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 March 31, 2024
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.:
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, par value $0.001 per share, outstanding as of May 9, 2024 was 24,125,642.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Statements of Assets and Liabilities as of March 31, 2024 (unaudited) and December 31, 2023
1
Consolidated Statements of Operations for the three-month periods ended March 31, 2024 and 2023 (unaudited)
2
Consolidated Statements of Changes in Net Assets for the three-month periods ended March 31, 2024 and 2023 (unaudited)
3
Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2024 and 2023 (unaudited)
4
Consolidated Schedules of Investments as of March 31, 2024 (unaudited) and December 31, 2023
5
Notes to Unaudited Financial Statements
29
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
59
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
76
Item 4.
Controls and Procedures
77
PART II. OTHER INFORMATION
Legal Proceedings
78
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
79
SIGNATURES
80
PART I — FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
March 31, 2024
(unaudited)
December 31, 2023
ASSETS
Controlled investments at fair value (amortized cost of $17,934,808 and $17,285,138, respectively)
$
7,362,234
6,175,994
Non-controlled, non-affiliated investments, at fair value (amortized cost of $862,218,903 and $884,858,412, respectively)
868,521,912
868,284,689
Cash and cash equivalents
48,761,721
26,125,741
Receivable for sales and repayments of investments
776,417
371,877
Interest receivable
6,484,400
4,882,338
Income tax receivable
2,673,730
1,588,708
Other receivables
42,995
Deferred offering costs
12,521
7,312
Prepaid expenses
585,418
606,674
Total Assets
935,221,348
908,086,328
LIABILITIES
Notes Payable
99,107,786
98,996,412
Credit Facility payable
181,343,929
156,564,776
SBA-guaranteed debentures
320,587,412
320,273,358
Dividends payable
3,215,948
—
Management fees payable
1,852,233
2,918,536
Income incentive fees payable
2,745,073
2,885,180
Interest payable
1,493,044
5,241,164
Unearned revenue
412,314
397,725
Administrative services payable
425,048
402,151
Deferred tax liability
381,500
188,893
Other accrued expenses and liabilities
216,657
278,345
Total Liabilities
611,780,944
588,146,540
Commitments and contingencies (Note 7)
Net Assets
323,440,404
319,939,788
NET ASSETS
Common stock, par value $0.001 per share (100,000,000 shares authorized; 24,125,642 issued and outstanding for both periods)
24,125
Paid-in capital
335,918,984
Total distributable loss
(12,502,705)
(16,003,321)
Total Liabilities and Net Assets
Net Asset Value Per Share
13.41
13.26
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
For the three months ended
March 31, 2023
INVESTMENT INCOME
From controlled investments:
Interest income
81,636
From non-controlled, non-affiliated investments
24,956,851
23,408,604
Other income
958,262
666,743
Total Investment Income
25,996,749
24,075,347
OPERATING EXPENSES
Management fees
3,852,233
3,735,102
Valuation fees
156,507
147,073
Administrative services expenses
490,901
461,964
Income incentive fees
2,509,110
2,124,835
Capital gains incentive fee
(569,528)
Professional fees
339,627
430,848
Directors’ fees
108,250
117,250
Insurance expense
124,989
120,546
Interest expense and other fees
7,767,573
7,886,424
Income tax expense
370,719
374,763
Other general and administrative expenses
245,275
178,450
Total Operating Expenses
15,965,184
15,007,727
Income incentive fee waiver
(204,351)
Total Operating Expenses, net of fee waivers
15,760,833
Net Investment Income
10,235,916
9,067,620
Net realized (loss) gain on non-controlled, non-affiliated investments
(20,384,731)
34,967
Net realized loss on foreign currency translation
(25,106)
(39,912)
Net change in unrealized appreciation on controlled investments
536,570
Net change in unrealized appreciation (depreciation) on non-controlled, non-affiliated investments
22,982,020
(4,249,642)
Net change in unrealized (depreciation) appreciation on foreign currency translations
(3,602)
1,874
Provision for taxes on net unrealized appreciation on investments
(192,607)
(78,760)
Net Increase in Net Assets Resulting from Operations
13,148,460
4,736,147
Net Investment Income Per Share—basic and diluted
0.42
0.46
Net Increase in Net Assets Resulting from Operations Per Share – basic and diluted
0.54
0.24
Weighted Average Shares of Common Stock Outstanding—basic and diluted
24,125,642
19,779,988
Distributions Per Share—basic and diluted
0.40
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, 2022
19,666,769
19,667
275,114,720
642,226
275,776,613
Net investment income
Net realized gain on investments
Net realized loss on foreign currency translations
Net change in unrealized depreciation on investments
Net change in unrealized appreciation on foreign currency translations
Provision for taxes on unrealized appreciation on investments
Distributions from net investment income
(7,951,284)
Issuance of common stock, net of offering costs(1)
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
Balances at December 31, 2023
Net realized loss on investments
Net change in unrealized appreciation on investments
23,518,590
Net change in unrealized depreciation on foreign currency translations
(9,647,844)
Balances at March 31, 2024
(1) See Note 4 to the Consolidated Financial Statements contained herein for more information on offering costs.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
For three months ended
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
(28,516,430)
(41,237,273)
Proceeds from sales and repayments of investments
31,169,595
5,890,813
Net change in unrealized (appreciation) depreciation on investments
(23,518,590)
4,249,642
3,602
10,126
Increase in investments due to PIK
(750,054)
(769,954)
Amortization of premium and accretion of discount, net
(702,543)
(665,998)
Deferred tax provision
192,607
78,760
Amortization of loan structure fees
264,707
143,822
Amortization of deferred financing costs
111,374
110,150
Amortization of loan fees on SBA-guaranteed debentures
314,055
317,508
Net realized loss (gain) on investments
20,384,731
(34,967)
Changes in other assets and liabilities
Increase in interest receivable
(1,602,062)
(187,420)
Increase in income tax receivable
(1,085,022)
Decrease in prepaid expenses
21,256
148,414
Decrease in management fees payable
(1,066,303)
(2,592,566)
(Decrease) increase in income incentive fees payable
(140,107)
Decrease in capital gains incentive fees payable
Increase in administrative services payable
22,897
39,951
Decrease in interest payable
(3,748,120)
(3,437,073)
Decrease in related party payable
(646,393)
Increase (decrease) in unearned revenue
14,589
(47,573)
Increase in income tax payable
374,460
Decrease in other accrued expenses and liabilities
(61,688)
(78,907)
Net Cash Provided (Used) in Operating Activities
4,456,954
(32,043,024)
Cash flows from Financing Activities
Proceeds from the issuance of common stock
8,487,127
Sales load for common stock issued
(126,303)
Offering costs paid for common stock issued
(5,209)
(72,955)
Stockholder distributions paid
(6,431,896)
(5,252,174)
Financing costs paid on Credit Facility
(49,969)
Borrowings under Credit Facility
50,000,000
13,300,000
Repayments of Credit Facility
(25,333,900)
(14,483,900)
Net Cash Provided by Financing Activities
18,179,026
1,851,795
Net Increase (Decrease) in Cash and Cash Equivalents
22,635,980
(30,191,229)
Cash and Cash Equivalents Balance at Beginning of Period
48,043,329
Cash and Cash Equivalents Balance at End of Period
17,852,100
Supplemental and Non-Cash Activities
Cash paid for interest expense
10,825,557
10,752,017
Income and excise tax paid
1,455,741
303
Increase in distributions payable
2,699,110
Increase in deferred offering costs
5,209
2,700
Exchange of investments
8,256,411
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
Controlled investments (13)
EH Real Estate Services, LLC
(13)
Skokie, IL
Term Loan A-1
(16)
First Lien
10.00
%
-
9/3/2021
9/3/2026
FIRE: Real Estate
1,882,226
56,467
0.02
Term Loan A-2
4/3/2023
650,943
19,528
0.01
Term Loan A-3
6/7/2023
230,678
6,920
0.00
Term Loan A-4
7/12/2023
1,505,537
0.47
Term Loan A-5
1/8/2024
5,710,182
1.77
Revolver
(16)(23)
10/3/2023
63,597
EH Holdco, LLC Common Units
Equity
15,356
EH Holdco, LLC Series A Preferred Units
7,892
7,891,642
17,934,808
2.29
Total Controlled investments
Non-controlled, non-affiliated investments
(4)(5)
2X LLC
(9)
Berwyn, PA
Term Loan
(11)
3M SOFR+
6.50
2.00
11.81
6/5/2023
6/5/2028
Services: Business
5,472,707
5,352,857
5,445,343
1.68
10/31/2023
1,441,146
1,407,548
1,433,940
0.44
2X Investors LP Class A Units
58,949
589,496
681,041
0.21
7,349,901
7,560,324
2.33
Ad.Net Acquisition, LLC
Los Angeles, CA
Term Loan (SBIC II)
(5)(11)
6.00
1.00
11.57
5/7/2021
5/7/2026
15,159,559
15,052,207
4.69
Ad.Net Holdings, Inc. Series A Common Stock (SBIC II)
(5)
7,794
77,941
56,802
Ad.Net Holdings, Inc. Series A Preferred Stock (SBIC II)
7,015
701,471
511,219
0.16
15,831,619
15,727,580
4.87
AdCellerant LLC
Denver, CO
Term A Loan (SBIC II)
1M SOFR+
11.32
12/12/2023
12/12/2028
Media: Advertising, Printing & Publishing
9,975,000
9,785,233
9,875,250
3.05
AdCellerant Holdings, LLC Series A Units
728,710
758,882
0.23
10,513,943
10,634,132
3.28
ADS Group Opco, LLC
Lakewood, CO
6.70
12.01
6/4/2021
6/4/2026
Aerospace & Defense
14,250,000
14,109,125
14,178,750
4.38
100,000
99,500
0.03
ADS Group Topco, LLC Class A Units
77,626
288,691
ADS Group Topco, LLC Class B Units
56,819
211,309
ADS Group Topco, LLC Class Y Units
4/11/2023
23,859
88,733
221,833
0.07
ADS Group Topco, LLC Class Z Units
6/15/2022
72,043
267,929
38,350
15,065,787
14,538,433
4.49
Advanced Barrier Extrusions, LLC
Rhinelander, WI
Term Loan B (SBIC)
(4)(11)
7.50
12.88
11/30/2020
11/30/2026
Containers, Packaging, & Glass
16,931,250
16,760,867
15,661,405
4.84
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
1,464
146,416
122,600
0.04
17,435,678
15,784,005
4.88
American Refrigeration, LLC
Jacksonville, FL
Term Loan (SBIC)
6.25
1.50
11.56
3/31/2023
3/31/2028
Capital Equipment
8,192,921
8,019,858
2.53
Delayed Draw Term Loan
98,770
AR-USA Holdings, LLC Class A Units
141
141,261
220,801
8,259,889
8,513,722
2.63
Amika OpCo LLC
Brooklyn, NY
6M SOFR+
5.25
0.75
10.62
7/1/2022
7/1/2029
Consumer Goods: Non-Durable
94,638
93,079
93,692
5.75
11.24
12/5/2023
9,681,628
9,496,190
9,584,812
2.96
Ishtar Co-Invest-B LP Partnership Interests
77,778
42,813
208,400
0.06
Oshun Co-Invest-B LP Partnership Interests
22,222
59,542
9,654,304
9,946,446
3.07
Anne Lewis Strategies, LLC
Washington, DC
7.00
12.31
3/5/2021
5/9/2028
9,165,894
9,084,543
2.83
4/15/2022
2,860,398
2,829,404
0.88
SG AL Investment, LLC Common Units
(6)
1,000
571,027
1,581,609
0.49
SG AL Investment, LLC Common-A Units
12/22/2023
239
492,905
985,826
0.30
12,977,879
14,593,727
4.50
APE Holdings, LLC
Deer Park, TX
Class A Units
9/5/2014
Chemicals, Plastics, & Rubber
375,000
66,584
Atmosphere Aggregator Holdings II, L.P.
