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What changed in Stellus Capital Investment Corp's 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of Stellus Capital Investment Corp's 2023 and 2024 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2024 report.

+513 added−518 removedSource: 10-K (2025-03-04) vs 10-K (2024-03-04)

Top changes in Stellus Capital Investment Corp's 2024 10-K

513 paragraphs added · 518 removed · 449 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

158 edited+20 added−9 removed192 unchanged
Biggest changeQualifying assets include investments in “eligible portfolio companies.” 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 of business in the United States.
Biggest changeQualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes any issuer that (i) is organized and with their principal of business in the United States, (ii) is not an investment company (other than SBICs (as defined below) that are wholly owned subsidiaries of a BDC) or a company that would be an investment company but for certain exclusions under the 1940 Act, and (iii) satisfies any one of the following criteria: such company (a) has a market capitalization of less than $250 million or does not have a class of securities listed on a national securities exchange, (b) is controlled by a BDC or a group of companies including a BDC, the BDC actually exercises a controlling influence over the management or policies of the company, and, as a result thereof, the BDC has an affiliated person who is a director of the company, or (c) is a small and solvent company having total assets of not more than $4 million and capital and surplus of not less than $2 million.
We co-invest, subject to the conditions in the Order, with an affiliated private BDC and other private credit funds managed by Stellus Capital Management that have an investment strategy that is similar or identical to our investment strategy, and we may co-invest with other BDCs and registered investment companies managed by Stellus Capital Management or an adviser that is controlled, controlling, or under common control with Stellus Capital Management in the future.
We co-invest, subject to the conditions in the Order, with an affiliated private BDC and other private credit funds managed by Stellus Capital Management that have an investment strategy that is similar or identical to our investment strategy, and we may co-invest with other BDCs, registered investment companies and other private credit funds managed by Stellus Capital Management or an adviser that is controlled, controlling, or under common control with Stellus Capital Management in the future.
For instance, as a BDC, we may 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.
For instance, as a BDC, we may not acquire any assets other than “qualifying assets” as specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets.
These transactions tend to offer stronger covenant packages, higher interest rates, lower leverage levels and better call protection compared to larger financings. In addition, middle-market loans typically offer other investor protections such as default penalties, lien protection, change of control provisions and information rights for lenders.
These transactions tend to offer stronger covenant packages, higher interest rates, lower leverage levels and better call protection compared to larger financings. In addition, lower middle-market loans typically offer other investor protections such as default penalties, lien protection, change of control provisions and information rights for lenders.
In addition, we co-invest with private credit funds and a private BDC managed by Stellus Capital Management or its affiliates that have a similar, overlapping or identical investment strategy as us and where doing so is consistent with conditions of the Order, and we may co-invest with other BDCs and registered investment companies managed by Stellus Capital Management or an adviser that is controlled, controlling, or under common control with Stellus Capital Management in the future.
In addition, we co-invest with private credit funds and a private BDC managed by Stellus Capital Management or its affiliates that have a similar, overlapping or identical investment strategy as us and where doing so is consistent with conditions of the Order, and we may co-invest with other BDCs, registered investment companies, and private credit funds managed by Stellus Capital Management or an adviser that is controlled, controlling, or under common control with Stellus Capital Management in the future.
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 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 to designate certain parties to perform fair value determinations, subject to board oversight and certain other conditions.
Example 3: Capital Gains Portion of Incentive Fee(*): Alternative 1: Assumptions Year 1: $2.0 million investment made in Company A (“Investment A”), and $3.0 million investment made in Company B (“Investment B”) Year 2: Investment A sold for $5.0 million and fair market value (“FMV”) of Investment B determined to be $3.5 million Year 3: FMV of Investment B determined to be $2.0 million Year 4: Investment B sold for $3.25 million The capital gains portion of the incentive fee would be: Year 1: None Year 2: Capital gains incentive fee of $0.6 million — ($3.0 million realized capital gains on sale of Investment A multiplied by 20.0%) Year 3: None — $0.4 million (20.0% multiplied by ($3.0 million cumulative capital gains less $1.0 million cumulative capital depreciation)) less $0.6 million (previous capital gains fee paid in Year 2) Year 4: Capital gains incentive fee of $50,000 — $0.65 million ($3.25 million cumulative realized capital gains multiplied by 20.0%) less $0.6 million (capital gains incentive fee taken in Year 2) Alternative 2 Assumptions Year 1: $2.0 million investment made in Company A (“Investment A”), $5.25 million investment made in Company B (“Investment B”) and $4.5 million investment made in Company C (“Investment C”) Year 2: Investment A sold for $4.5 million, FMV of Investment B determined to be $4.75 million and FMV of Investment C determined to be $4.5 million Year 3: FMV of Investment B determined to be $5.0 million and Investment C sold for $5.5 million Year 4: FMV of Investment B determined to be $6.0 million Year 5: Investment B sold for $4.0 million The capital gains incentive fee, if any, would be: Year 1: None 20 Table of Contents Year 2: $0.4 million capital gains incentive fee — 20.0% multiplied by $2.0 million ($2.5 million realized capital gains on Investment A less $0.5 million unrealized capital depreciation on Investment B) Year 3: $0.25 million capital gains incentive fee (1) — $0.65 million (20.0% multiplied by $3.25 million ($3.5 million cumulative realized capital gains less $0.25 million unrealized capital depreciation)) less $0.4 million capital gains incentive fee received in Year 2 Year 4: $0.05 million capital gains incentive fee — $0.7 million ($3.50 million cumulative realized capital gains multiplied by 20.0%) less $0.65 million cumulative capital gains incentive fee paid in Year 2 and Year 3 Year 5: None — $0.45 million (20.0% multiplied by $2.25 million (cumulative realized capital gains of $3.5 million less realized capital losses of $1.25 million)) less $0.7 million cumulative capital gains incentive fee paid in Year 2, Year 3 and Year 4 (2) * The hypothetical amounts of returns shown are based on a percentage of our total net assets and assume no leverage.
Example 3: Capital Gains Portion of Incentive Fee(*): Alternative 1: Assumptions Year 1: $2.0 million investment made in Company A (“Investment A”), and $3.0 million investment made in Company B (“Investment B”) Year 2: Investment A sold for $5.0 million and fair market value (“FMV”) of Investment B determined to be $3.5 million Year 3: FMV of Investment B determined to be $2.0 million Year 4: Investment B sold for $3.25 million The capital gains portion of the incentive fee would be: Year 1: None Year 2: Capital gains incentive fee of $0.6 million — ($3.0 million realized capital gains on sale of Investment A multiplied by 20.0%) 20 Table of Contents Year 3: None — $0.4 million (20.0% multiplied by ($3.0 million cumulative capital gains less $1.0 million cumulative capital depreciation)) less $0.6 million (previous capital gains fee paid in Year 2) Year 4: Capital gains incentive fee of $50,000 — $0.65 million ($3.25 million cumulative realized capital gains multiplied by 20.0%) less $0.6 million (capital gains incentive fee taken in Year 2) Alternative 2 Assumptions Year 1: $2.0 million investment made in Company A (“Investment A”), $5.25 million investment made in Company B (“Investment B”) and $4.5 million investment made in Company C (“Investment C”) Year 2: Investment A sold for $4.5 million, FMV of Investment B determined to be $4.75 million and FMV of Investment C determined to be $4.5 million Year 3: FMV of Investment B determined to be $5.0 million and Investment C sold for $5.5 million Year 4: FMV of Investment B determined to be $6.0 million Year 5: Investment B sold for $4.0 million The capital gains incentive fee, if any, would be: Year 1: None Year 2: $0.4 million capital gains incentive fee — 20.0% multiplied by $2.0 million ($2.5 million realized capital gains on Investment A less $0.5 million unrealized capital depreciation on Investment B) Year 3: $0.25 million capital gains incentive fee (1) — $0.65 million (20.0% multiplied by $3.25 million ($3.5 million cumulative realized capital gains less $0.25 million unrealized capital depreciation)) less $0.4 million capital gains incentive fee received in Year 2 Year 4: $0.05 million capital gains incentive fee — $0.7 million ($3.50 million cumulative realized capital gains multiplied by 20.0%) less $0.65 million cumulative capital gains incentive fee paid in Year 2 and Year 3 Year 5: None — $0.45 million (20.0% multiplied by $2.25 million (cumulative realized capital gains of $3.5 million less realized capital losses of $1.25 million)) less $0.7 million cumulative capital gains incentive fee paid in Year 2, Year 3 and Year 4 (2) * The hypothetical amounts of returns shown are based on a percentage of our total net assets and assume no leverage.
