock. We used, and expect to continue to use, these capital resources as well as proceeds from turnover within our portfolio and from public and private offerings of securities to finance our investment activities.
67
Although we expect to fund the growth of our investment portfolio through the net proceeds from future public and private equity offerings and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act, our plans to raise capital may not be successful. In this regard, if our common stock trades at a price below our then-current net asset value per share, we may be limited in our ability to raise equity capital given that we cannot sell our common stock at a price below net asset value per share unless our stockholders approve such a sale and our Board makes certain determinations in connection therewith. A proposal, approved by our stockholders at our 2023 annual stockholders meeting, authorizes us to sell up to 25% of our outstanding common shares at a price equal to or below the then current net asset value per share in one or more offerings. This authorization will expire on the earlier of June 22, 2024, the one-year anniversary of our 2023 annual stockholders meeting or the date of our 2024 annual stockholder meeting. We would need similar future approval from our stockholders to issue shares below the then current net asset value per share any time after the expiration of the current approval. In addition, we intend to distribute between 90% and 100% of our taxable income to our stockholders in order to satisfy the requirements applicable to RICs under Subchapter M of the Code. Consequently, we may not have the funds or the ability to fund new investments, to make additional investments in our portfolio companies, to fund our unfunded commitments to portfolio companies or to repay borrowings. In addition, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.
Also, as a BDC, we generally are required to meet an asset coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, over the aggregate amount of the senior securities, which include all of our borrowings and any outstanding preferred stock, of at least 150% effective June 29, 2018 (at least 200% prior to June 29, 2018). This requirement limits the amount that we may borrow. We have received exemptive relief from the SEC to permit us to exclude the debt of the Stellus Capital SBIC, LP (the “SBIC subsidiary”) and Stellus Capital SBIC II, LP (the “SBIC II subsidiary”) (collectively, the “SBIC subsidiaries”) guaranteed by the U.S. Small Business Administration (“SBA”) from the definition of senior securities in the asset coverage test under the 1940 Act. We were in compliance with the asset coverage ratios at all times. As of September 30, 2023 and December 31, 2022, our asset coverage ratio was 221% and 192%, respectively. The amount of leverage that we employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing, such as the maturity, covenant package and rate structure of the proposed borrowings, our ability to raise funds through the issuance of shares of our common stock and the risks of such borrowings within the context of our investment outlook. Ultimately, we only intend to use leverage if the expected returns from borrowing to make investments will exceed the cost of such borrowing. As of September 30, 2023 and December 31, 2022, we had cash and cash equivalents of $19.2 million and $48.0 million, respectively.
The Credit Facility, as amended and restated, provides for borrowings up to a maximum of $265.0 million on a committed basis with an accordion feature that allows us to increase the aggregate commitments up to $280.0 million, subject to new or existing lenders agreeing to participate in the increase and other customary conditions.
Pursuant to the Third Amendment and Commitment Increase to Amended and Restated Senior Secured Revolving Credit Agreement the Credit Facility will bear interest, subject to the Company’s election, on a per annum basis equal to (i) term SOFR plus 2.50% (or 2.75% during certain periods in which the Company’s asset coverage ratio is equal to or below 1.90 to 1.00) plus a SOFR credit spread adjustment (0.10% for one-month term SOFR and 0.15% for three-month term SOFR), with a 0.25% SOFR floor, or (ii) 1.50% (or 1.75% during certain periods in which the Company’s asset coverage ratio is equal to or below 1.90 to 1.00) plus an alternate base rate based on the highest of the prime rate (subject to a 3% floor), Federal Funds Rate plus 0.50% and one month term SOFR plus 1.00%. The Company pays unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility. Interest is payable monthly or quarterly in arrears. The commitment to fund the revolver expires on September 18, 2024, after which the Company may no longer borrow under the Credit Facility and must begin repaying principal equal to 1/12 of the aggregate amount outstanding under the Credit Facility each month. Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on September 18, 2025.
Our obligations to the lenders are secured by a first priority security interest in our portfolio of securities and cash not held at the SBIC subsidiaries, but excluding short term investments. The Credit Facility contains certain covenants, including but not limited to: (i) maintaining a minimum liquidity test of at least $10.0 million, including cash, liquid investments and undrawn availability, (ii) maintaining an asset coverage ratio of at least 1.67 to 1.0, and (iii) maintaining a minimum stockholder’s equity, and (iv) maintaining a
68
minimum interest coverage ratio of at least 2.00 to 1.00. As of September 30, 2023 and December 31, 2022, we were in compliance with these covenants.