Atlanta, GA
Common Units
1/26/2016
254,250
2,495,790
0.77
Stratose Aggregator Holdings, L.P. Common Units
6/30/2015
750,000
7,362,213
2.28
9,858,003
ArborWorks, LLC
(22)
Oakhurst, CA
(11)(17)
11/6/2023
11/6/2028
Environmental Industries
3,461,538
3,150,000
0.97
15.00
1,732,563
1,576,632
ArborWorks Intermediate Holdco, LLC Class A-1 Preferred Units
16,037
3,610,847
2,811,404
0.87
ArborWorks Intermediate Holdco, LLC Class B-1 Preferred Units
ArborWorks Intermediate Holdco, LLC Class A-1 Common Units
1,923
8,804,948
7,538,036
Axis Portable Air, LLC
Phoenix, AZ
11.21
3/22/2022
3/22/2028
9,476,250
9,341,122
2.93
4/17/2023
1,888,876
1,856,640
0.58
99,750
98,990
Axis Air Parent, LLC Preferred Units
4,436
443,636
994,555
0.31
11,740,388
12,459,431
3.85
Baker Manufacturing Company, LLC
Evansville, IN
(5)(10)(12)
11.36
7/5/2022
7/5/2027
13,701,636
13,504,237
13,633,128
4.22
BSC Blue Water Holdings, LLC Series A Units (SBIC II)
743,770
941,217
0.29
14,248,007
14,574,345
4.51
BL Products Parent, L.P.
Houston, TX
2/1/2022
879,060
983,608
1,353,540
Café Valley, Inc.
7.24
12.55
8/28/2019
8/28/2025
Beverage, Food, & Tobacco
15,504,762
15,474,029
4.79
CF Topco LLC Units
9,160
916,015
1,433,365
16,390,044
16,938,127
5.23
Camp Profiles LLC
Boston, MA
10.71
9,993,750
9,886,009
3.09
CIVC VI-A 829 Blocker, LLC Units
250
250,000
530,483
10,136,009
10,524,233
3.25
CEATI International Inc.
(7)(9)
Montreal, Canada
11.51
2/19/2021
2/19/2026
8,515,911
8,442,512
CEATI Holdings, LP Class A Units
331,245
0.10
8,692,512
8,847,156
2.73
Cerebro Buyer, LLC
Columbia, SC
6.75
12.18
3/15/2023
3/15/2029
Healthcare & Pharmaceuticals
4,635,499
4,534,491
1.43
Cerebro Holdings Partnership, L.P. Series A Partner Interests
62,961
69,130
Cerebro Holdings Partnership, L.P. Series B Partner Interests
341,091
374,510
0.12
4,938,543
5,079,139
1.57
6
CF Arch Holdings LLC
8/10/2022
170,697
0.05
CF512, Inc.
Blue Bell, PA
11.53
9/1/2021
9/1/2026
13,875,674
13,726,082
13,736,917
4.25
11.50
2,996,270
2,979,469
2,966,307
0.92
StellPen Holdings, LLC Membership Interests
220,930
202,998
16,926,481
16,906,222
Channel Partners Intermediateco, LLC
Tampa Bay, FL
12.58
2/24/2022
2/7/2027
Retail
13,219,422
13,136,195
13,021,131
4.03
3/27/2023
1,685,582
1,672,342
1,660,298
0.51
12.56
26,667
26,267
14,835,204
14,707,696
4.55
CompleteCase, LLC
Seattle, WA
11.96
12/21/2020
12/21/2025
Services: Consumer
6,653,197
6,600,499
6,619,931
2.05
CompleteCase Holdings, Inc. Class A Common Stock (SBIC II)
417
CompleteCase Holdings, Inc. Series A Preferred Stock (SBIC II)
522
521,734
308,398
CompleteCase Holdings, Inc. Class A Common Stock
4/27/2023
89
CompleteCase Holdings, Inc. Series C Preferred Stock
111
111,408
65,854
7,233,647
6,994,187
2.17
Compost 360 Acquisition, LLC
Tampa, FL
11.83
8/2/2023
8/2/2028
9,571,113
9,355,276
9,427,546
2.91
11.82
41,667
41,042
Compost 360 Investments, LLC Class A Units
2,508
250,761
209,273
9,647,704
9,677,861
2.98
COPILOT Provider Support Services, LLC
Maitland, FL
11/22/2022
11/22/2027
4,925,000
4,847,537
1.52
20,000
QHP Project Captivate Blocker, Inc. Common Stock
285,714
235,883
5,153,251
5,180,883
1.60
Craftable Intermediate II Inc.
Dallas, TX
6/30/2023
6/30/2028
High Tech Industries
10,058,506
9,879,815
10,008,213
Gauge Craftable LP Partnership Interests
626,690
770,102
10,506,505
10,778,315
3.33
Curion Holdings, LLC
Chicago, IL
12.21
7/29/2022
7/29/2027
12,864,101
12,679,534
12,735,460
3.94
85,000
84,150
SP CS Holdings LLC Class A Units
739,999
822,245
0.25
13,504,533
13,641,855
DRS Holdings III, Inc.
St. Louis, MO
11.68
11/1/2019
11/1/2025
Consumer Goods: Durable
8,869,635
8,841,548
2.74
DTE Holding Company, LLC
Roselle, IL
Class A-2 Units
4/13/2018
Energy: Oil & Gas
776,316
466,204
Class AA Units
723,684
1,189,888
EHI Buyer, Inc.
Grand Prarie, TX
Term A Loan (SBIC)
7/31/2023
7/31/2029
6,080,786
5,940,630
5,989,574
1.85
EHI Group Holdings, L.P. Class A Units
618
617,801
796,229
6,558,431
6,785,803
2.10
7
Elliott Aviation, LLC
Moline, IL
(8)(11)
8.00
11.48
1/31/2020
6/30/2025
8,578,901
8,547,586
7,978,378
2.47
Unsecured
10/26/2023
1/31/2026
58,938
44,204
Revolver A
1,417,420
1,318,201
0.41
Revolver B
3/1/2023
667,463
620,741
0.19
SP EA Holdings LLC Class A Units
1,048,896
901,489
11,592,896
9,961,524
3.08
EOS Fitness Holdings, LLC
Class A Preferred Units
12/30/2014
Hotel, Gaming, & Leisure
118
Class B Common Units
3,017
813,686
Equine Network, LLC
Boulder, CO
11.94
5/22/2023
5/22/2028
5,921,396
5,790,769
5,891,789
1.82
83,333
82,916
59,700
59,402
5,933,802
6,034,107
1.87
evolv Consulting, LLC
12.08
12/7/2023
12/7/2028
10,000,000
9,809,560
9,900,000
3.06
evolv Holdco, LLC Preferred Units
473,485
541,401
0.17
10,283,045
10,441,401
3.23
Evriholder Acquisition, Inc.
Anaheim, CA
1/23/2023
1/24/2028
12,675,000
12,416,084
3.92
KEJ Holdings LP Class A Units
873,333
1,629,078
0.50
13,289,417
14,304,078
4.42
Exacta Land Surveyors, LLC
(20)
Cleveland, OH
(4)(8)(11)
2/8/2019
7/31/2025
16,314,652
16,314,651
15,172,626
4.70
7/15/2022
991,786
922,361
SP ELS Holdings LLC Class A Units
1,122,250
64,693
18,428,687
16,159,680
5.01
Exigo, LLC
11.43
3/16/2022
3/16/2027
8,789,476
8,704,845
8,745,529
2.70
Gauge Exigo Coinvest, LLC Common Units
377,535
367,103
0.11
9,082,380
9,112,632
2.81
FiscalNote Boards LLC
Toronto, Canada
11.33
3/11/2024
3/12/2029
4,311,584
4,226,390
1.31
Florachem Corporation
4/29/2022
4/29/2028
9,825,000
9,681,195
9,775,875
3.02
43,333
43,116
53,616
53,348
SK FC Holdings, L.P. Class A Units
362
362,434
420,423
0.13
10,140,578
10,292,762
3.18
General LED OPCO, LLC
San Antonio, TX
Second Lien
9.00
14.41
5/1/2018
3/31/2026
4,500,000
4,475,588
4,410,000
1.36
Green Intermediateco II, Inc.