(2) As noted above, it is possible that the cumulative aggregate capital gains fee received by Stellus Capital Management ($0.70 million) is effectively greater than $0.45 million (20.0% of cumulative aggregate realized capital gains less net realized capital losses or net unrealized depreciation ($2.25 million)). ​ 21 Table of Contents Payment of Our Expenses All investment professionals of Stellus Capital Management, when and to the extent engaged in providing investment advisory and management services to us, and the compensation and routine overhead expenses of personnel allocable to these services to us, are provided and paid for by Stellus Capital Management and not by us.
(2) As noted above, it is possible that the cumulative aggregate capital gains fee received by Stellus Capital Management ($0.70 million) is effectively greater than $0.45 million (20.0% of cumulative aggregate realized capital gains less net realized capital losses or net unrealized depreciation ($2.25 million)). ​ 21 Table of Contents Payment of Our Expenses All investment professionals of Stellus Capital Management, when and to the extent engaged in providing investment advisory and management services, and the compensation and routine overhead expenses of personnel allocable to these services to us, are provided and paid for by Stellus Capital Management and not by us.
We bear all other out-of-pocket costs and expenses of our operations and transactions, including, without limitation, those relating to: ● organization and offering; ● calculating our net asset value (including the cost and expenses of any independent valuation firm); ● fees and expenses payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments; ● interest payable on debt, if any, incurred to finance our investments and expenses related to unsuccessful portfolio acquisition efforts; ● offerings of our common stock and other securities; ● base management and incentive fees; ● administration fees and expenses, if any, payable under the Administration Agreement (including our allocable portion of Stellus Capital Management’s overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our Chief Compliance Officer and Chief Financial Officer and his staff); ● transfer agent, dividend agent and custodial fees and expenses; ● U.S. federal and state registration fees; ● all costs of registration and listing our shares on any securities exchange; ● U.S. federal, state and local taxes; ● independent directors’ fees and expenses; ● costs of preparing and filing reports or other documents required by the SEC or other regulators; ● costs of any reports, proxy statements or other notices to stockholders, including printing costs; ● costs and fees associated with any fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums; ● direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; ● proxy voting expenses; and ● all other expenses incurred by us or Stellus Capital Management in connection with administering our business. 22 Table of Contents Duration and Termination Unless terminated earlier as described below, the Investment Advisory Agreement will continue in effect from year to year if approved annually by our Board or by the affirmative vote of the holders of a majority of our outstanding voting securities, and, in either case, if also approved by a majority of the independent directors.
We bear all other out-of-pocket costs and expenses of our operations and transactions, including, without limitation, those relating to: ● our organization and offering; ● calculating our net asset value (including the cost and expenses of any independent valuation firm); ● fees and expenses payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments; ● interest payable on debt, if any, incurred to finance our investments and expenses related to unsuccessful portfolio acquisition efforts; ● offerings of our common stock and other securities; ● base management and incentive fees; ● administration fees and expenses, if any, payable under the Administration Agreement (including our allocable portion of Stellus Capital Management’s overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our Chief Compliance Officer and Chief Financial Officer and his staff); ● transfer agent, dividend agent and custodial fees and expenses; ● U.S. federal and state registration fees; ● all costs of registration and listing our shares on any securities exchange; ● U.S. federal, state and local taxes; ● independent directors’ fees and expenses; ● costs of preparing and filing reports or other documents required by the SEC or other regulators; ● costs of any reports, proxy statements or other notices to stockholders, including printing costs; ● costs and fees associated with any fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums; ● direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; ● proxy voting expenses; and ● all other expenses incurred by us or Stellus Capital Management in connection with administering our business. 22 Table of Contents Duration and Termination Unless terminated earlier as described below, the Investment Advisory Agreement will continue in effect from year to year if approved annually by our Board or by the affirmative vote of the holders of a majority of our outstanding voting securities, and, in either case, if also approved by a majority of the independent directors.
For example, based on the experience of Stellus Capital Management’s senior investment professionals, lending to middle-market companies in the United States (a) is generally more labor intensive than lending to larger companies due to the smaller size of each investment and the fragmented nature of the information available with respect to such companies, (b) requires specialized due diligence and underwriting capabilities, and (c) may also require more extensive ongoing monitoring by the lender.
For example, based on the experience of Stellus Capital Management’s senior investment professionals, lending to lower middle-market companies in the United States (a) is generally more labor intensive than lending to larger companies due to the smaller size of each investment and the fragmented nature of the information available with respect to such companies, (b) requires specialized due diligence and underwriting capabilities, and (c) may also require more extensive ongoing monitoring by the lender.
The senior investment team and other investment professionals of Stellus Capital Management have been actively investing in the middle-market for more than a decade and have focused on extensive calling and marketing efforts via speaking engagements, sponsorships, industry events and referrals to broaden their relationship network. Existing relationships are constantly cultivated through transactional work and other personal contacts.
The senior investment team and other investment professionals of Stellus Capital Management have been actively investing in the lower middle-market for more than a decade and have focused on extensive calling and marketing efforts via speaking engagements, sponsorships, industry events and referrals to broaden their relationship network. Existing relationships are constantly cultivated through transactional work and other personal contacts.
In addition to financial sponsors, Stellus Capital Management has developed a network of other deal sources, including: ● management teams and entrepreneurs; ● portfolio companies of private equity firms; ● other investment firms that have similar strategies to Stellus Capital Management and are seeking co-investors; ● placement agents and investment banks representing financial sponsors and issuers; ● corporate operating advisers and other financial advisers; and ● consultants, attorneys and other service providers to middle-market companies and financial sponsors.
In addition to financial sponsors, Stellus Capital Management has developed a network of other deal sources, including: ● management teams and entrepreneurs; ● portfolio companies of private equity firms; ● other investment firms that have similar strategies to Stellus Capital Management and are seeking co-investors; ● placement agents and investment banks representing financial sponsors and issuers; ● corporate operating advisers and other financial advisers; and ● consultants, attorneys and other service providers to lower middle-market companies and financial sponsors.
We seek direct origination opportunities of first lien (including unitranche), second lien, and unsecured debt financing, often with corresponding equity co-investments, in middle-market companies. We believe that businesses in this size range often have limited access to public financial markets, and will benefit from Stellus Capital Management’s reliable lending approach.
We seek direct origination opportunities of first lien (including unitranche), second lien, and unsecured debt financing, often with corresponding equity co-investments, in lower middle-market companies. We believe that businesses in this size range often have limited access to public financial markets, and will benefit from Stellus Capital Management’s reliable lending approach.
In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different from the valuations currently assigned. ​ We have adopted Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC 820”).
In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different from the valuations currently assigned. ​ We have adopted Financial Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC 820”).
Competition Our primary competitors in providing financing to middle-market companies include public and private funds, other BDCs, commercial and investment banks, commercial financing companies and, to the extent they provide an alternative form of financing, private equity and hedge funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do.
Competition Our primary competitors in providing financing to lower middle-market companies include public and private funds, other BDCs, commercial and investment banks, commercial financing companies and, to the extent they provide an alternative form of financing, private equity and hedge funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do.
In accordance with ASC 820, the market in which we can exit portfolio investments with the greatest volume and level activity is considered our principal market. ​ With respect to investments for which market quotations are not readily available, our Board undertakes a multi-step valuation process each quarter, as described below: ● our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of Stellus Capital Management responsible for the portfolio investment; ● preliminary valuation conclusions are then documented and discussed with Stellus Capital Management’s senior investment professionals; ● at least twice annually, the valuation for each portfolio investment is reviewed by an independent valuation firm; 13 Table of Contents ● the audit committee of our Board then reviews these preliminary valuations; and ● the Board then discusses the valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of Stellus Capital Management’s investment professionals, the independent valuation firm and the audit committee of the Board.
In accordance with 13 Table of Contents ASC 820, the market in which we can exit portfolio investments with the greatest volume and level activity is considered our principal market. ​ With respect to investments for which market quotations are not readily available, our Board undertakes a multi-step valuation process each quarter, as described below: ● our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of Stellus Capital Management responsible for the portfolio investment; ● preliminary valuation conclusions are then documented and discussed with Stellus Capital Management’s senior investment professionals; ● at least twice annually, the valuation for each portfolio investment is reviewed by an independent valuation firm; ● the audit committee of our Board then reviews these preliminary valuations and any valuation provided by an independent valuation firm; and ● the Board then discusses the valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of Stellus Capital Management’s investment professionals, the independent valuation firm and the audit committee of the Board.
In addition, we believe that the relationships of the investment professionals of Stellus Capital Management enable us to learn about, and compete effectively for, financing opportunities with attractive middle-market companies in the industries in which we invest. Employees We do not have any direct employees, and our day-to-day investment operations are managed by Stellus Capital Management.
In addition, we believe that the relationships of the investment professionals of Stellus Capital Management enable us to learn about, and compete effectively for, financing opportunities with attractive lower middle-market companies in the industries in which we invest. Employees We do not have any direct employees, and our day-to-day investment operations are managed by Stellus Capital Management.