As of September 30, 2023 and December 31, 2022, $162.3 million and $199.2 million, respectively, was outstanding under the Credit Facility. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value. The fair values of the Credit Facility is determined in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Credit Facility is estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. We incurred costs of $4.0 million in connection with the current Credit Facility, which are being amortized over the life of the facility. Additionally, $0.3 million of costs from a prior credit facility will continue to be amortized over the remaining life of the Credit Facility. As of September 30, 2023 and December 31, 2022, $1.1 million and $1.5 million of such prepaid loan structure fees and administration fees had yet to be amortized, respectively. These prepaid loan fees are presented on the Consolidated Statements of Assets and Liabilities as a deduction from the debt liability.
Interest is paid quarterly in arrears. The following table summarizes the interest expense and amortized loan fees on the Credit Facility for the three and nine months ended September 30, 2023 and 2022 (dollars in millions):
3.7
2.6
11.3
5.8
11.7
6.2
178.0
207.4
193.5
201.7
2.5
11.1
SBA-Guaranteed Debentures
Due to the SBIC subsidiaries’ status as Small Business Investment Companies (“SBICs”), we have the ability to issue debentures guaranteed by the SBA at favorable interest rates (“SBA-guaranteed debentures”). Under the regulations applicable to SBIC funds, a single licensee can have outstanding SBA-guaranteed debentures, subject to a regulatory leverage limit, up to two times the amount of regulatory capital. As of both September 30, 2023 and December 31, 2022, the SBIC subsidiary had $75.0 million in “regulatory capital”, as such term is defined by the SBA, and $150.0 million of SBA-guaranteed debentures outstanding.
As of both September 30, 2023 and December 31, 2022, the SBIC II subsidiary had $87.5 million in regulatory capital. As of September 30, 2023 and December 31, 2022, the SBIC II subsidiary had $175.0 million and $163.6 million of SBA-guaranteed debentures outstanding, respectively.
On August 12, 2014, we obtained exemptive relief from the SEC to permit us to exclude the debt of the SBIC subsidiaries guaranteed by the SBA from our 150% asset coverage test under the 1940 Act. The exemptive relief provides us with increased flexibility under the 150% asset coverage test by permitting us to borrow up to $325.0 million more than we would otherwise be able to absent the receipt of this exemptive relief.
On a stand-alone basis, the SBIC subsidiaries held $489.2 million and $470.7 million in assets at September 30, 2023 and December 31, 2022, respectively, which accounted for approximately 54.2% and 52.4% of our total consolidated assets, respectively.
SBA-guaranteed debentures have fixed interest rates that equal prevailing 10-year U.S. Treasury Note rates plus a market spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the debentures is not required to be paid before maturity but may be pre-paid at any time with no prepayment penalty. SBA-guaranteed debentures drawn before October 1, 2019 incur upfront fees of 3.425%, which consists of a 1.00% commitment fee and a 2.425% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. SBA-guaranteed debentures drawn after October 1, 2019 incur upfront fees of 3.435%, which consists of a 1.00% commitment fee and a 2.435% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. Once pooled, which occurs in March and September of each applicable year, the SBA-guaranteed debentures bear interest at a fixed rate that is set to the current 10-year treasury rate plus a spread at each pooling date.
69
The fair values of the SBA-guaranteed debentures are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the SBA-guaranteed debentures is estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. At September 30, 2023 and December 31, 2022, the SBA-guaranteed debentures would be deemed to be Level 3, as defined in Note 6 to the Consolidted Financial Statements.
As of September 30, 2023, we have incurred $11.1 million in financing costs related to the SBA-guaranteed debentures since the SBIC subsidiaries received their licenses, which were recorded as prepaid loan fees. As of September 30, 2023 and December 31, 2022, $5.0 and $5.7 million of prepaid financing costs had yet to be amortized, respectively. These prepaid loan fees are presented on the Consolidated Statements of Assets and Liabilities as a deduction from the debt liability.
The following table summarizes the interest expense and amortized fees on the SBA-guaranteed debentures for the three and nine months ended September 30, 2023 and 2022 (dollars in millions):
2.1
5.7
2.9
2.4
8.3
6.6
323.0
299.6
316.8
280.7
5.0
4.0
9.6
Notes Offering
On January 14, 2021, we issued $100.0 million in aggregate principal amount of 4.875% fixed-rate notes due 2026 (the “Notes Payable”). The Notes Payable will mature on March 30, 2026 and may be redeemed in whole or in part at any time or from time to time at our option on or after December 31, 2025 at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest is payable semi-annually beginning September 30, 2022.