Irvine, CA
8/8/2023
8/8/2028
11,114,401
10,863,589
10,947,685
3.38
407,107
402,346
401,000
Green Topco Holdings, LLC Class A Units
271,401
235,246
11,537,336
11,583,931
3.57
8
GS HVAM Intermediate, LLC
Carlsbad, CA
11.93
10/18/2019
4/2/2025
12,361,852
12,345,115
3.82
1,590,909
HV GS Acquisition, LP Class A Interests
10/2/2019
2,144
1,967,133
5,573,420
1.72
15,903,157
19,526,181
6.03
Health Monitor Holdings, LLC
Montvale, NJ
Series A Preferred Units
5/15/2019
1,105,838
1,052,919
1,463,324
0.45
Heartland Business Systems, LLC
Little Chute, WI
11.71
8/26/2022
8/26/2027
9,850,000
9,705,321
49,500
49,097
AMCO HBS Holdings, LP Class A Units
2,861
244,939
838,610
0.26
9,999,357
10,738,110
HV Watterson Holdings, LLC
Schaumburg, IL
11.46
12/17/2021
12/17/2026
13,134,279
12,977,390
13,002,936
11.45
96,000
95,040
319,059
316,884
315,868
HV Watterson Parent, LLC Class A Units
1,632
1,631,591
1,900,056
0.59
15,021,865
15,313,900
4.75
I2P Holdings, LLC
1/31/2018
3,670,442
1.13
ICD Holdings, LLC
(7)
San Francisco, CA
1/2/2018
Finance
9,962
437,854
2,308,013
0.71
Impact Home Services LLC
4/28/2023
4/28/2028
5,892,372
5,765,824
5,686,139
1.76
10/11/2023
537,020
524,712
518,224
267,835
261,935
258,461
0.08
82,500
79,613
Impact Holdings Georgia LLC Class A Units
397
397,487
73,021
7,032,458
6,615,458
2.04
Infolinks Media Buyco, LLC
Ridgewood, NJ
11.18
11/1/2021
11/1/2026
7,514,685
7,428,787
2.32
1,473,863
1,461,887
Tower Arch Infolinks Media, LP LP Interests
(15)
10/28/2021
451,688
424,156
757,474
9,314,830
9,746,022
3.01
Informativ, LLC
Fresno, CA
7/30/2021
7/30/2026
8,459,857
8,373,567
8,417,558
2.60
3/31/2022
6,377,430
6,303,785
6,345,543
1.96
Credit Connection Holdings, LLC Series A Units
804,384
1,321,745
15,481,736
16,084,846
4.97
Inoapps Bidco, LLC
Term Loan B
3M SONIA+
11.07
2/15/2022
2/15/2027
£
13,155,674
12,216,550
3.78
11.19
40,000
82,083
81,523
Inoapps Holdings, LLC Series A-1 Preferred Units
739,844
783,756
948,274
14,060,953
13,286,907
4.11
9
Integrated Oncology Network, LLC
Newport Beach, CA
7/17/2019
6/24/2025
15,649,251
15,630,694
15,492,758
4.80
1,083,247
1,081,021
1,072,415
0.33
554,070
548,529
17,265,785
17,113,702
5.30
Intuitive Health, LLC
Plano, TX
5.50
12.15
10/18/2027
5,771,920
5,721,922
1.78
(10)(12)
8,117,989
8,048,071
2.51
8/31/2021
3,040,324
3,011,455
0.94
Legacy Parent, Inc. Class A Common Stock
10/30/2020
58
203,633
16,781,448
17,133,866
5.29
Invincible Boat Company LLC
Opa Locka, FL
5,356,627
5,326,368
5,329,844
1.65
4,944,579
4,916,556
4,919,856
6/1/2021
1,099,244
1,091,014
1,093,748
0.34
106,383
105,851
Warbird Parent Holdco, LLC Class A Units
1,362,575
1,299,691
1,052,636
12,740,012
12,501,935
3.87
J.R. Watkins, LLC
(4)(19)
12.00
12/22/2017
3/31/2024
13,597,208
4,894,995
1.51
J.R. Watkins Holdings, Inc. Class A Preferred Stock
1,133
1,132,576
14,729,784
Jurassic Acquisition Corp.
Sparks, MD
10.93
12/28/2018
11/15/2024
Metals & Mining
16,581,250
16,548,784
16,581,249
5.13
KidKraft, Inc.
(10)(12)(18)
PRIME+
4/3/2020
6/30/2024
1,580,768
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
11/9/2026
7,472,730
7,387,078
7,435,366
2.30
SP L2 Holdings LLC Class A Units (SBIC)
168,576
7,845,411
7,686,858
2.38
Lightning Intermediate II, LLC
11.98
6/6/2022
6/6/2027
13,157,097
12,975,960
12,959,741
4.02
Gauge Vimergy Coinvest, LLC Units
399
391,274
121,354
13,367,234
13,081,095
4.06
MacKenzie-Childs Acquisition, Inc.
Aurora, NY
9/2/2022
9/2/2027
98,500
97,409
MacKenzie-Childs Investment, LP Partnership Interests
91,499
217,409
209,999
Madison Logic Holdings, Inc.
New York, NY
12.30
12/30/2022
12/30/2028
4,483,925
4,375,706
4,439,086
1.37
BC Partners Glengarry Co-Investment LP Class 1 Interests
7/7/2023
394,767
297,834
0.09
4,770,473
4,736,920
1.46
MedLearning Group, LLC
11.80
3/26/2024
12/30/2027
4,339,663
4,252,652
4,252,724
2,543,813
2,492,808
2,492,851
2,076,890
2,035,352
2,035,282
0.63
8,780,812
8,780,857
2.71
10
Michelli, LLC
New Orleans, LA
11.06
12/21/2023
12/21/2028
4,987,500
4,891,484
4,937,625
1.53
SP MWM Holdco LLC Class A Units
509,215
551,000
5,400,699
5,488,625
1.70
Microbe Formulas LLC
Meridian, ID
4/4/2022
4/3/2028
8,470,065
8,409,110
2.62
MOM Enterprises, LLC
Richmond, CA
6.48
11.79
5/19/2021
5/19/2026
16,013,833
15,859,410
15,853,695
4.91
50,000
MBliss SPC Holdings, LLC Units
933,333
390,465
16,842,743
16,293,660
5.05
Monitorus Holding, LLC
London, UK
14.00
4.00
5/24/2022
5/24/2027
Media: Diversified & Production
101,999
101,316
100,469
€
100,999
110,889
109,226
102,948
101,404
Sapphire Aggregator S.a r.l. Convertible Bonds
(8)(14)
11/15/2023
3/31/2025
5,532
5,938
5,880
3/1/2024
12,241
13,290
13,014
Sapphire Aggregator S.a r.l. Class A Shares
9/1/2022
557,689
11,156
12,994
Sapphire Aggregator S.a r.l. Class B Shares
557,682
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
434,785
446,939
Morgan Electrical Group Intermediate Holdings, Inc.
Fremont, CA
11.58
8/3/2023
8/3/2029
Construction & Building
4,428,340
4,336,414
4,384,057
1,718,492
1,699,767
1,701,307
0.53
Morgan Electrical Group Holdings, LLC Series A-2 Preferred Units
380
380,330
345,218
6,416,511
6,430,582
Naumann/Hobbs Material Handling Corporation II, Inc.
12.06
8/30/2019
8/30/2025
8,269,553
8,253,032
2.56
5,214,811
5,204,528
1.61
Naumann Hobbs Holdings, L.P. Class A-1 Units
9/29/2022
123
220,379
524,592
Naumann Hobbs Holdings, L.P. Class A-2 Units
13,898,318
14,533,548
NINJIO, LLC
Westlake Village, CA
10/12/2022
10/12/2027
4,962,500
4,887,037
33,333
99,035
NINJIO Holdings, LLC Units
184
313,253
238,722
Gauge NINJIO Blocker LLC Preferred Units
9/22/2023
14
14,470
110,290
5,347,128
5,444,845
1.67
NS412, LLC
8.50
13.91
5/6/2019
11/6/2025
7,615,000
7,568,459
7,538,850
NS Group Holding Company, LLC Class A Units
782
795,002
717,346
0.22
8,363,461
8,256,196
2.55
11
NuSource Financial Acquisition, Inc.
Eden Prairie, MN
(5)(8)
13.75
9.75
1/29/2021
1/31/2027
6,178,406
6,131,212
6,147,514
1.90
NuSource Holdings, Inc. Warrants (SBIC II)
54,966
Nutritional Medicinals, LLC
Centerville, OH
6.21
11.52
11/15/2018
11/15/2025
8,089,536
8,056,769
2.50
3,387,128
3,364,522
1.05
Functional Aggregator, LLC Units
12,500
972,803
2,340,202
0.72
12,394,094
13,816,866
4.27
Onpoint Industrial Services, LLC
1.75
11/16/2022
11/16/2027
12,732,093
12,531,529
Spearhead TopCo, LLC Class A Units
606,742
675,168
13,138,271
13,407,261
4.15
PCP MT Aggregator Holdings, L.P.
Oak Brook, IL
3/29/2019
825,020
119,281
4,517,977
1.40
PCS Software, Inc.
Shenandoah, TX
7/1/2019
7/1/2024
Transportation & Logistics
13,882,311
13,860,589
4.30
1,820,631
1,817,782
0.56
571,195
0.18
960,000
PCS Software Parent, LLC Class A Common Units
9/16/2022
461,216
382,720
17,209,566
17,616,857
5.46
Pearl Media Holdings, LLC
Garland, TX
8/31/2022
8/31/2027
9,644,444
9,502,420
9,499,777
2.94
23,333
22,983
9,525,753
9,522,760
2.95
Peltram Group Holdings LLC
Auburn, WA
12/30/2021
508,516
506,119
532,545
Premiere Digital Services, Inc.