We seek to achieve our investment objective by: ● accessing the extensive origination channels established and developed by the Stellus Capital Management senior investment professionals which include long-standing relationships with private equity firms, commercial banks, investment banks and other financial services firms; ● investing in what we believe to be companies with strong business fundamentals, generally within our core middle-market company focus; ● focusing on a variety of industry sectors, including business services, energy, general industrial, government services, healthcare, software and specialty finance; ● focusing primarily on directly originated transactions; ● applying the disciplined underwriting standards that the Stellus Capital Management senior investment professionals have developed over their extensive investing careers; and ● capitalizing upon the experience and resources of the Stellus Capital Management investment team to monitor our investments.
We seek to achieve our investment objective by: ● accessing the extensive origination channels established and developed by the Stellus Capital Management senior investment professionals, which include long-standing relationships with private equity firms, commercial banks, investment banks and other financial services firms; ● investing in what we believe to be companies with strong business fundamentals, generally within our core lower middle-market company focus; ● focusing on a variety of industry sectors, including business services, general industrial, government services, healthcare, software and specialty finance; ● focusing primarily on directly originated transactions; ● applying the disciplined underwriting standards that the Stellus Capital Management senior investment professionals have developed over their extensive investing careers; and ● capitalizing upon the experience and resources of the Stellus Capital Management investment team to monitor our investments.
This flexible approach enables Stellus Capital Management to respond to market conditions and offer customized lending solutions. Stellus Capital Management invests across a wide range of industries with deep expertise in select verticals including, but not limited to, business services, retail, general industrial, government services, healthcare, software and specialty finance.
This flexible approach enables us to respond to market conditions and offer customized lending solutions. Stellus Capital Management invests across a wide range of industries with deep expertise in select verticals including, but not limited to, business services, retail, general industrial, government services, healthcare, software and specialty finance.
A smaller enterprise is a business (together with its affiliates) that has a net worth not exceeding $6 million and has average annual net income after U.S. federal income taxes not exceeding $2 million (average net income to be computed without benefit of any carryover loss) for the two most recent fiscal years.
A smaller enterprise is a business (together with its affiliates) that has a net worth not exceeding $6.0 million and has average annual net income after U.S. federal income taxes not exceeding $2.0 million (average net income to be computed without benefit of any carryover loss) for the two most recent fiscal years.
These individuals have developed long-term relationships with middle-market companies, management teams, financial sponsors, lending institutions and deal intermediaries by providing flexible financing throughout the capital structure. We believe that these relationships provide us with a competitive advantage in identifying investment opportunities in our target market.
These individuals have developed long-term relationships with lower middle-market companies, management teams, financial sponsors, lending institutions and deal intermediaries by providing flexible financing throughout the capital structure. We believe that these relationships provide us with a competitive advantage in identifying investment opportunities in our target market.
We originate and invest primarily in private middle-market companies (typically those with $5 million to $50 million of EBITDA (earnings before interest, taxes, depreciation and amortization)) through first lien (including unitranche), second lien, and unsecured debt financing, often with corresponding equity co-investments.
We originate and invest primarily in private lower middle-market companies (typically those with $5 million to $50 million of EBITDA (earnings before interest, taxes, depreciation and amortization)) through first lien (including unitranche), second lien, and unsecured debt financing, often with corresponding equity co-investments.
We believe the environment for investing in middle-market companies is attractive for several reasons, including: Robust Demand for Debt Capital We believe that private equity firms have significant committed but uncalled capital, a large portion of which is still available for investment in the United States.
We believe the environment for investing in lower middle-market companies is attractive for several reasons, including: Robust Demand for Debt Capital We believe that private equity firms have significant committed but uncalled capital, a large portion of which is still available for investment in the United States.
Many financing providers have chosen to focus on large corporate clients and managing capital markets transactions rather than lending to middle-market businesses. Further, many financial institutions and traditional lenders are faced with constrained balance sheets and are requiring existing borrowers to reduce leverage.
Many financing providers have chosen to focus on large corporate clients and managing capital markets transactions rather than lending to lower middle-market businesses. Further, many financial institutions and traditional lenders are faced with constrained balance sheets and are requiring existing borrowers to reduce leverage.
Attractive Deal Pricing and Structures We believe that the pricing of middle-market debt investments is higher, and the terms of such investments are more conservative, compared to larger liquid, public debt financings, due to the more limited universe of lenders as well as the highly negotiated nature of these financings.
Attractive Deal Pricing and Structures We believe that the pricing of lower middle-market debt investments is higher, and the terms of such investments are more conservative, compared to larger liquid, public debt financings, due to the more limited universe of lenders as well as the highly negotiated nature of these financings.
We believe that, over the past decade, the senior investment team and other investment professionals of Stellus Capital Management have built a reputation as a thoughtful and disciplined provider of capital to middle-market companies and a preferred financing source for private equity sponsors and management teams.
We believe that over the past decade, the senior investment team and other investment professionals of Stellus Capital Management have built a reputation as a thoughtful and disciplined provider of capital to lower middle-market companies and a preferred financing source for private equity sponsors and management teams.
Our debt orientation provides for increased potential exit opportunities, including (a) the sale of investments in the private markets, (b) the refinancing of investments held, often due to maturity or recapitalizations, and (c) other liquidity events, including the sale or merger of the portfolio company.
Our debt orientation provides for increased potential exit opportunities, including (a) the sale of investments in the private markets, (b) the refinancing of investments, often due to maturity or recapitalizations, and (c) other liquidity events, including the sale or merger of the portfolio company.
To the extent that Stellus Capital Management outsources any of its functions, we will pay the fees associated with such functions on a direct basis without any incremental profit to Stellus Capital Management. Stockholder approval is not required to amend the Administration Agreement .
To the extent that Stellus Capital Management outsources any of its functions under the Administration Agreement, we will pay the fees associated with such functions on a direct basis without any incremental profit to Stellus Capital Management. Stockholder approval is not required to amend the Administration Agreement .
Specialized Lending Requirements Lending to middle-market companies requires in-depth diligence, credit expertise, restructuring experience and active portfolio management. We believe that several factors render many U.S. financial institutions ill-suited to lend to middle-market companies.
Specialized Lending Requirements Lending to lower middle-market companies requires in-depth diligence, credit expertise, restructuring experience and active portfolio management. We believe that several factors render many U.S. financial institutions ill-suited to lend to lower middle-market companies.
We source investments primarily through the extensive network of relationships that the senior investment professionals of Stellus Capital Management have developed with financial sponsor firms, financial institutions, middle-market companies, management teams and other professional intermediaries.
We source investments primarily through the extensive network of relationships that the senior investment professionals of Stellus Capital Management have developed with financial sponsor firms, financial institutions, lower middle-market companies, management teams and other professional intermediaries.
Stellus Capital Management relies upon the analysis conducted and information gathered through the investment process to evaluate the appropriate structure for our investments. We invest primarily in the debt securities of middle-market companies.
Stellus Capital Management relies upon the analysis conducted and information gathered through the investment process to evaluate the appropriate structure for our investments. We invest primarily in the debt securities of lower middle-market companies.
We expect to hold most of our investments to maturity or repayment, but we may sell some of our investments earlier if a liquidity event occurs, such as a sale, recapitalization or worsening of the credit quality of the portfolio company.
We expect to hold most of our investments to maturity or repayment, but we may sell some of our investments earlier if a liquidity event occurs, such as a sale or recapitalization, or upon the worsening of the credit quality of the portfolio company.
The U.S. services, healthcare, technology and consumer products sectors continue to show strong growth and profitability, allowing middle-market companies to continue to service their debt and prudently borrow to support growth initiatives and mergers and acquisitions activity.
The U.S. services, healthcare, technology and consumer products sectors continue to show strong growth and profitability, allowing lower middle-market companies to continue to service their debt and prudently borrow to support growth initiatives and mergers and acquisitions activity.
Market Opportunity We originate and invest primarily in private middle-market companies through first lien (including unitranche), second lien and unsecured debt financing, often with corresponding equity co-investments.
Market Opportunity We originate and invest primarily in private lower middle-market companies through first lien (including unitranche), second lien and unsecured debt financing, often with corresponding equity co-investments.
This dynamism, coupled with ample capital from private equity firms to support middle-market companies, is creating a large population of credit worthy companies looking for debt capital.
This dynamism, coupled with ample capital from private equity firms to support lower middle-market companies, is creating a large population of credit worthy companies looking for debt capital.
Example 2: Income Portion of Incentive Fee with Total Return Requirement Calculation: Alternative 1: Assumptions Investment income (including interest, dividends, fees, etc.) = 3.5% Hurdle rate (1) = 2.0% Management fee (2) = 0.4375% Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.2% Pre-incentive fee net investment income (investment income — (management fee + other expenses) = 2.8625% Cumulative incentive compensation accrued and/or paid for preceding 11 calendar quarters = $9,000,000 20.0% of cumulative net increase in net assets resulting from operations over current and preceding 11 calendar quarters = $8,000,000 Although our pre-incentive fee net investment income exceeds the hurdle rate of 2.0% (as shown in Alternative 3 of Example 1 above), no incentive fee is payable because 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding calendar quarters did not exceed the cumulative income and capital gains incentive fees accrued and/or paid for the preceding 11 calendar quarters.