As of both September 30, 2023 and December 31, 2022, the aggregate carrying amount of the Notes Payable were approximately $100.0 million. The Notes Payable are institutional, non-traded notes.
In connection with the issuance of the Notes Payable, we have incurred $2.3 million of fees which are being amortized over the term of the Notes Payable, of which $1.1 million and $1.5 million remains to be amortized as of September 30, 2023 and December 31, 2022, respectively. These financing costs are presented on the Consolidated Statements of Assets and Liabilities as a deduction from the debt liability.
The following table summarizes the interest expense and deferred financing costs on the Notes Payable for the three and nine months ended September 30, 2023 and 2022 (dollars in millions):
1.2
100.0
70
Off-Balance Sheet Arrangements
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of September 30, 2023, our only off-balance sheet arrangements consisted of $28.8 million of unfunded commitments to provide debt financing and $0.3 million in unfunded equity commitments to 58 existing portfolio companies. As of December 31, 2022, our only off-balance sheet arrangements consisted of $27.5 million of unfunded commitments to provide debt financing to 52 existing portfolio companies and $0.3 million in unfunded equity commitments to one existing portfolio company. As of September 30, 2023, we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded commitments should the need arise.
Regulated Investment Company Status and Dividends
We have elected, have qualified, and intend to qualify annually to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code. So long as we maintain our qualification as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders as dividends on a timely basis.
Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Distributions declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.
To qualify for RIC tax treatment, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). If we maintain our qualification as a RIC, we must also satisfy certain distribution requirements each calendar year in order to avoid a federal excise tax on our undistributed earnings of a RIC. As of December 31, 2022, we had $28.6 million of undistributed taxable income that will be carried forward toward distributions paid during the year ending December 31, 2023.
We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, the covenants contained in the Credit Facility may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement. In addition, we may retain for investment some or all of our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividends for that fiscal year, a portion of those dividend distributions may be deemed a return of capital to our stockholders.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a business development company under the 1940 Act and due to provisions in Credit Facility. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.
In accordance with certain applicable U.S. Treasury regulations and private letter rulings issued by the Internal Revenue Service (the “IRS”), a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash.
If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our stock in accordance with these U.S. Treasury regulations or private letter rulings. However, we continue to monitor the Company’s liquidity position and the overall economy and will continue to assess whether it would be in our and our shareholders best interest to take advantage of the IRS rulings.
71
Recent Accounting Pronouncements
See Note 1 to the consolidated financial statements contained herein for a description of recent accounting pronouncements, if any, including the expected dates of adoption and the anticipated impact on the financial statements.
Critical Accounting Policies
See Note 1 to the consolidated financial statements contained herein for a description of critical accounting policies.
Subsequent Events
The outstanding balance under the Credit Facility as of November 7, 2023 was $163.0 million.
Dividend Declared
72
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We are subject to financial market risks, including changes in interest rates. In connection with the COVID-19 pandemic, the U.S. Federal Reserve (the "Federal Reserve") and other central banks had reduced certain interest rates. However, in March 2022, the Federal Reserve raised interest rates for the first time since December 2018, and subsequently raised interest rates several times, most recently in July 2023, bringing the target for the federal funds rate to 5.25% - 5.50%, the highest since January 2001. As of September 30, 2023 and December 31, 2022, 98% and 97% of the loans in our portfolio bore interest at floating rates, respectively. These floating rate loans typically bear interest in reference to LIBOR and SOFR, which are indexed to 30-day or 90-day LIBOR and SOFR rates, subject to an interest rate floor. As of September 30, 2023 and December 31, 2022, the weighted average interest rate floor on our floating rate loans was 1.18% and 1.07%, respectively.
On July 1, 2023, the publication of all LIBOR settings as representative rates has ceased. As of September 30, 2023, we have facilitated an orderly transition of our LIBOR-based investments to SOFR. Any remaining USD LIBOR-based investments will transition subsequent to September 30, 2023 or the next contract reset date.