10.69
11/3/2021
11/3/2026
Media: Broadcasting & Subscription
13,183,167
13,145,742
4.09
Premiere Digital Holdings, Inc. Common Stock
10/18/2018
5,000
2,414,674
15,597,841
Red's All Natural, LLC
Franklin, TN
1/31/2023
1/31/2029
8,815,327
8,663,949
Centeotl Co-Invest B, LP Common Units
710,600
657,006
0.20
9,374,549
9,472,333
RIA Advisory Borrower, LLC
Coral Gables, FL
5/1/2023
8/2/2027
5,940,000
5,841,118
1.84
58,686
RIA Advisory Aggregator, LLC Class A Units
104,425
165,078
167,913
RIA Products Aggregator, LLC Class A Units
81,251
78,390
6,143,272
6,244,989
1.93
Rogers Mechanical Contractors, LLC
4/28/2021
9/28/2028
9,039,929
8,980,584
8,994,729
2.78
Sales Benchmark Index, LLC
1/7/2020
1/7/2025
12,148,958
12,101,872
3.76
SBI Holdings Investments LLC Class A Units
66,573
665,730
336,879
12,767,602
12,485,837
3.86
12
Service Minds Company, LLC
Bradenton, FL
7.97
5.00
2/7/2022
2/7/2028
5,192,602
5,122,221
4,361,786
1.35
7.96
100,805
84,676
96,028
95,289
80,664
5,318,315
4,527,126
TAC LifePort Holdings, LLC
Woodland, WA
3/1/2021
546,543
537,049
780,306
The Hardenbergh Group, Inc.
Livonia, MI
11.66
8/7/2023
8/7/2028
10,449,388
10,213,838
10,344,894
3.20
BV HGI Holdings, L.P. Class A Units
434,504
392,912
10,648,342
10,737,806
3.32
Tilley Distribution, Inc.
Baltimore, MD
4/1/2022
12/31/2026
94,497
93,595
92,135
Titan Meter Bidco Corp.
Erie, PA
10,029,219
9,682,314
2.99
Titan Meter Topco LP Class A Units
515,578
10,197,892
3.15
Trade Education Acquisition, L.L.C.
Austin, TX
7.25
7.68
12/28/2021
12/28/2027
Education
9,788,001
9,656,189
8,075,101
Trade Education Holdings, L.L.C. Class A Units
662,660
2,048
10,318,849
8,077,149
TradePending OpCo Aggregator, LLC
Carrboro, NC
3/2/2021
3/2/2026
9,602,020
9,517,395
9,554,010
8/4/2023
2,454,677
2,416,357
2,442,404
0.76
33,166
685,290
679,645
681,864
TradePending Holdings, LLC Series A Units
908,333
967,114
1,474,296
TradePending Holdings, LLC Series A-1 Units
132,783
260,254
388,548
13,874,098
14,574,288
Unicat Catalyst Holdings, LLC
(21)
Alvin, TX
4/27/2021
4/27/2026
6,984,375
6,919,363
6,949,453
2.15
Unicat Catalyst, LLC Class A Units
7,500
620,308
Unicat Catalyst, LLC Class A-1 Units
12/13/2023
510
28,135
22,062
7,697,498
7,591,823
2.35
U.S. Expediters, LLC
Stafford, TX
11.76
12/22/2021
12/22/2026
15,666,459
15,479,800
15,509,794
4.81
Cathay Hypnos LLC Units
1,372,932
1,316,740
1,249,738
0.39
16,796,540
16,759,532
5.20
Venbrook Buyer, LLC
6.46
3/13/2020
3/13/2026
13,893,591
13,795,765
12,156,892
158,081
156,968
138,321
2,437,590
2,132,891
0.66
4,737,228
4,717,833
4,145,075
1.28
Venbrook Holdings, LLC Convertible Term Loan
12/20/2028
101,113
Venbrook Holdings, LLC Common Units
822,758
819,262
22,028,531
18,573,179
5.74
13
Whisps Holdings LP
Elgin, IL
4/18/2019
500,000
Class A-1 Units
3/6/2023
182,610
97,400
682,610
Xanitos, Inc.
Newtown Square, PA
6/25/2021
6/25/2026
12,448,000
12,323,666
12,385,760
3.83
2,193,136
2,181,221
2,182,170
0.67
Pure TopCo, LLC Class A Units
442,133
1,053,478
1,058,890
15,658,365
15,726,320
4.86
Total Non-control, non-affiliated investments
862,218,903
268.51
Total Investments
880,153,711
875,884,146
270.80
LIABILITIES IN EXCESS OF OTHER ASSETS
(552,443,742)
(170.80)
100.00
Unused
Unfunded
Commitment
Security
Fee
0.50%
June 5, 2028
1,299,020
May 7, 2026
875,995
December 12, 2028
March 31, 2028
July 1, 2028
May 9, 2028
March 22, 2028
September 3, 2026
February 19, 2026
March 15, 2029
September 1, 2026
73,333
February 7, 2027
166,667
December 21, 2025
58,333
August 2, 2028
4,096,741
80,000
November 22, 2027
June 30, 2028
15,000
July 29, 2027
909,091
November 1, 2025
3,055,671
1.00%
July 31, 2029
16,667
May 22, 2028
1,363,636
December 7, 2028
January 24, 2028
March 16, 2027
627,139
March 12, 2029
391,962
56,667
April 29, 2028
1,060,606
April 2, 2025
4,000
December 17, 2026
17,500
April 28, 2028
July 30, 2026
60,000
February 15, 2027
957,447
August 28, 2025
November 9, 2026
15
June 6, 2027
September 2, 2027
December 30, 2027
2,445,188
3,888,228
December 21, 2028
1,296,076
April 3, 2028
May 19, 2026
1,145,662
August 3, 2029
Revolver - Working Capital
1,763,033
August 30, 2025
66,667
October 12, 2027
2,000,000
November 15, 2025
746,948
July 1, 2024
76,667
August 31, 2027
576,923
November 3, 2026
41,314
August 2, 2027
September 28, 2028
1,331,461
January 7, 2025
August 6, 2028
December 31, 2026
1,055,707
March 2, 2026
December 22, 2026
June 25, 2026
A
Abbreviation Legend
PIK — Payment-In-Kind
PRIME — U.S. Prime Rate
SOFR — Secured Overnight Financing Rate
SONIA — Sterling Overnight Index Average
16
Control investments (23)
Term Loan A-1 (SBIC)
(4)(16)
1st Lien
5,337,200
5,255,564
3,042,204
0.95
Term Loan A-2 (SBIC)
1,140,558
650,118
570,279
325,059
Term Loan A-3 (SBIC)
392,910
223,959
196,455
111,979
Term Loan A-4 (SBIC)
1,003,691
993,654
501,846
496,828
332,190
17,285,138
Total Control investments
Non-control, non-affiliated investments
11.85
5,486,458
5,361,018
5,431,593
1,444,767
1,409,607
1,430,319
644,844
7,360,121
7,506,756
11.61
15,198,529
15,079,548
649,510
58,566
527,094
16,508,470
16,433,699
11.35
9,802,403
10,531,113
3.29
12.20
14,095,019
4.43
112,626
15,051,681
14,390,876
16,975,000
16,789,930
15,447,250
4.83
1,139
113,927
92,305
17,432,252
15,539,555
11.60
8,213,610
8,031,788
2.57
220,296
8,173,049
8,433,906
2.64
17
10.87
93,031
93,218
9,705,893
9,513,799
9,560,305
200,675
57,335
9,671,865
9,911,533
3.10
12.35
9,189,074
9,098,232
9,005,293
2,867,632
2,833,029
2,810,279
606,733
1,205,165
0.38
13,030,899
14,006,563
49,816
2,471,396
7,290,252
9,761,648
3,184,615
924,871
850,881
0.27
2,695,747
0.84
7,997,256
6,731,243
2.11
Archer Systems, LLC
CF Arch Holdings LLC Class A Units
151,447
11.25
9,500,000
9,357,284
2.97
1,893,610
1,859,720
99,199
1,039,036
0.32
11,759,839
12,532,646
3.91
11.42
13,491,633
4.26
855,572
14,235,403
14,488,700
4.53
BLP Buyer, Inc.