Example 2: Income Portion of Incentive Fee with Total Return Requirement Calculation: Alternative 1: Assumptions Investment income (including interest, dividends, fees, etc.) = 3.5% Hurdle rate (1) = 2.0% Management fee (2) = 0.4375% Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.2% Pre-incentive fee net investment income (investment income — (management fee + other expenses) = 2.8625% Cumulative incentive compensation accrued and/or paid for preceding 11 calendar quarters = $9,000,000 ​ 19 Table of Contents 20.0% of cumulative net increase in net assets resulting from operations over current and preceding 11 calendar quarters = $8,000,000 Although our pre-incentive fee net investment income exceeds the hurdle rate of 2.0% (as shown in Alternative 3 of Example 1 above), no incentive fee is payable because 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding calendar quarters did not exceed the cumulative income and capital gains incentive fees accrued and/or paid for the preceding 11 calendar quarters.
Incentive Fee The incentive fee, which provides Stellus Capital Management with a share of the income that it generates for us, has two components, ordinary income and capital gains, calculated as follows: The ordinary income component is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the immediately preceding calendar quarter, subject to a total return requirement, and deferral of non-cash amounts, and is 20.0% of the amount, if any, by which our pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets attributable to our common stock, for the immediately preceding calendar quarter, exceeds a 2.0% (which is 8.0% annualized) hurdle rate and a “catch-up” provision, for the benefit of Stellus Capital Management, measured as of the end of each calendar quarter.
Incentive Fee The incentive fee, which provides Stellus Capital Management with a share of the income that it generates for us, has two components, ordinary income and capital gains, calculated as follows: The ordinary income component is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the immediately preceding calendar quarter, subject to a total return requirement and deferral of non-cash amounts, and is 20.0% of the amount, if any, by which our pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets attributable to our common stock, for the immediately preceding calendar quarter, exceeds a 2.0% (which is 8.0% annualized) hurdle rate and a “catch-up” provision, for the benefit of 16 Table of Contents Stellus Capital Management, measured as of the end of each calendar quarter.
Competitive Strengths We believe that the following competitive strengths will allow us to achieve positive returns for our investors: Experienced Investment Team Through our investment adviser, Stellus Capital Management, we have access to the experience and expertise of the Stellus Capital Management senior investment professionals, including its senior investment professionals who have an average of over 35 years of investing, corporate finance, restructuring, consulting and accounting experience and have worked together at several companies.
Competitive Strengths We believe that the following competitive strengths will allow us to achieve positive returns for our investors: Experienced Investment Team Through our investment adviser, Stellus Capital Management, we have access to the experience and expertise of the Stellus Capital Management senior investment professionals, including its senior investment professionals who have an average of over 36 years of investing, corporate finance, restructuring, consulting and accounting experience and have worked together at several companies.
The exemptive relief provides us with increased flexibility under the 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. Summary Risk Factors Investing in our securities involves a high degree of risk. You should carefully consider the information in “Item 1A.
The exemptive relief provides us with increased flexibility under the asset coverage requirement 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. Summary Risk Factors Investing in our securities involves a high degree of risk. You should carefully consider the information in “Item 1A.
Under the 1940 Act, we may generally only offer warrants provided that (i) the warrants expire by their terms within ten years, (ii) the exercise or conversion price is 27 Table of Contents not less than the current market value at the date of issuance, (iii) our stockholders authorize the proposal to issue such warrants, and our Board approves such issuance on the basis that the issuance is in the best interests of us and our stockholders and (iv) if the warrants are accompanied by other securities, the warrants are not separately transferable unless no class of such warrants and the securities accompanying them have been publicly distributed.
Under the 1940 Act, we may generally only offer warrants provided that (i) the warrants expire by their terms within ten years, (ii) the exercise or conversion price is not less than the current market value at the date of issuance, (iii) our stockholders authorize the proposal to issue such warrants, and our Board approves such issuance on the basis that the issuance is in the best interests of us and our stockholders and (iv) if the warrants are accompanied by other securities, the warrants are not separately transferable unless no class of such warrants and the securities accompanying them have been publicly distributed.
With an average of over 35 years of investing, corporate finance, restructuring, consulting and accounting experience, the senior investment professionals of Stellus Capital Management have demonstrated investment expertise throughout the balance sheet and in a variety of situations, including financial sponsor buyouts, growth capital, debt refinancing, balance sheet recapitalizations, rescue financings, distressed opportunities, and acquisition financings.
With an average of over 36 years of investing, corporate finance, restructuring, consulting and accounting experience, the senior investment professionals of Stellus Capital Management have demonstrated investment expertise throughout the balance sheet and in a variety of situations, including financial sponsor buyouts, growth capital, debt refinancing, balance sheet recapitalizations, rescue financings, distressed opportunities, and acquisition financings.
The SBA generally prohibits an SBIC from providing financing to small businesses with certain characteristics, such as relending or businesses with the majority of their employees located outside the United States, and business engaged in certain prohibited industries, such as project finance, real estate, farmland, financial intermediaries or “passive” (i.e. non-operating) businesses.
The SBA generally prohibits an SBIC from providing financing to small businesses with certain characteristics, such as relenders or businesses with the majority of their employees located outside the United States, and business engaged in certain prohibited industries, such as project finance, real estate, farmland, financial intermediaries or certain “passive” (i.e. non-operating) businesses.
Stellus Capital Management has designed a highly involved and interactive investment management process, which is the core of its culture and the basis for what we believe is a strong track record of investment returns. The investment process seeks to select only those investments that it believes have the most attractive risk/reward characteristics.
Stellus Capital Management has designed a highly involved and interactive investment management process, which is the core of its culture and the basis for what we believe is a strong track record of investment returns. The investment process seeks to select only those investments that the Advisor believes have the most attractive risk/reward characteristics.
The SBA restricts the ability of an SBIC to provide financing to an “associate,” as defined in the SBA regulations, without prior written approval from the SBA.
Additionally, the SBA restricts the ability of an SBIC to provide financing to an “associate,” as defined in the SBA regulations, without prior written approval from the SBA.
Under the terms of the Investment Advisory Agreement (the “Investment Advisory Agreement”) , Stellus Capital Management: ● determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes; 15 Table of Contents ● identifies, evaluates and negotiates the structure of the investments we make; ● executes, closes, services and monitors the investments we make; ● determines the securities and other assets that we purchase, retain or sell; ● performs due diligence on prospective portfolio companies; and ● provides us with such other investment advisory, research and related services as we may, from time to time, reasonably require for the investment of our funds.
Under the terms of the Investment Advisory Agreement (the “Investment Advisory Agreement”) , Stellus Capital Management: ● determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes; ● identifies, evaluates and negotiates the structure of the investments we make; ● executes, closes, services and monitors the investments we make; ● determines the securities and other assets that we purchase, retain or sell; ● performs due diligence on prospective portfolio companies; and ● provides us with such other investment advisory, research and related services as we may, from time to time, reasonably require for the investment of our funds.
The weighted average yield was computed using the effective interest rates for all of our debt investments, which represents the interest rate on our debt investments restated as an interest rate payable annually in arrears and is computed including cash and payment in kind, or Payment-In-Kind (“ PIK”) interest, as well as accretion of original issue discount.
The weighted average yield was computed using the effective interest rates for all of our debt investments, which represents the interest rate on our debt investments restated as an interest rate payable annually in arrears and is computed including cash and payment-in-kind (“ PIK”) interest, as well as accretion of original issue discount (“OID”).
Stellus Capital Management requires comprehensive information rights including access to management, financial statements and budgets and, in some cases, membership on the portfolio company’s board of directors or board observation rights. Additionally, Stellus Capital Management generally requires financial covenants and terms that restrict an issuer’s use of leverage and limitations on asset sales and capital expenditures.
Stellus Capital Management requires comprehensive information rights including access to management, financial statements and budgets and, in some cases, membership on the portfolio company’s board of directors or board observation rights. Additionally, Stellus Capital Management generally requires financial covenants and terms that restrict an issuer’s use of leverage and limit asset sales and capital expenditures.
As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock. ● Any failure to comply with SBA regulations could have an adverse effect on our SBIC subsidiaries’ operations. 3 Table of Contents ● Because we intend to distribute substantially all of our income to our stockholders to obtain and maintain our status as a RIC, we will continue to need additional capital to finance our growth.
As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock. ● Any failure to comply with SBA regulations could have an adverse effect on our SBIC subsidiaries’ operations. ● Because we intend to distribute substantially all of our income to our stockholders to obtain and maintain our status as a RIC, we will continue to need additional capital to finance our growth.