Assuming that the Consolidated Statements of Assets and Liabilities as of September 30, 2023 were to remain constant and no actions were taken to alter the existing interest rate sensitivity, the following table shows the annual impact on net income of changes in interest rates:
($ in millions)
Interest
Net Interest
Change in Basis Points(2)
Income
Expense(3)
Income(1)
Up 200 basis points
16.1
(3.2)
12.9
Up 150 basis points
12.1
(2.4)
9.7
Up 100 basis points
(1.6)
Up 50 basis points
(0.8)
Down 50 basis points
(4.0)
Down 100 basis points
(8.1)
(6.5)
Down 150 basis points
(12.1)
(9.7)
Down 200 basis points
(16.1)
(12.9)
Although we believe 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 balance sheet and other business developments that could affect net increase in net assets resulting from operations. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate. We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contacts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. For the three and nine months ended September 30, 2023 and 2022, we did not engage in hedging activities.
Item 4.Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures
The Company’s management, under the supervision and with the participation of various members of management, including its Chief Executive Officer and its Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report.
(b)
Changes in Internal Control Over Financial Reporting
The Company’s management did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2023 that has materially affected, or is reasonable likely to materially affect, the Company’s internal control over financial reporting.
74
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 or our subsidiaries. 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 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
Investing in our securities involves a number of significant risks. In addition to the other information set forth in this quarterly report on Form 10-Q, including the risk factors set forth below, you should carefully consider the risk factors discussed in “Item 1A. Risk Factors” of Annual Report on Form 10-K filed with the SEC on February 28, 2023, all of which could materially affect our business, financial condition and/or results of operations. Although the risks described below and in our other SEC filings referenced above represent the principal risks associated with an investment in us, they are not the only risks we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, might materially and adversely affect our business, financial condition and/or results of operations.
Other than as described below, during the nine months ended September 30, 2023, there have been no material changes to the risk factors discussed in our SEC filings referenced above.
We may be subject to risk related to bank impairments or failure either directly or through our portfolio companies, which, in turn, could indirectly impact our performance and results of operations.
In March 2023, the U.S. Federal Deposit Insurance Corporation (“FDIC”) took control of Silicon Valley Bank and Signature Bank, and in May 2023, the FDIC took control of First Republic Bank due to liquidity concerns. The impairment or failure of one or more banks with whom any of our portfolio companies transact may inhibit the ability of our portfolio companies to access depository accounts, including cash and cash equivalents, as well as investment accounts, which, in turn, may indirectly impact our performance and results of operations. In the event of a bank impairment or failure, affected portfolio companies may default on their debt obligations to us, resulting in impacts to our performance. In the event of such a failure of a banking institution where one or more of our portfolio companies holds depository accounts, access to such accounts could be restricted and FDIC protection may not be available for balances in excess of amounts insured by the FDIC. In such instances, our affected portfolio companies would not recover such excess, uninsured amounts, and they may not be able to cure any defaults. Additionally, unfavorable economic conditions also could 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 could prevent us from increasing our investments and harm business, financial condition, operating results and prospects. We closely monitor activity in the banking sector as it relates to any of our borrowers and continually assess any potential indirect impact to us as a result of the same.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
No shares were issued under the distribution reinvestment program during either of the nine months ended September 30, 2023 and 2022.
Item 3.Defaults Upon Senior Securities
Not applicable.
Item 4.Mine Safety Disclosures
Item 5.Other Information
Rule 10b5-1 Trading Plans
During the fiscal quarter ended September 30, 2023, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
Item 6.Exhibits.
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits filed with the SEC:
ExhibitNumber
Description
Articles of Amendment and Restatement (Incorporated by reference to Exhibit (a)(1) to the Registrant’s Registration Statement on Form N-2 (File No. 333-184195), filed on October 23, 2012).
Bylaws (Incorporated by reference to Exhibit (b)(1) to the Registrant’s Registration Statement on Form N-2 (File No. 333-184195), filed on October 23, 2012).
Form of Stock Certificate (Incorporated by reference to Exhibit (d) to the Registrant’s Registration Statement on Form N-2 (File No. 333-184195), filed on October 23, 2012).
10.1
Equity Distribution Agreement, dated August 11, 2023, by and among Stellus Capital Investment Corporation and Stellus Capital Management, LLC, on the one hand, and Keefe, Bruyette & Woods, Inc. and Raymond James & Associates, Inc. on the other hand (Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 814-00971), filed on August 14, 2023).
31.1
Chief Executive Officer Certification pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2
Chief Financial Officer Certification pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1
Chief Executive Officer Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2
Chief Financial Officer Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS*
XBRL Instance Document — the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File — The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
*
Filed herewith
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 7, 2023
By:
/s/ Robert T. Ladd
Name:
Robert T. Ladd
Title:
Chief Executive Officer and President
/s/ W. Todd Huskinson
W. Todd Huskinson
Chief Financial Officer