BL Products Parent, L.P. Class A Units
1,322,224
12.59
15,548,810
15,499,968
1,148,854
0.36
16,415,983
16,697,664
5.22
10.75
10,019,375
9,901,621
3.13
496,112
10,151,621
10,515,487
18
11.55
8,532,718
8,450,383
2.67
280,414
8,700,383
8,813,132
2.76
4,647,205
4,542,323
1.45
68,042
368,615
4,946,375
5,083,862
1.59
13,911,253
13,747,760
13,772,140
11.54
3,003,933
2,985,566
2,973,894
0.93
209,747
16,954,256
16,955,781
12.66
13,253,232
13,163,476
13,054,434
4.08
1,689,882
1,675,663
1,664,534
0.52
12.60
32,833
14,872,472
14,751,801
4.61
6,676,113
6,616,263
6,642,732
2.08
16,584
398,991
85,199
7,266,078
7,143,511
2.24
11.89
9,595,100
9,369,680
9,403,198
32,666
226,512
9,653,774
9,662,376
4,937,500
4,855,637
1.54
12.02
282,009
5,161,351
5,239,509
1.64
10,083,715
9,897,128
9,982,878
3.12
727,010
10,523,818
10,709,888
3.35
12.25
12,896,751
12,700,039
12,703,300
3.97
901,644
0.28
13,540,038
13,703,444
4.28
Dresser Utility Solutions, LLC
Bradford, PA
2nd Lien
13.96
10/1/2018
4/1/2026
Utilities: Oil & Gas
9,943,041
19
8,894,635
8,862,512
8,850,162
2.77
DTE Enterprises, LLC
DTE Holding Company, LLC Class A-2 Units
DTE Holding Company, LLC Class AA Units
852,078
6,096,064
5,950,980
5,974,143
630,082
6,568,781
6,604,225
2.07
8,536,150
8,495,851
8,023,981
56,794
42,596
1,410,357
1,325,736
10,864,491
9,392,313
890,968
12.11
5,936,305
5,799,443
5,906,623
59,850
59,551
5,942,626
6,049,090
12.13
9,802,352
0.15
10,275,837
3.21
12,756,250
12,482,481
3.99
1,070,891
13,355,814
13,827,141
4.32
(19)
2/8/2024
16,316,361
16,303,438
15,174,216
4.74
991,806
989,698
922,380
172,674
18,415,386
16,269,270
5.08
8,811,898
8,720,761
2.75
9,098,296
9,189,433
2.87
9,698,462
9,751,500
23,100
53,750
53,213
465,212
10,137,979
10,293,025
20
14.45
4,472,890
4,342,500
11,142,326
10,880,445
10,919,479
3.41
408,127
403,154
399,964
272,055
11,555,000
11,591,498
3.63
12,394,128
12,370,361
1,803,030
4,703,284
1.47
16,140,524
18,900,442
5.90
1,348,494
11.75
9,875,000
9,721,122
49,625
49,197
249,873
726,591
10,020,192
10,651,216
3.34
13,167,870
12,998,250
13,036,191
4.07
79,200
319,869
317,522
316,670
2,154,608
15,027,363
15,586,669
3,341,856
1.04
449,758
1,710,337
5,907,215
5,774,440
5,818,607
538,369
525,461
530,293
268,510
262,321
264,482
81,263
324
324,242
213,311
6,968,964
6,907,956
7,613,871
7,519,532
1,477,575
1,464,619
(6)(15)
751,355
9,408,307
9,842,801
8,481,549
8,386,574
8,396,734
6,393,699
6,312,673
6,329,762
1.98
1,044,566
15,503,631
15,771,062
4.93
21
11.12
13,176,385
12,352,226
11.22
39,800
11.39
82,292
81,689
81,881
928,462
14,081,830
13,402,369
4.19
15,689,031
15,652,169
15,453,696
1,086,000
1,081,580
1,069,710
545,759
17,287,819
17,069,165
5.33
12.19
5,718,925
1.80
8,043,856
2.54
3,009,699
213,240
16,772,480
17,143,473
5.36
5,321,375
5,303,061
1.66
4,911,947
4,895,133
1,089,662
1,088,252
531,915
526,596
1,184,219
0.37
13,154,590
12,997,261
(4)
10.96
16,625,000
16,580,562
7,491,842
7,398,788
2.34
75,000
(6)(4)
242,696
7,848,788
7,809,538
2.44
13,243,091
13,048,737
13,044,445
30,000
29,550
128,766
13,470,011
13,202,761
4.13
98,750
97,591
98,256
46,667
46,434
96,532
244,258
241,222
22
4,495,248
4,381,153
4,450,296
1.39
328,212
4,775,920
4,778,508
1.49
5,000,000
4,900,000
129,608
127,016
5,538,823
5,536,231
1.73
8,405,946
2.65
16,055,000
15,884,362
15,814,175
4.94
49,250
595,832
16,867,695
16,459,257
5.15
100,989
100,260
99,979
109,791
108,693
101,929
100,910
6,045
13,487
13,486
418,322
437,002
4,439,439
4,344,311
4,372,847
357
356,800
351,351
4,701,111
4,724,198
1.48
12.10
8/30/2024
8,317,483
8,291,166
8,275,896
2.59
5,245,036
5,228,576
5,218,811
1.63
471,147
13,960,500
14,437,001
4.52
4,882,796
1.55
226,849
103,563
5,243,852
5,326,245
13.95
7,561,754
879,589
8,356,756
8,494,589
23
NuMet Machining Techniques, LLC
Birmingham, UK
(11)(13)
11/5/2019
5/5/2026
12,563,025
Bromford Industries Limited Term Loan
7,800,000
7,728,858
20,291,883
NuSource Financial, LLC
NuSource Financial Acquisition, Inc. (SBIC II)
7/29/2026
6,028,203
5,976,818
5,907,639
8,793,840
8,753,238
3,692,025
3,663,943
1.15
2,273,286
13,389,984
14,759,151
12,764,326
12,552,435
701,538
13,159,177
13,465,864
4.21
4,026,531
1.26
13,918,747
13,880,996
4.35
1,825,410
1,820,459
0.57
962,500
384,007
17,235,150
17,661,859
5.52
9,669,444
9,518,772
9,524,402
9,542,105
9,547,385
Peltram Plumbing Holdings, LLC
12/30/2026
16,160,003
15,951,839
Peltram Group Holdings LLC Class A Units
418,449
16,517,958
16,638,452
10.72
13,216,883
13,176,183
2,765,529
0.86
15,982,412
4.99
12.57
8,837,476
8,680,057
8,793,289
586,022
9,390,657
9,379,311
12.03
5,955,000
5,850,377
5,925,225
27,257
27,121
113,278
6,121,102
6,144,014
1.92
24
12.71
9/9/2025
9,123,801
9,054,460
9,078,182
2.84
45,808
45,590
45,579
9,100,050
9,123,761
2.85
12,088,362
12,088,213
394,609
12,754,092
12,482,822
3.90
5,331,274
5,253,965
4,504,927
1.41
11.04
90,266
76,275
99,128
98,321
83,763
5,442,552
4,664,965
758,732
11.70
10,475,643
10,229,596
10,318,508
418,275
10,664,100
10,736,783
3.36
96,627
95,632
93,728
9,727,847
9,588,519
8,365,948
2.61
1,521
10,251,179
8,367,469
9,626,768
9,532,209
9,530,500
2,460,860
2,418,287
2,436,251
33,000
687,007
680,733
680,137
1,466,224
386,420
13,891,930
14,532,532
4.54
7,031,250
6,958,652
6,750,000
361,345
382
21,103
21,262
7,729,755
7,132,607
2.23
15,706,527
15,504,206
15,627,994
1,530,385
0.48
16,820,946
17,158,379
25
13,686,954
13,577,731
11,976,085
3.74
155,730
154,487
136,264
2,395,666
2,096,208
4,666,672
4,645,016
4,083,338
(14)
98,633
21,690,795
18,291,895
5.72
107,418
607,418
12,480,000
12,342,824
12,417,600
3.88
2,198,745
2,185,595
2,187,751
0.68
1,020,714
15,681,897
15,725,565
884,858,412
271.39
902,143,550
874,460,683
273.32
(554,520,895)
(173.32)
26
150,000
666,667
June 30, 2025
848,485
August 26, 2027
2,555,354
27
25,000
70,000
53,333
1,166,469
2,864,154
Revolver – Working Capital
August 30, 2024
December 30, 2026
72,743
0.75%
September 9, 2025
10,000
February 7, 2028
BSBY — Bloomberg Short-Term Bank Yield Index
28
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 March 31, 2024, the Company had issued a total of 24,125,642 shares and raised $352,021,617 in gross proceeds since Inception, incurring $11,044,123 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 $341,650,411. 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 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.
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 March 31, 2024 and December 31, 2023, the SBIC subsidiary had $75,000,000 in regulatory capital. As of both March 31, 2024 and December 31, 2023, the SBIC II subsidiary had $87,500,000 in regulatory capital.
As of both March 31, 2024 and December 31, 2023, the SBIC subsidiary had $150,000,000 of SBA-guaranteed debentures outstanding. As of both March 31, 2024 and December 31, 2023, the SBIC II subsidiary had $175,000,000 of SBA-guaranteed debentures outstanding. See footnotes (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 March 31, 2024, our asset coverage ratio was 214%.
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 months ended March 31, 2024 and March 31, 2023 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, 2023.
30
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.
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, 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 March 31, 2024, cash balances totaling $346,435, including foreign currency of $111,845 (acquisition cost of $111,845), exceeded Federal Deposit Insurance Corporation insurance protection levels of $250,000 by $96,435. In addition, as of March 31, 2024, the Company held $48,415,286 in cash equivalents, which are carried at net asset value, which is considered a Level 1 valuation technique. 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 receivables and payables approximate the fair value of these items due to the short maturity of these instruments. This is considered a Level 2 valuation technique.
The Credit Facility, SBA-guaranteed debentures, and Notes Payable (as defined in Note 11) are carried at amortized cost in the Consolidated Statements of Assets and Liabilities. As of March 31, 2024, 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 $304,465,000 and $92,626,000, respectively. See Note 6 to the consolidated financial statements for further discussion regarding the fair value measurements and hierarchy.
31
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 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
32
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 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
33
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.
A presentation of the interest income we have earned from portfolio companies for the three months ended March 31, 2024 and 2023 is as follows:
Loan interest
22,991,087
21,885,089
PIK income
750,054
769,954
Fee amortization income(1)
771,741
722,822
Fee income acceleration(2)
525,605
30,739
Total Interest Income
25,038,487
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 March 31, 2024, we had four loans on non-accrual status, which represented approximately 3.7% of our loan portfolio at cost and 2.1% at fair value. As of December 31, 2023, the Company had four loans on non-accrual status, which represented approximately 4.2% of the Company’s loan portfolio at cost and 1.3% at fair value. As of March 31, 2024 and December 31, 2023, $2,992,215 and $7,545,775, 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.
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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.
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 months ended March 31, 2024 of $370,719 and $374,763, 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 March 31, 2024 and December 31, 2023, 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 months ended March 31, 2024 and 2023 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.
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For the three months ended March 31, 2024 and 2023, the Company recorded deferred income tax provision of $192,607 and $78,760, respectively, related to the Taxable Subsidiaries. In addition, as of March 31, 2024 and December 31, 2023, the Company had a deferred tax liability of $381,500 and $188,893, 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.
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 Consolidated Statements of Assets and Liabilities as of March 31, 2024 and December 31, 2023 are as follows:
Accumulated net realized loss from investments, net of cumulative dividends of $29,808,394 for both periods
(45,516,965)
(25,107,128)
Net unrealized depreciation on non-controlled, non-affiliated investments and cash equivalents, net of deferred tax liability of $381,500 and $188,893, respectively
(3,745,618)
(27,071,601)
Net unrealized depreciation on foreign currency translations
(4,066)
(464)
Accumulated undistributed net investment income
36,763,944
36,175,872
Recently Issued Accounting Standards
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures. The amendments in this update require more disaggregated information on income taxes paid. ASU 2023-09 is effective for years beginning after December 15, 2024. Early adoption is permitted; however, the Company has not elected to adopt this provision as of the date of the financial statements contained in this Quarterly Report on Form 10-Q. The Company is still assessing the impact of the new guidance. However, it does not expect ASU 2023-09 to have a material impact on the Consolidated Financial Statements and the notes thereto.
In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures. ASU 2023-07 enhances the disclosures required for reportable segments on an annual and interim basis. ASU 2023-07 is effective on a retrospective basis for annual periods beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted; however, the Company has not elected to adopt this provision as of the date of the financial statements contained in this Quarterly Report on Form 10-Q. The Company is still assessing the impact of the new guidance. However, it does not expect ASU 2023-07 to have a material impact on the Consolidated Financial Statements and the notes thereto.
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.