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.
Debt and equity securities that are not publicly traded or whose market quotations 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.
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.
For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the amount, if positive, of the sum of our pre-incentive fee net investment income, realized gains and losses and unrealized appreciation and depreciation for the then current and 11 preceding calendar quarters.
SBIC Licenses Two of our wholly owned subsidiaries, Stellus Capital SBIC LP and Stellus Capital SBIC II LP (together, the “SBIC subsidiaries” and individually, the “SBIC I subsidiary” and “SBIC II subsidiary,” respectively), hold a license to operate as small business investment companies (“SBICs”). Current U.S.
SBIC Licenses Two of our wholly owned subsidiaries, Stellus Capital SBIC LP and Stellus Capital SBIC II LP (together, the “SBIC subsidiaries” and individually, the “SBIC I subsidiary” and “SBIC II subsidiary,” respectively), hold licenses to operate as small business investment companies (“SBICs”). Current U.S.
We do not disclose any non-public personal information about our stockholders or former stockholders to anyone, except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent or third-party administrator).
We do not disclose any non-public personal information about our stockholders or former stockholders to anyone, except as required by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent or third-party administrator).
Alternative 3 Assumptions Investment income (including interest, dividends, fees, etc.) = 3.5% Hurdle rate (1) = 2.0% Management fee (2) = 0.4375% Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.2% Pre-incentive fee net investment income (investment income — (management fee + other expenses)) = 2.8625% Incentive fee = 100% × Pre-incentive fee net investment income (subject to “catch-up”) (3) Incentive fee = 100% × “catch-up” + (20.0% × (Pre-Incentive Fee Net Investment Income — 2.5%)) “Catch-up” = 2.5% — 2.0% = 0.5% 18 Table of Contents Incentive fee = (100% × 0.5%) + (20.0% × (2.8625% — 2.5%)) = 0.5% + (20.0% × 0.3625%) = 0.5% + 0.0725% = 0.5725% Pre-incentive fee net investment income exceeds the hurdle rate, and fully satisfies the “catch-up” provision, therefore the income related portion of the incentive fee is 0.5725%.
Alternative 3 Assumptions Investment income (including interest, dividends, fees, etc.) = 3.5% Hurdle rate (1) = 2.0% Management fee (2) = 0.4375% Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.2% Pre-incentive fee net investment income (investment income — (management fee + other expenses)) = 2.8625% Incentive fee = 100% × Pre-incentive fee net investment income (subject to “catch-up”) (3) Incentive fee = 100% × “catch-up” + (20.0% × (Pre-Incentive Fee Net Investment Income — 2.5%)) “Catch-up” = 2.5% — 2.0% = 0.5% Incentive fee = (100% × 0.5%) + (20.0% × (2.8625% — 2.5%)) = 0.5% + (20.0% × 0.3625%) = 0.5% + 0.0725% = 0.5725% Pre-incentive fee net investment income exceeds the hurdle rate, and fully satisfies the “catch-up” provision, therefore the income related portion of the incentive fee is 0.5725%.
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).
We 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).
The foregoing incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre-incentive fee net investment income will be payable except to the extent 20.0% of the cumulative net 16 Table of Contents increase in net assets resulting from operations over the then current and 11 preceding quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding quarters.
The foregoing incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre-incentive fee net investment income will be 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 quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding quarters.
Alternative 2 Assumptions Investment income (including interest, dividends, fees, etc.) = 2.9% Hurdle rate (1) = 2.0% Management fee (2) = 0.4375% Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.2% Pre-incentive fee net investment income (investment income — (management fee + other expenses)) = 2.2625% Incentive fee = 100% × Pre-incentive fee net investment income (subject to “catch-up”) (3) = 100% × (2.2625% — 2.0%) = 0.2625% Pre-incentive fee net investment income exceeds the hurdle rate, but does not fully satisfy the “catch-up” provision, therefore the income related portion of the incentive fee is 0.2625%.
Alternative 2 Assumptions Investment income (including interest, dividends, fees, etc.) = 2.9% Hurdle rate (1) = 2.0% Management fee (2) = 0.4375% Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.2% ​ 18 Table of Contents Pre-incentive fee net investment income (investment income — (management fee + other expenses)) = 2.2625% Incentive fee = 100% × Pre-incentive fee net investment income (subject to “catch-up”) (3) = 100% × (2.2625% — 2.0%) = 0.2625% Pre-incentive fee net investment income exceeds the hurdle rate, but does not fully satisfy the “catch-up” provision, therefore the income related portion of the incentive fee is 0.2625%.
Realized gains or losses will be computed using the specific identification method. ​ Under procedures established by our Board, we intend to value investments for which market quotations are readily available at such market quotations.
Realized gains or losses will be computed using the specific identification method. ​ Under procedures approved by our Board, we intend to value investments for which market quotations are readily available at such market quotations.
You may also obtain copies of each code of ethics, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov. Proxy Voting Policies and Procedures We have delegated our proxy voting responsibility to Stellus Capital Management. The proxy voting policies and procedures of Stellus Capital Management are set out below.
You may also obtain copies of each code of ethics, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov. 28 Table of Contents Proxy Voting Policies and Procedures We have delegated our proxy voting responsibility to Stellus Capital Management. The proxy voting policies and procedures of Stellus Capital Management are set out below.
If Stellus Capital Management’s senior investment professionals believe an investment opportunity merits further review, the investment opportunity is assigned a deal team and the deal team prepares and presents to the investment committee for initial review a prescreen memorandum that generally describes the potential transaction and includes a description of the risks, due diligence process and proposed structure and pricing for the proposed investment opportunity.
If Stellus Capital Management’s senior investment professionals believe an investment opportunity merits further review, the investment opportunity is assigned a deal team and the deal team 10 Table of Contents prepares and presents to the investment committee for initial review a prescreen memorandum that generally describes the potential transaction and includes a description of the risks, due diligence process and proposed structure and pricing for the proposed investment opportunity.
If we are not able to obtain sufficient cash from other sources to satisfy the Annual Distribution Requirement, we may fail to maintain our tax treatment as a RIC and become subject to corporate-level U.S. federal income taxes on all of our taxable income without the benefit of the dividends-paid deduction.
If we are not able to obtain sufficient cash from other sources to satisfy the Annual Distribution Requirement, we may fail to maintain our tax treatment as a RIC and become subject to U.S. federal income tax on all of our taxable income without the benefit of the dividends-paid deduction.
The senior investment professionals of Stellus Capital Management have an average of over 35 years of investing, corporate finance, restructuring, consulting and accounting experience and have worked together at several companies. The Stellus Capital Management senior investment professionals have a wide range of experience in middle-market investing, including originating, structuring and managing loans and debt securities through market cycles.
The senior investment professionals of Stellus Capital Management have an average of over 36 years of investing, corporate finance, restructuring, consulting and accounting experience and have worked together at several companies. The Stellus Capital Management senior investment professionals have a wide range of experience in lower middle-market investing, including originating, structuring and managing loans and debt securities through market cycles.
Because we expect that there will not be a readily available market quotation for many of the investments in our 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.
Because we expect that there will not be a readily available market quotation for many of the investments in our portfolio, we expect to value most of our portfolio investments at fair value as determined in good faith by the Board using a documented valuation policy and a consistently applied valuation process.
As part of the monitoring process, Stellus Capital Management also tracks developments in the broader marketplace. Stellus Capital Management’s investment professionals have a wealth of information on the competitive 11 Table of Contents landscape, industry trends, relative valuation metrics, and analyses that assist in the execution of our investment strategy.
As part of the monitoring process, Stellus Capital Management also tracks developments in the broader marketplace. Stellus Capital Management’s investment professionals have a wealth of information on the competitive landscape, industry trends, relative valuation metrics, and analyses that assist in the execution of our investment strategy.
Resources of Stellus Capital Management Platform We have access to the resources and capabilities of Stellus Capital Management, which has 17 investment professionals, including Robert T. Ladd, Dean D’Angelo, and Joshua T. Davis, who are supported by five managing directors, four vice presidents and four analysts.
Resources of Stellus Capital Management Platform We have access to the resources and capabilities of Stellus Capital Management, which has 17 investment professionals, including Robert T. Ladd, Dean D’Angelo, and Joshua T. Davis, who are supported by seven managing directors, three vice presidents and four analysts.
Other than with respect to this limited license, we have 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 Management is in effect. 25 Table of Contents Exchange Act Reports We maintain a website at www.stelluscapital.com (under the public investors section) .
Other than with respect to this limited license, we have 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 Management is in effect. 25 Table of Contents Exchange Act Reports We maintain a website at www.stelluscapital.com (under the “Public Investors” section) .
In addition, we have formed and operate two SBIC subsidiaries, and are partially dependent on the SBIC subsidiaries for cash distributions to enable us to meet the RIC distribution requirement.