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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 months ended March 31, 2024 and 2023, the Company recorded an expense for base management fees of $3,852,233 and $3,735,102, respectively. As of March 31, 2024 and December 31, 2023, $1,852,233 and $2,918,536 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:
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 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 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 incentive fee that is attributable to deferred interest until the Company actually receives such interest in cash.
For the three months ended March 31, 2024 and 2023, the Company incurred $2,509,110 and $2,124,835 of Income Incentive Fees, respectively. As of March 31, 2024 and December 31, 2023, $2,745,073 and $2,885,180, respectively, of such Income Incentive Fees were payable to the Advisor, of which $2,232,367 and $2,444,867, respectively, were currently payable (as explained below). As of March 31, 2024 and December 31, 2023, $512,706 and $440,313, respectively, of Income Incentive Fees incurred but not paid by the Company were
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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. For the three months ended March 31, 2024, $204,351 of Income Incentive Fees accrued but not paid by the Company were permanently written off due to the Cumulative Pre-Incentive Fee Net Return limitation.
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 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 March 31, 2024 and 2023, the Company reversed $0 and $569,528, respectively, related to the Capital Gains Incentive Fee. As of March 31, 2024 and December 31, 2023, no Capital Gains Incentive Fees were accrued.
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
2,304,759
1,555,307
Investment income incentive fee currently payable
2,232,367
2,444,867
Investment income incentive fee deferred
512,706
440,313
Incentive fee payable
Director Fees
For the three months ended March 31, 2024 and 2023, the Company recorded an expense relating to independent director fees of $108,250 and $117,250, respectively. As of both March 31, 2024 and December 31, 2023, the Company had no unpaid independent director fees.
Co-Investment Pursuant to SEC Order
On May 9, 2022, the Company received a new exemptive order (the “Order”) that superseded prior co-investment exemptive relief orders and permits the Company to co-invest with additional types of private funds, other BDCs, and registered investment companies
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managed by Stellus Capital or an adviser that is controlled, controlling, or under common control with Stellus Capital, subject to the conditions included therein. 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 a private BDC and private credit funds managed by Stellus Capital or an affiliate thereof that have investment strategies that are 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.
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 March 31, 2024 and December 31, 2023, there were no payables due to other investment funds or related parties 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” and “Related party payable” on the Consolidated Statements of Assets and Liabilities, respectively.
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 months ended March 31, 2024 and 2023, the Company recorded expenses of $413,678 and $383,436, respectively, related to the administration agreement and are included in “Administrative services expenses” on our Consolidated Statements of Operations. As of March 31, 2024 and December 31, 2023, $413,678 and $397,953, 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
39
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.
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 both the three months ended March 31, 2024 and 2023, the Company declared aggregate distributions of $0.40 per share on its common stock. The Company has declared aggregate distributions of $15.35 per share on its common stock since Inception:
Date Declared
Record Date
Payment Date
Per Share(1)
Fiscal 2012
Fiscal 2013
Fiscal 2014
1.42
Fiscal 2015
Fiscal 2016
Fiscal 2017
Various
Fiscal 2018
Fiscal 2019
Fiscal 2020
Fiscal 2021
1.14
Fiscal 2022
1.30
Fiscal 2023
Fiscal 2024
January 13, 2024
January 31, 2024
February 15, 2024
0.1333
February 29, 2024
March 15, 2024
March 29, 2024
April 15, 2024
15.35
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
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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 months ended March 31, 2024 or 2023.
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
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
Year ended December 31, 2023
4,458,873
62,871,349
943,248
247,701
477,088
62,157,488
14.10
352,021,617
8,395,975
2,648,148
672,917
341,650,411
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 2023 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 581,614 shares during the three months ended March 31, 2023 under the ATM Program, for gross proceeds of $8,418,160 and underwriting fees and other expenses of $196,558. The average per share offering price of shares issued in the ATM
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Program during the three months ended March 31, 2023 was $14.47. The Advisor agreed to reimburse the Company for underwriting fees and expenses to the extent the per share price of the shares to the public, less underwriting fees, was less then net asset value per share. For the three months ended March 31, 2023, the Advisor reimbursed the Company $68,967, which resulted in net proceeds of $8,290,569, or $14.38 per share, excluding the impact of offering expenses. The Company did not issue any shares during the three months ended March 31, 2024 under the ATM Program.
The Company did not issue shares of common stock through the DRIP for both the three months ended March 31, 2024 and 2023.
NOTE 5 — NET INCREASE IN NET ASSETS PER COMMON SHARE
The following information sets forth the computation of net increase in net assets resulting from operations per common share for the three months ended March 31, 2024 and 2023.
Weighted average common shares
Net 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.
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At March 31, 2024, the Company had investments in 94 portfolio companies. The composition of our investments as of March 31, 2024 is as follows:
Fair Value
Senior Secured – First Lien(1)
801,208,004
782,845,785
Senior Secured – Second Lien
12,044,047
11,948,850
Unsecured Debt
6,310,491
6,210,612
60,591,169
74,878,899
At December 31, 2023, the Company had investments in 93 portfolio companies. The composition of our investments as of December 31, 2023 was as follows:
793,819,152
774,789,320
42,269,568
21,957,500
6,138,183
5,956,280
59,916,647
71,757,583
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 March 31, 2024 and December 31, 2023, the Company had 56 and 57 of such investments with aggregate unfunded commitments of $34,404,328 and $37,021,242, 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 March 31, 2024 and December 31, 2023 were as follows:
Aggregate cost of portfolio company securities
Gross unrealized appreciation of portfolio company securities
42,426,157
38,379,839
Gross unrealized depreciation of portfolio company securities
(45,790,275)
(65,262,547)
Gross unrealized appreciation on foreign currency translations of portfolio company securities
8,198
11,142
Gross unrealized depreciation on foreign currency translations of portfolio company securities
(913,645)
(811,301)
Aggregate fair value of portfolio company securities
43
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 March 31, 2024 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, 2023 are as follows:
The change in aggregate values of Level 3 portfolio investments during the three months ended March 31, 2024 are as follows:
Senior Secured
Loans-First
Loans-Second
Lien
Debt
Fair value at beginning of period
27,776,073
727,067
28,516,430
Payment-in-kind interest
595,228
154,826
Sales and redemptions
(21,648,975)
(9,782,348)
(52,543)
(31,483,866)
Realized losses
(20,475,000)
Change in unrealized appreciation included in earnings(1)
769,881
20,216,870
82,238
2,449,601
Change in unrealized depreciation on foreign currency included in earnings
(102,267)
(212)
(2,809)
(105,288)
666,525
31,828
4,190
702,543
Fair value at end of period
There were no Level 3 transfers during the three months ended March 31, 2024.
44
The change in aggregate values of Level 3 portfolio investments during the year ended December 31, 2023 are as follows:
735,555,508
45,304,300
4,823,898
59,049,932
844,733,638
174,156,432
62,086
13,251,090
187,469,608
3,185,845
613,998
3,799,843
(125,442,776)
(9,882,105)
(211,627)
(2,280,087)
(137,816,595)
(11,200,184)
(17,979,749)
(702,093)
(29,882,026)
Change in unrealized (depreciation) appreciation included in earnings(1)
(4,667,866)
4,373,111
651,997
2,434,910
2,792,152
Change in unrealized appreciation on foreign currency included in earnings
610,523
166
3,831
614,520
2,591,838
141,943
15,762
2,749,543
There were no Level 3 transfers during the year ended December 31, 2023.
45
The following is a summary of geographical concentration of our investment portfolio as of March 31, 2024:
% of Total
Investments at
Texas
182,450,677
174,944,018
19.98
California
177,062,291
171,421,469
19.58
Florida
92,637,917
91,343,527
10.43
Illinois
60,045,881
50,894,890
5.81
Pennsylvania
50,132,639
50,390,758
Arizona
42,028,750
44,744,792
5.11
Ohio
30,822,781
33,646,988
3.84
Colorado
31,513,532
31,206,672
3.56
Wisconsin
27,435,035
26,522,115
3.03
New York
23,422,998
23,674,222
Georgia
18,852,732
16,642,379
16,673,384
District of Columbia
Indiana
North Carolina
Canada
12,918,902
13,073,546
New Jersey
10,367,749
11,209,346
Michigan
1.23
Massachusetts
1.20
Tennessee
1.08
Missouri
1.01
Idaho
Washington
8,276,815
8,307,038
Minnesota
0.70
Louisiana
South Carolina
United Kingdom
46
The following is a summary of geographical concentration of our investment portfolio as of December 31, 2023:
at Fair Value
182,531,256
175,311,724
20.04
175,207,692
167,713,589
19.18
93,155,844
92,297,574
10.55
49,939,315
50,188,102
58,633,617
49,834,429
5.70
42,136,322
44,558,279
5.10
31,805,370
34,370,277
3.93
31,525,420
30,971,079
3.54
27,452,444
26,190,771
3.00
24,321,085
24,540,695
18,885,409
2.16
16,676,194
16,718,728
1.91
14,692,043
14,931,263
1.71
10,461,226
11,191,295
1.07
20,710,205
47
The following is a summary of industry concentration of our investment portfolio as of March 31, 2024:
197,937,690
209,619,236
23.94
108,417,180
110,328,971
12.61
71,603,900
72,553,276
8.28
62,240,408
63,533,613
63,003,175
52,686,261
6.02
42,350,360
46,034,041
5.26
48,514,565
43,572,505
40,632,591
42,389,663
27,947,881
26,392,967
27,195,732
25,280,263
2.89
25,011,083
24,001,700
18,306,671
18,043,304
2.06
2.01
1.89
15,903,214
15,957,856
11,387,780
1.16
6,847,793
0.78
557,135
6,825,990
5,781,913
5,891,784
48
The following is a summary of industry concentration of our investment portfolio as of December 31, 2023:
198,018,290
207,963,749
23.78
100,724,952
102,915,887
11.77
90,795,799
91,992,012
10.52
57,640,321
58,741,061
6.72
63,145,301
52,938,611
6.05
42,554,582
45,074,817
49,046,730
43,725,324
32,517,673
33,879,801
33,976,976
33,260,111
3.80
30,319,119
30,486,411
3.49
46,745,104
24,541,921
24,219,811
22,997,844
17,952,103
20,760,920
2.37
2.02
18,338,366
17,569,176
0.96
5,662,174
5,763,247
569,039
5,736,868
49
The following provides quantitative information about Level 3 fair value measurements as of March 31, 2024:
Description:
Valuation Technique
Unobservable Inputs
Range (Average)(1)(3)
First lien debt
Income/Market
HY credit spreads,
-4.12% to 6.99% (-0.67%)
approach(2)
Risk free rates
-2.73% to 2.59% (0.46%)
Market multiples
5.2x to 22.5x (11.0x)(4)
Second lien debt
-1.45% to -0.77% (-1.11%)
0.05% to 0.07% (0.06%)
6.5x to 8.7x (7.6x)(4)
Unsecured debt
-0.55% to -0.55% (-0.55%)
0.04% to 0.04% (0.04%)
9.5x to 9.5x (9.5x)(4)
Equity investments
Market approach(5)
Underwriting multiple/
EBITDA multiple
3.6x to 23.4x (12.3x)
Total Long Term Level 3 Investments
50
The following provides quantitative information about Level 3 fair value measurements as of December 31, 2023:
-3.00% to 8.11% (-0.23%)
-1.62% to 2.03% (0.04%)
-0.97% to -0.33% (-0.63%)
-0.51% to 0.31% (-0.23%)
6.5x to 17.5x (10.9x)(4)
4.98% to 4.98% (4.98%)
4.47% to 4.47% (4.47%)
3.5x to 23.2x (12.1x)
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.