In addition, we have formed and operate two SBIC subsidiaries, and are partially dependent on the SBIC subsidiaries for cash distributions to enable us to meet the Annual Distribution Requirement.
In addition, our SBIC subsidiaries may be limited in their ability to make distributions to us if they do not have sufficient capital, in accordance with SBA regulations.
Our SBIC subsidiaries also may be limited in their ability to make distributions to us if they do not have sufficient capital, in accordance with SBA regulations.
The SBA, as a creditor, will have a superior claim to our SBIC subsidiaries’ assets over our stockholders in the event we liquidate one or both of our SBIC subsidiaries or the SBA exercises its remedies under the SBA-guaranteed debentures issued by our SBIC subsidiaries upon an event of default. ​ 33 Table of Contents
The SBA, as a creditor, will have a superior claim to our SBIC subsidiaries’ assets over our stockholders in the event we liquidate one or both of our SBIC subsidiaries or the SBA exercises its remedies under the SBA-guaranteed debentures issued by our SBIC subsidiaries upon an event of default. ​
We believe that such co-investments may afford us additional investment opportunities and an ability to achieve greater diversification. In addition, we will not co-invest with D.E. Shaw group funds. Stellus Capital Management is headquartered in Houston, Texas, and also maintains offices in the Washington, D.C. area and Charlotte, North Carolina.
We believe that such co-investments may afford us additional investment opportunities and an ability to achieve greater diversification. In addition, we will not co-invest with D.E. Shaw group funds. 5 Table of Contents Stellus Capital Management is headquartered in Houston, Texas, and also maintains offices in the Washington, D.C. area and Charlotte, North Carolina.
Stellus Capital Management structures investment terms based on the business, the credit profile, the outlook for the industry in which a potential portfolio company operates, the competitive landscape, the 8 Table of Contents products or services which the company sells and the management team and ownership of the company, among other factors.
Stellus Capital Management structures investment terms based on the business, the credit profile, the outlook for the industry in which a potential portfolio company operates, the competitive landscape, the products or services which the company sells and the management team and ownership of the company, among other factors.
Our officers are employees of Stellus Capital Management and our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and his staff is paid by us pursuant to the Administration Agreement that we have entered into with Stellus Capital Management (the “Administration Agreement”) .
Our officers are employees of Stellus Capital Management and our allocable portion of the cost of our Chief Financial Officer and 15 Table of Contents Chief Compliance Officer and his staff is paid by us pursuant to the Administration Agreement that we have entered into with Stellus Capital Management (the “Administration Agreement”) .
Alternative 2: Assumptions Investment income (including interest, dividends, fees, etc.) = 3.5% Hurdle rate (1) = 2.0% Management fee (2) = 0.4375% Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.2% Pre-incentive fee net investment income (investment income — (management fee + other expenses) = 2.8625% Cumulative incentive compensation accrued and/or paid for preceding 11 calendar quarters = $9,000,000 20.0% of cumulative net increase in net assets resulting from operations over current and preceding 11 calendar quarters = $10,000,000 Because our pre-incentive fee net investment income exceeds the hurdle rate of 2.0% and because 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding calendar quarters exceeds the cumulative income and capital gains incentive fees accrued and/or paid for the preceding 11 calendar quarters, an incentive fee would be payable, as shown in Alternative 3 of Example 1 above. 19 Table of Contents (1) Represents 8.0% annualized hurdle rate.
Alternative 2: Assumptions Investment income (including interest, dividends, fees, etc.) = 3.5% Hurdle rate (1) = 2.0% Management fee (2) = 0.4375% Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.2% Pre-incentive fee net investment income (investment income — (management fee + other expenses) = 2.8625% Cumulative incentive compensation accrued and/or paid for preceding 11 calendar quarters = $9,000,000 20.0% of cumulative net increase in net assets resulting from operations over current and preceding 11 calendar quarters = $10,000,000 Because our pre-incentive fee net investment income exceeds the hurdle rate of 2.0% and because 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding calendar quarters exceeds the cumulative income and capital gains incentive fees accrued and/or paid for the preceding 11 calendar quarters, an incentive fee would be payable, as shown in Alternative 3 of Example 1 above.
A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price that is greater than the purchase price by an amount that reflects an agreed-upon interest rate.
A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price that is 27 Table of Contents greater than the purchase price by an amount that reflects an agreed-upon interest rate.
For any taxable year in which we: ● qualify as a RIC; and ● satisfy the Annual Distribution Requirement; we will not be subject to U.S. federal income tax on the portion of our income we timely distribute to stockholders.
For any taxable year in which we: ● qualify as a RIC; and ● satisfy the Annual Distribution Requirement; we will not be subject to U.S. federal income tax on the portion of our income we timely distribute (or are deemed to distribute) to stockholders.
Additionally, if the Investment 17 Table of Contents Advisory Agreement is terminated as of a date that is not a calendar year end, the termination date will be treated as though it were a calendar year end for purposes of calculating and paying the capital gains incentive fee.
Additionally, if the Investment Advisory Agreement is terminated as of a date that is not a calendar year end, the termination date will be treated as though it were a calendar year end for purposes of calculating and paying the capital gains incentive fee.
We restrict access to non-public personal information about our stockholders to employees of Stellus Capital Management and its affiliates with a legitimate business need for the information. We intend to maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our stockholders.
We restrict access to non-public personal information about our stockholders to employees of Stellus Capital Management and its affiliates with a legitimate business need for the information. We maintain physical, electronic and procedural safeguards that are designed to protect the non-public personal information of our stockholders.
If additional funds are unavailable or not available on favorable terms, our ability to grow may be impaired. ● The time and resources that the investment professionals of Stellus Capital Management devote to us may be diverted, and we may face additional competition due to the fact that Stellus Capital Management and its affiliates are not prohibited from raising money for, or managing, another entity that makes the same types of investments that we target. ● If we do not invest a sufficient portion of our assets in qualifying assets, we could violate the 1940 Act provisions applicable to BDCs or be precluded from investing according to our current business strategy. ● The failure in cyber security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning, could impair our ability to conduct business effectively. ● Our investments in private and middle-market portfolio companies are risky, and we could lose all or part of our investment. ● Price declines and illiquidity in the corporate debt markets may adversely affect the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation. ● Because we generally do not hold controlling equity interests in our portfolio companies, we may not be able to exercise control over our portfolio companies or to prevent decisions by management of our portfolio companies that could decrease the value of our investments. ● The interest rates of our floating-rate loans to our portfolio companies might be subject to change based on recent regulatory changes.
If additional funds are unavailable or not available on favorable terms, our ability to grow may be impaired. ● The time and resources that the investment professionals of Stellus Capital Management devote to us may be diverted, and we may face additional competition due to the fact that Stellus Capital Management and its affiliates are not prohibited from raising money for, or managing, another entity that makes the same types of investments that we target. ● If we do not invest a sufficient portion of our assets in qualifying assets, we could violate the 1940 Act provisions applicable to BDCs or be precluded from investing according to our current business strategy. ● The failure of cyber security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning, could impair our ability to conduct business effectively. ● Our investments in private and lower middle-market portfolio companies are risky, and we could lose all or part of our investment. ● Price declines and illiquidity in the corporate debt markets may adversely affect the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation. ● Because we generally do not hold controlling equity interests in our portfolio companies, we may not be able to exercise control over our portfolio companies or to prevent decisions by management of our portfolio companies that could decrease the value of our investments. ● The interest rates of our floating-rate loans to our portfolio companies might be subject to change, and such fluctuations could negatively impact our financial condition and results of operations.
With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments might subject our stockholders to additional expenses. None of these policies is fundamental and may be changed without stockholder approval upon 60 days’ prior written notice to stockholders.
With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments might subject our stockholders to additional expenses. None of these are policies fundamental and any of them may be changed without stockholder approval upon 60 days’ prior written notice to stockholders.
As a RIC, we generally will not be subject to U.S. federal income tax on any net ordinary income or capital gains that we timely distribute to our stockholders as dividends. To continue to maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below).
As a RIC, we generally will not be subject to U.S. federal income tax on any net ordinary income or capital gains that we timely distribute to our stockholders as dividends. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below).
The frequency of Stellus Capital Management’s monitoring of an investment is determined by a number of factors, including, but not limited to, the trends in the financial performance of the portfolio company, the investment structure and the type of collateral securing the investment.
The frequency of Stellus Capital Management’s monitoring of an investment is 12 Table of Contents determined by a number of factors, including, but not limited to, the trends in the financial performance of the portfolio company, the investment structure and the type of collateral securing the investment.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeThe transition away from LIBOR to alternative reference rates is complex and could have a material adverse effect on our business, financial condition and results of operations, including as a result of any changes in the pricing of our investments, changes to the documentation for certain of our investments and the pace of such changes, disputes and other actions regarding the interpretation of current and prospective loan documentation or modifications to processes and systems.