51
As of March 31, 2024, the Company had $34,106,016 in unfunded debt commitments and $298,312 in unfunded equity commitments to 56 existing portfolio companies. As of December 31, 2023, the Company had $36,722,930 in unfunded debt commitments and $298,312 in unfunded equity commitments to 57 existing portfolio companies. As of March 31, 2024, 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.
NOTE 8 — FINANCIAL HIGHLIGHTS
Per Share Data:(1)
Net asset value at beginning of period
14.02
Change in unrealized appreciation (depreciation) on investments
0.98
(0.21)
Net realized loss
(0.85)
(0.01)
Total from operations
Sales load
Stockholder distributions from:
(0.40)
Accretive effect of stock offerings (issuing shares above net asset value per share)
Other(6)
Net asset value at end of period
13.87
Per share market value at end of period
13.08
14.09
Total return based on market value(2)
3.7
8.2
Weighted average shares outstanding for the period
Ratio/Supplemental Data:(1)
Net assets at end of period
Weighted average net assets
319,978,256
277,747,062
Annualized ratio of gross operating expenses to net assets(5)
20.07
21.94
Annualized ratio of net operating expenses to net assets(5)(6)
19.82
Annualized ratio of interest expense and other fees to net assets
9.74
Annualized ratio of net investment income before fee waiver to net assets(5)
13.24
Annualized ratio of net investment income to net assets(5)
12.83
Portfolio turnover(3)
13.07
Notes payable
100,000,000
184,650,119
198,277,831
325,000,000
313,600,000
Asset coverage ratio(4)
2.14
x
1.94
52
NOTE 9 — CREDIT FACILITY
On October 11, 2017, we 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, May 13, 2022 and November 21, 2023, 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 $260,000,000 on a committed basis with an accordion feature that allows the Company to increase the aggregate commitments up to $350,000,000, subject to new or existing lenders agreeing to participate in the increase and other customary conditions.
Pursuant to the Fourth Amendment 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 November 21, 2027, 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 November 21, 2028.
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 1.75 to 1.00. As of March 31, 2024 and December 31, 2023, the Company was in compliance with these covenants.
As of March 31, 2024 and December 31, 2023, $184,650,119 and $160,085,705, 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 $6,630,390 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 March 31, 2024 and December 31, 2023, $3,306,190 and $3,520,929 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:
160,085,705
Prepaid loan structure fees
(3,306,190)
(3,520,929)
Credit Facility payable, net of prepaid loan structure fees
53
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 months ended March 31, 2024 and 2023:
Interest expense
3,238,636
3,695,476
Loan fee amortization
Total interest and financing expenses
3,503,343
3,839,298
Weighted average interest rate
8.5
7.3
Effective interest rate (including fee amortization)
9.1
7.6
Average debt outstanding
154,110,158
204,426,259
Cash paid for interest and unused fees
3,180,209
3,633,518
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 March 31, 2024 and December 31, 2023, 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 March 31, 2024 and December 31, 2023, the SBIC II subsidiary had $87,500,000 in regulatory capital. As of both March 31, 2024 and December 31, 2023, the SBIC II subsidiary had $175,000,000 of SBA-guaranteed debentures outstanding.
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 $498,485,510 and $485,152,670 in assets at March 31, 2024 and December 31, 2023, respectively, which accounted for approximately 53.3% and 53.4% 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.
54
The following table summarizes the SBIC subsidiaries’ aggregate SBA-guaranteed debentures outstanding as of March 31, 2024:
Issuance Date
Licensee
Maturity Date
Debenture Amount
Interest Rate
SBA Annual Charge
October 14, 2014
SBIC I
March 1, 2025
6,500,000
2.52
October 17, 2014
December 24, 2014
3,250,000
June 29, 2015
September 1, 2025
9,750,000
October 22, 2015
March 1, 2026
1,500,000
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
3.55
July 30, 2018
17,500,000
September 25, 2018
March 1, 2029
2,500,000
3.11
Total SBIC I Subsidiary SBA-guaranteed Debentures
150,000,000
October 17, 2019
SBIC II
March 1, 2030
6,000,000
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
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
5.69
September 19, 2023
March 1, 2034
2,280,000
5.04
Total SBIC II Subsidiary SBA-guaranteed Debentures
175,000,000
Total SBA-guaranteed Debentures
55
As of March 31, 2024 and December 31, 2023, the SBA-guaranteed debentures would be deemed to be Level 3, as defined in Note 6.
As of both March 31, 2024 and December 31, 2023, the Company has incurred $11,148,750 in financing costs related to the SBA-guaranteed debentures since receiving its licenses, which were recorded as prepaid loan fees. As of March 31, 2024 and December 31, 2023, $4,412,588 and $4,726,642 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-guaranteed Debentures payable
Prepaid loan fees
(4,412,588)
(4,726,642)
SBA-guaranteed Debentures, net of prepaid loan fees
The following table summarizes the interest expense and amortized fees on the SBA-guaranteed debentures for the three months ended March 31, 2024 and 2023:
2,614,051
2,400,718
Debenture fee amortization
2,928,106
2,718,226
3.2
3.1
3.6
3.5
Cash paid for interest
5,201,848
4,680,999
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, 2021. As of both March 31, 2024 and December 31, 2023, 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 March 31, 2024 and December 31, 2023, $892,214 and $1,003,588 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.
56
The following table summarizes the interest expense and deferred financing costs on the Notes Payable for the three months ended March 31, 2024 and 2023:
1,224,750
1,218,750
Deferred financing costs
1,336,124
1,328,900
4.9
5.4
2,443,500
2,437,500
The following is a summary of the Notes Payable, net of deferred financing costs:
(892,214)
(1,003,588)
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 longer be subject to the reporting requirements under the Exchange Act. As of March 31, 2024 and 2023, 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 March 31, 2024:
Activity Type
Company Name
Company Description
Investment Amount
Instrument Type
New Investment
April 1, 2024
FairWave Holdings, LLC
Specialty coffee platform
7,615,265
2,665,343
Delayed Draw Term Loan Commitment
1,142,290
Revolver Commitment
285,572
April 11, 2024
WER Holdings, LLC
Regional provider of commercial landscaping services
2,704,164
1,338,695
401,609
180,300
Add-On Investment
April 16, 2024
Impact Home Services LLC*
Residential garage door, electrical, and plumbing services provider
8,932
90,773
April 22, 2024
Exacta Land Surveyors, LLC*
Provider of land survey and field management services to facilitate real estate transactions
2,164
* Existing portfolio company
57
The Company realized the following portfolio company investment subsequent to March 31, 2024:
Proceeds Received
Realized Gain
Full Repayment
May 1, 2024
Nutritional Medicinals, LLC*
Manufacturer and distributor of organic whole food, plant-based feeding tube formulas and meal replacement kits.
11,421,291
2,950,929
1,978,126
Credit Facility
The outstanding balance under the Credit Facility as of May 9, 2024 was $172,500,000.
Dividends Declared
On April 3, 2024, the Board declared a regular monthly dividend for each of April 2024, May 2024, and June 2024 as follows:
Ex-Dividend
Record
Payment
Amount per
Declared
Share
4/3/2024
4/29/2024
4/30/2024
5/15/2024
5/31/2024
6/14/2024
6/28/2024
7/15/2024
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 March 31, 2024, 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 March 31, 2024, our asset coverage ratio was 214%. 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.
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 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.
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As of March 31, 2024, we had $875.9 million (at fair value) invested in 94 portfolio companies. As of March 31, 2024, our portfolio included approximately 90% of first lien debt, 1% of second lien debt, 1% of unsecured debt and 8% of equity investments at fair value. The composition of our investments at cost and fair value as of March 31, 2024 was as follows:
As of December 31, 2023, we had $874.5 million (at fair value) invested in 93 portfolio companies. As of December 31, 2023, our portfolio included approximately 89% of first lien debt, 2% of second lien debt, 1% of unsecured debt and 8% of equity investments at fair value. The composition of our investments at cost and fair value as of December 31, 2023 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 March 31, 2024 and December 31, 2023, we had unfunded commitments of $34.4 million and $37.0 million, respectively, to provide financing to 56 and 57 portfolio companies, respectively. As of March 31, 2024, 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.
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62
63
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At March 31, 2024, our average portfolio company investment at amortized cost and fair value was approximately $9.2 million and $9.2 million, respectively, and our largest portfolio company investment at amortized cost and fair value was $22.0 million and $19.5 million, respectively. At December 31, 2023, our average portfolio company investment at amortized cost and fair value was approximately $9.7 million and $9.4 million, respectively, and our largest portfolio company investment at amortized cost and fair value was approximately $21.7 million and $18.9 million, respectively.
At both March 31, 2024 and December 31, 2023, 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 both March 31, 2024 and December 31, 2023 was approximately 11.9%. The weighted average yield on all of our investments, including non-income producing equity positions, as of both March 31, 2024 and December 31, 2023 was approximately 11.1%. 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 March 31, 2024 and December 31, 2023, we had cash and cash equivalents of $48.8 million and $26.1 million, respectively.