Biggest changeAn inability to raise or access capital, and any required sale of all or a portion of our investments as a result, could have a material adverse effect on our business, financial condition or results of operations.
The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, which could include concurrent investments in the same portfolio company, without prior approval of our independent directors and, in some cases, of the SEC.
The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, which could include concurrent investments in the same portfolio company, without prior approval of our independent directors and, in some cases, the SEC.
In addition, as part of the Investment Advisory Agreement, we have agreed to indemnify Stellus Capital Management and each of its officers, directors, members, managers 50 Table of Contents and employees from and against any claims or liabilities, including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our business and operations or any action taken or omitted on our behalf pursuant to authority granted by the Investment Advisory Agreement, except where attributable to gross negligence, willful misfeasance, bad faith or reckless disregard of such person’s duties under the Investment Advisory Agreement.
In addition, as part of the Investment Advisory Agreement, we have agreed to indemnify Stellus Capital Management and each of its officers, directors, members, managers and employees from and against any claims or liabilities, including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our business and operations or any action taken or omitted on our behalf pursuant to authority granted by the Investment Advisory Agreement, except where attributable to gross negligence, willful misfeasance, bad faith or reckless disregard of such person’s duties under the Investment 50 Table of Contents Advisory Agreement.
The issuance of preferred shares convertible into shares of common stock may also reduce the net income and net asset value per share of our common stock upon conversion, provided, that we will only be permitted to issue such convertible preferred stock to the extent we comply with the requirements of Section 61 of the 1940 Act, including obtaining common stockholder approval.
The issuance of preferred stock convertible into shares of common stock may also reduce the net income and net asset value per share of our common stock upon conversion, provided, that we will only be permitted to issue such convertible preferred stock to the extent we comply with the requirements of Section 61 of the 1940 Act, including obtaining common stockholder approval.
When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our valuation. We record decreases in the market values or fair values of our investments as unrealized depreciation.
When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate the valuation. We record decreases in the market values or fair values of our investments as unrealized depreciation.
In addition, such companies typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. Additionally, middle-market companies are more likely to depend on the management talents and efforts of a small group of persons.
In addition, such companies typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. Additionally, lower middle-market companies are more likely to depend on the management talents and efforts of a small group of persons.
We are partially dependent on our SBIC subsidiaries for cash distributions to enable us to meet the RIC distribution requirements. Our SBIC subsidiaries may be limited by the Small Business Investment Act of 1958, and SBA regulations governing SBICs, from making certain distributions to us that may be necessary to maintain our tax treatment as a RIC.
We are partially dependent on our SBIC subsidiaries for cash distributions to enable us to meet the RIC distribution requirements. Our SBIC subsidiaries may be limited by the Small Business Investment Act of 1958, as amended, and SBA regulations governing SBICs, from making certain distributions to us that may be necessary to maintain our tax treatment as a RIC.
Middle-market companies may have limited financial resources and may be unable to meet their obligations under their loans and debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of our realizing any guarantees we may have obtained in connection with our investment.
Lower middle-market companies may have limited financial resources and may be unable to meet their obligations under their loans and debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of our realizing any guarantees we may have obtained in connection with our investment.
Credit ratings are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization in its sole discretion. Neither we nor the underwriter undertakes any obligation to maintain our credit ratings or to advise holders of Notes of any changes in our credit ratings.
Credit ratings are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization in its sole discretion. Neither we nor the underwriter undertakes any obligation to maintain our credit ratings or to advise holders of Notes Payable of any changes in our credit ratings.
For example, Stellus Capital Management and its affiliates currently manage private credit funds and another BDC that have investment strategies that are similar to, overlapping with or identical to our investment strategy, and with which we co-invest. Stellus Capital Management also provides sub-advisory services to the D. E.
For example, Stellus Capital Management and its affiliates currently manage several private credit funds and another BDC that have investment strategies that are similar to, overlapping with and/or identical to our investment strategy, and with which we co-invest. Stellus Capital Management also provides sub-advisory services to the D. E.
In particular, the terms of the indenture and the 2026 Notes do not place any restrictions on our or our subsidiaries’ ability to: ● issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the 2026 Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the 2026 Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the 2026 Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in our subsidiaries and therefore rank structurally senior to the 2026 Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) of the 1940 Act, as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to us by the SEC, which generally prohibit us from incurring additional indebtedness, including through the issuance of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 150% after such incurrence or issuance; ● pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the 2026 Notes, including subordinated indebtedness, except that we have agreed that, for the period of time during which the 2026 Notes are outstanding, we will not violate Section 18(a)(1)(B) of the 1940 Act, as modified by (i) Section 61(a)(2) of the 1940 Act, or any successor provisions and after giving effect to any exemptive relief granted to us by the SEC and (ii) the following two exceptions: (A) we will be permitted to declare a cash dividend or distribution notwithstanding the prohibition 65 Table of Contents contained in Section 18(a)(1)(B) of the 1940 Act, as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions, but only up to such amount as is necessary for us to maintain our status as a RIC under Subchapter M of the Code; and (B) this restriction will not be triggered unless and until such time as our asset coverage has not been in compliance with the minimum asset coverage required by Section 18(a)(1)(B) of the 1940 Act, as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions (after giving effect to any exemptive relief granted to us by the SEC) for more than six consecutive months.
In particular, the terms of the indenture and the Notes Payable do not place any restrictions on our or our subsidiaries’ ability to: ● issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the Notes Payable, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the Notes Payable to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the Notes Payable and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in our subsidiaries and therefore rank structurally senior to the Notes Payable with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) of the 1940 Act, as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to us by the SEC, which generally prohibit us from incurring additional indebtedness, including through the issuance of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 150% after such incurrence or issuance; ● pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the Notes Payable, including subordinated indebtedness, except that we have agreed that, for the period of time during which the Notes Payable are outstanding, we will not violate Section 18(a)(1)(B) of the 1940 Act, as modified by (i) Section 61(a)(2) of the 1940 Act, or any successor provisions and after giving effect to any exemptive relief granted to us by the SEC and (ii) the following two exceptions: (A) we will be permitted to declare a cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) of the 1940 Act, as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions, but only up to such amount as is necessary for us to maintain our status as a RIC under Subchapter M of the Code; and (B) this restriction will not be triggered unless and until such time as our asset coverage has not been in compliance with the minimum asset coverage required by Section 18(a)(1)(B) of the 1940 Act, as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions (after giving effect to any exemptive relief granted to us by the SEC) for more than six consecutive months.
If Section 18(a)(1)(B) of the 1940 Act, as modified by Section 61(a)(2) of the 1940 Act, were currently applicable to us in connection with this offering, these provisions would generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, were below 150% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase; ● sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets); ● enter into transactions with affiliates; ● create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions; ● make investments; or ● create restrictions on the payment of dividends or other amounts to us from our subsidiaries.
If Section 18(a)(1)(B) of the 1940 Act, as modified by Section 61(a)(2) of the 1940 Act, were currently applicable to us in connection with this offering, these provisions would generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, were below 150% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase; ● sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets); ● enter into transactions with affiliates; ● create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions; ● make investments; or 65 Table of Contents ● create restrictions on the payment of dividends or other amounts to us from our subsidiaries.
These factors include: ● significant volatility in the market price and trading volume of securities of BDCs or other companies in our sector, which is not necessarily related to the operating performance of these companies; ● changes in regulatory policies or tax guidelines, particularly with respect to RICs, BDCs and SBICs; ● loss of our qualification as a RIC or BDC or the status of either of our SBIC subsidiaries as a SBIC; ● changes in earnings or variations in operating results; ● changes in the value of our portfolio of investments; ● changes in accounting guidelines governing valuation of our investments; ● any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts; ● departure of Stellus Capital Management’s key personnel; ● operating performance of companies comparable to us; and ● ​ general economic trends and other external factors.
These factors include: ● significant volatility in the market price and trading volume of securities of BDCs or other companies in our sector, which is not necessarily related to the operating performance of these companies; 63 Table of Contents ● changes in regulatory policies or tax guidelines, particularly with respect to RICs, BDCs and SBICs; ● loss of our qualification as a RIC or BDC or the status of either of our SBIC subsidiaries as a SBIC; ● changes in earnings or variations in operating results; ● changes in the value of our portfolio of investments; ● changes in accounting guidelines governing valuation of our investments; ● any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts; ● departure of Stellus Capital Management’s key personnel; ● operating performance of companies comparable to us; and ● ​ general economic trends and other external factors.
If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, as applicable, in the instruments governing our indebtedness (including the Credit Facility), we could be in default under the terms of the agreements governing such indebtedness, including the 2026 Notes.
If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, as applicable, in the instruments governing our indebtedness (including the Credit Facility), we could be in default under the terms of the agreements governing such indebtedness, including the Notes Payable.