Investment Activity
During the three months ended March 31, 2024, we made an aggregate of $28.5 million of investments in three new portfolio companies and eight existing portfolio companies. During the three months ended March 31, 2024, we received an aggregate of $31.2 million in proceeds from repayments of our investments.
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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 March 31, 2024
As of December 31, 2023
(dollars in millions)
Portfolio
Investment Category
Companies(1)
222.9
214.1
495.5
535.3
137.6
107.2
14.9
11.1
5.0
6.8
875.9
100
95
874.5
94
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 March 31, 2024, we had loans to four portfolio companies that were on non-accrual status, which represented approximately 3.7% of our loan portfolio at cost and 2.1% at fair value. As of December 31, 2023, we had loans to four 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 March 31, 2024 and December 31, 2023, $3.0 million and $7.5 million of income from investments on non-accrual had not been accrued, respectively.
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
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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 months ended March 31, 2024 and 2023
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 months ended March 31, 2024 and 2023 (in millions).
Interest income(1)
23.8
22.6
PIK interest
0.8
Miscellaneous fees(1)
1.5
0.7
26.0
24.1
The increase in investment 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:
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The following shows the breakdown of operating expenses for the three months ended March 31, 2024 and 2023 (in millions).
Operating Expenses
3.9
0.2
0.5
2.5
2.1
(0.6)
0.3
0.4
0.1
7.8
7.9
16.0
15.0
(0.2)
15.8
The increase in operating expenses for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 was due to (1) higher management fees due to a larger investment portfolio and (2) higher incentive fees due to portfolio performance, offset by the Income Incentive Fee Waiver.
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For the three months ended March 31, 2024, net investment income was $10.2 million, or $0.42 per common share (based on 24,125,642 weighted average shares outstanding for the three months ended March 31, 2024).
For the three months ended March 31, 2023, net investment income was $9.1 million, or $0.46 per common share (based on 19,779,988 weighted average shares outstanding for the three months ended March 31, 2023).
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 net 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 March 31, 2024 totaled $30.7 million and net realized losses totaled $20.4 million.
Proceeds from repayments of investments and amortization of certain other investments for the three months ended March 31, 2023 totaled $5.9 million and net realized gains totaled $0.0 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 appreciation (depreciation) on investments and cash equivalents for the three months ended March 31, 2024 and 2023 totaled $23.5 million and ($4.2) million, respectively.
The change in unrealized appreciation (depreciation) over the respective periods was due to reversals of previous write-downs that were realized and company-specific investment write-downs, offset by company-specific write-ups.
Provision for Taxes on Unrealized 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 March 31, 2024 and 2023, we recognized a provision for income tax on unrealized investments of $0.2 million and $0.1 million for the Taxable Subsidiaries, respectively. As of March 31, 2024 and December 31, 2023, there was $0.4 million and $0.2 million of deferred tax liabilities on the Consolidated Statements of Assets and Liabilities, respectively.
For the three months ended March 31, 2024, net increase in net assets resulting from operations totaled $13.1 million, or $0.54 per common share (based on 24,125,642 weighted average shares outstanding for the three months ended March 31, 2024).
For the three months ended March 31, 2023, net increase in net assets resulting from operations totaled $4.7 million, or $0.24 per common share (based on 19,779,988 weighted average shares outstanding for the three months ended March 31, 2023).
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The net increase in net assets between the respective periods was due to higher unrealized appreciation, offset by increased net realized losses in the current year.
Financial Condition, Liquidity and Capital Resources
Cash Flows from Operating and Financing Activities
Our operating activities provided net cash of $4.5 million for the three months ended March 31, 2024, primarily in connection with sales and repayments of portfolio investments, offset by the purchase of portfolio investments. Our financing activities for the three months ended March 31, 2024 provided cash of $18.2 million primarily from proceeds from net borrowings on our Credit Facility for the purchase of portfolio investments.
Our operating activities used net cash of $32.0 million for the three months ended March 31, 2023, primarily in connection with the purchase of portfolio investments, offset by sales and repayments of portfolio investments. Our financing activities for the three months ended March 31, 2023 provided cash of $1.9 million primarily from proceeds from the issuance of common stock, offset by stockholder distributions and net paydowns 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 (as defined below), 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.
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 March 31, 2024 and December 31, 2023, our asset coverage ratio was 214% and 223%, 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 March 31, 2024 and December 31, 2023, we had cash and cash equivalents of $48.8 million and $26.1 million, respectively.
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The Credit Facility provides for borrowings up to a maximum of $260.0 million on a committed basis with an accordion feature that allows us to increase the aggregate commitments up to $350.0 million, subject to new or existing lenders agreeing to participate in the increase and other customary conditions.
Pursuant to the Fourth Amendment to the Amended and Restated Senior Secured Revolving Credit Agreement, the Credit Facility will bear interest, subject to our election, on a per annum basis equal to (i) term SOFR plus 2.50% (or 2.75% during certain periods in which our 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 our 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%. We pay 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 November 21, 2027, after which we 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 November 21, 2028.
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 minimum interest coverage ratio of at least 1.75 to 1.00. As of March 31, 2024 and December 31, 2023, we were in compliance with these covenants.
As of March 31, 2024 and December 31, 2023, $184.7 million and $160.1 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 $6.6 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 March 31, 2024 and December 31, 2023, $3.5 million and $3.3 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 months ended March 31, 2024 and 2023 (dollars in millions):
3.8
154.1
204.4
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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 March 31, 2024 and December 31, 2023, 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 March 31, 2024 and December 31, 2023, the SBIC II subsidiary had $87.5 million in regulatory capital. As of both March 31, 2024 and December 31, 2023, the SBIC II subsidiary had $175.0 million of SBA-guaranteed debentures outstanding.
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 $498.5 million and $485.2 million in assets at March 31, 2024 and December 31, 2023, respectively, which accounted for approximately 53.3% 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.
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 March 31, 2024 and December 31, 2023, the SBA-guaranteed debentures would be deemed to be Level 3, as defined in Note 6 to the Consolidated Financial Statements.
As of March 31, 2024, 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 March 31, 2024 and December 31, 2023, $4.4 million and $4.7 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 months ended March 31, 2024 and 2023 (dollars in millions):
2.6
2.4
2.9
2.7
325.0
313.6
5.2
4.7
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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, 2021.
As of both March 31, 2024 and December 31, 2023, 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 $0.9 million and $1.0 million remains to be amortized as of March 31, 2024 and December 31, 2023, 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 months ended March 31, 2024 and 2023 (dollars in millions):
1.2
1.3
100.0
ATM Program
On August 11, 2023, we entered into an equity distribution agreement (the “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, we may issue and sell, from time to time, up to $100,000,000 in aggregate offering price of shares of our 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. We refer to our issuance and sale of shares under the Equity Distribution Agreement as the “ATM Program.”
We issued 581,614 shares during the three months ended March 31, 2023 under the ATM Program, for gross proceeds of $8.4 million and underwriting fees and other expenses of $0.2 million. The average per share offering price of shares issued in the ATM Program during the three months ended March 31, 2023 was $14.47. The Advisor agreed to reimburse us for underwriting fees and expenses to the extent the per share price of the shares to the public, less underwriting fees, was less then net asset value per share. For the three months ended March 31, 2023, the Advisor reimbursed us $0.1 million, which resulted in net proceeds of $8.3 million, or $14.38 per share, excluding the impact of offering expenses. We did not issue any shares during the three months ended March 31, 2024 under the ATM Program.
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 March 31, 2024, we had $34.1 million in unfunded debt commitments and $0.3 million in unfunded equity commitments to 56 existing portfolio companies. As of December 31, 2023, we had $36.7 million in unfunded debt commitments and $0.3 million in unfunded equity commitments to 57 existing portfolio companies. As of March 31, 2024, we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded loan commitments should the need arise.
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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, 2023, we had $37.0 million of undistributed taxable income that will be carried forward toward distributions paid during the year ending December 31, 2024.
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.
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.
74
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 May 9, 2024 was $172.5 million.
Dividend Declared
75
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We are subject to financial market risks, including changes in interest rates. In connection with the COVID-19 pandemic, the U.S. Federal Reserve (the “Federal Reserve”) and other central banks had reduced certain interest rates. However, in March 2022, the Federal Reserve raised interest rates for the first time since December 2018, and subsequently raised interest rates several times, most recently in July 2023, bringing the target for the federal funds rate to 5.25% - 5.50%, the highest since January 2001. As of both March 31, 2024 and December 31, 2023, 98% of the loans in our portfolio bore interest at a floating rate. These floating rate loans typically bear interest in reference to SOFR, which is indexed to 30-day or 90-day SOFR rates, subject to an interest rate floor. As of March 31, 2024 and December 31, 2023, the weighted average interest rate floor on our floating rate loans was 1.32% and 1.26%, respectively.
Assuming that the Consolidated Statements of Assets and Liabilities as of March 31, 2024 were to remain constant and no actions were taken to alter the existing interest rate sensitivity, the following table shows the annual impact on net income of changes in interest rates:
($ in millions)
Interest
Net Interest
Change in Basis Points(2)
Income
Expense(3)
Income(1)
Up 200 basis points
(3.7)
12.1
Up 150 basis points
11.9
(2.8)
Up 100 basis points
(1.8)
6.1
Up 50 basis points
4.0
(0.9)
Down 50 basis points
(4.0)
0.9
(3.1)
Down 100 basis points
(7.9)
1.8
(6.1)
Down 150 basis points
(11.9)
2.8
(9.1)
Down 200 basis points
(15.8)
(12.1)
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 months ended March 31, 2024 and 2023, 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 March 31, 2024 that has materially affected, or is reasonable likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1.Legal Proceedings
We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us 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, 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 March 4, 2024, all of which could materially affect our business, financial condition and/or results of operations. Although the risks described 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.
During the three months ended March 31, 2024, there have been no material changes to the risk factors discussed in our SEC filings referenced above.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
We did not engage in unregistered sales of equity securities during the three months ended March 31, 2024.
No shares were issued under the distribution reinvestment program during either of the three months ended March 31, 2024 and 2023.
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 March 31, 2024, 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).
4.1
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: May 9, 2024
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