The reappearance of market conditions similar to those experienced during portions of the past three fiscal years and from 2008 through 2009 for any substantial length of time could make it difficult to extend the maturity of or refinance our existing indebtedness or obtain new indebtedness with similar terms and any failure to do so could have a material adverse effect on our business.
The reappearance of market conditions similar to those experienced during portions of the past several fiscal years and from 2008 through 2009 for any substantial length of time could make it difficult to extend the maturity of or refinance our existing indebtedness or obtain new indebtedness with similar terms, and any failure to do so could have a material adverse effect on our business.
Our investments in private and middle-market portfolio companies are risky, and we could lose all or part of our investment. Investment in private and middle-market companies involves a number of significant risks.
Our investments in private and lower middle-market portfolio companies are risky, and we could lose all or part of our investment. Investment in private and lower middle-market companies involves a number of significant risks.
Any default under the agreements governing our indebtedness, including a default under the Credit Facility or other indebtedness to which we may be a party, that is not waived by the required lenders or holders, and the remedies sought by the lenders or holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the 2026 Notes and substantially decrease the market value of the 2026 Notes.
Any default under the agreements governing our indebtedness, including a default under the Credit Facility or other indebtedness to which we may be a party, that is not waived by the required lenders or holders, and the remedies sought by the lenders or holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the Notes Payable and substantially decrease the market value of the Notes Payable.
Furthermore, the terms of the indenture and the 2026 Notes do not protect holders of the 2026 Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, if any, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity.
Furthermore, the terms of the indenture and the Notes Payable do not protect holders of the Notes Payable in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, if any, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity.
Cybersecurity failures or breaches by Stellus Capital Management and other service providers (including, but not limited to, accountants, custodians, transfer agents and administrators), and the issuers of securities in which we invest, also have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, interference with our ability to calculate its net asset value, impediments to trading, the inability of our stockholders to transact business, violations of applicable privacy and other laws, regulatory fines, penalties, reputation damages, reimbursement of other compensation costs, or additional compliance costs.
Cybersecurity failures or breaches by Stellus Capital Management and other service providers (including, but not limited to, accountants, custodians, transfer agents and administrators), and the issuers of securities in which we invest, also have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, interference with our ability to calculate its net asset value, impediments to trading, the inability of our stockholders to transact business, violations of applicable privacy and other laws, regulatory fines, penalties, reputation damages, reimbursement of 53 Table of Contents other compensation costs, or additional compliance costs.
Middle-market companies also may be parties to litigation and may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence.
Lower middle-market companies also may be parties to litigation and may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence.
Our ability to recapitalize, incur additional debt (including additional debt that matures prior to the maturity of the 2026 Notes) and take a number of other actions that are not limited by the terms of the 2026 Notes may have important consequences for holders of the 2026 Notes, including making it more difficult for us to satisfy our obligations with respect to the 2026 Notes or negatively affecting the market value of the 2026 Notes.
Our ability to recapitalize, incur additional debt (including additional debt that matures prior to the maturity of the Notes Payable) and take a number of other actions that are not limited by the terms of the Notes Payable may have important consequences for holders of the Notes Payable, including making it more difficult for us to satisfy our obligations with respect to the Notes Payable or negatively affecting the market value of the Notes Payable.
If the 2026 Notes are traded after their initial issuance, they may trade at a discount to their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, our financial condition, performance and prospects, general economic conditions, or other relevant factors.
If the Notes Payable are traded after their initial issuance, they may trade at a discount to their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, our financial condition, performance and prospects, general economic conditions, or other relevant factors.
If we decide to withdraw our election, we may be required to register as an investment company under the 1940 Act and be subject to the substantially greater regulation under the 1940 Act as a closed-end investment company. Compliance with these regulations would significantly decrease our operating flexibility and could significantly increase our cost of doing business.
If we decide to withdraw our election, we may be required to register as an investment company under the 1940 Act and be subject to the substantially greater regulation under the 1940 Act as a closed-end investment company. Compliance with those regulations would significantly decrease our operating flexibility and could significantly increase our cost of doing business.
If our operating performance declines, we may in the future need to refinance or restructure our debt, including the 2026 Notes, sell assets, reduce or delay capital investments, seek to raise additional capital or seek to obtain waivers from the required lenders under the Credit Facility or other debt that we may incur in the future to avoid being in default.
If our operating performance declines, we may in the future need to refinance or restructure our debt, including the Notes Payable, sell assets, reduce or delay capital investments, seek to raise additional capital or seek to obtain waivers from the required lenders under the Credit Facility or other debt that we may incur in the future to avoid being in default.
Risks Relating to Our Debt Securities The 2026 Notes are unsecured and therefore are effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future and rank pari passu with, or equal to, all outstanding and future unsecured indebtedness issued by and us and our general liabilities (total liabilities, less debt).
Risks Relating to Our Debt Securities The Notes Payable are unsecured and therefore are effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future and rank pari passu with, or equal to, all outstanding and future unsecured indebtedness issued by and us and our general liabilities (total liabilities, less debt).
In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the 2026 Notes.
In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the Notes Payable.
Our failure to purchase such tendered Notes upon the occurrence of such Change of Control Repurchase Event would cause an event of default under the indenture governing the 2026 Notes and a cross-default under the agreements governing the Credit Facility, which may result in the acceleration of such indebtedness requiring us to repay that indebtedness immediately.
Our failure to purchase such tendered Notes Payable upon the occurrence of such Change of Control Repurchase Event would cause an event of default under the indenture governing the Notes Payable and a cross-default under the agreements governing the Credit Facility, which may result in the acceleration of such indebtedness requiring us to repay that indebtedness immediately.
We may not have the ability to control or direct such actions, even if our rights are adversely affected. We may be exposed to special risks associated with bankruptcy cases. One or more of our portfolio companies may be involved in bankruptcy or other reorganization or liquidation proceedings.
We may not have the ability to control or direct such actions, even if our rights are adversely affected. We may be exposed to special risks associated with bankruptcy cases. From time to time, one or more of our portfolio companies may be involved in bankruptcy or other reorganization or liquidation proceedings.
The types of factors that Board may take into account in determining the fair value of our investments generally include, as appropriate, comparison to publicly traded securities including such factors as yield, maturity and measures of credit quality, the enterprise value of a portfolio company, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business and 45 Table of Contents other relevant factors.
The types of factors that Board may take into account in determining the fair value of our investments generally include, as appropriate, comparison to publicly traded securities including such factors as yield, maturity and measures of credit quality, the enterprise value of a portfolio company, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business and other relevant factors.
Other debt we issue or incur in the future could contain more protections for its holders than the indenture and the 2026 Notes, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for, trading levels, and prices of the 2026 Notes.
Other debt we issue or incur in the future could contain more protections for its holders than the indenture and the Notes Payable, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for, trading levels, and prices of the Notes Payable.
Upon a Change of Control Repurchase Event, holders of the 2026 Notes may require us to repurchase for cash some or all of the 2026 Notes at a repurchase price equal to 100% of the aggregate principal amount of the 2026 Notes being repurchased, plus accrued and unpaid interest to, but not including, the repurchase date.
Upon a Change of Control Repurchase Event, holders of the Notes Payable may require us to repurchase for cash some or all of the Notes Payable at a repurchase price equal to 100% of the aggregate principal amount of the Notes Payable being repurchased, plus accrued and unpaid interest to, but not including, the repurchase date.
A downgrade, suspension or withdrawal of the credit rating assigned by a rating agency to us or the 2026 Notes or change in the debt markets could cause the liquidity or market value of the 2026 Notes to decline significantly. Our credit ratings are an assessment by rating agencies of our ability to pay our debts when due.
A downgrade, suspension or withdrawal of the credit rating assigned by a rating agency to us or the Notes Payable or change in the debt markets could cause the liquidity or market value of the Notes Payable to decline significantly. Our credit ratings are an assessment by rating agencies of our ability to pay our debts when due.
Such market conditions may materially and adversely affect debt and equity capital markets, which may have a negative impact on our business and operations. From time to time, capital markets may experience periods of disruption and instability, including during portions of the past four fiscal years .
Such market conditions may materially and adversely affect debt and equity capital markets, which may have a negative impact on our business and operations. From time to time, capital markets may experience periods of disruption and instability, including during portions of the past several fiscal years .
If prevailing rates are lower at the time of redemption, and we redeem the 2026 Notes, you likely would not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the interest rate on the 2026 Notes being redeemed.
If prevailing rates are lower at the time of redemption, and we redeem the Notes Payable, you likely would not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the interest rate on the Notes Payable being redeemed.
In addition, the occurrence of a Change of Control Repurchase Event enabling the holders of the 2026 Notes to require the mandatory purchase of the 2026 Notes will constitute an event of default under our Credit Facility, entitling the lenders to accelerate any indebtedness outstanding under our Credit Facility at that time and to terminate our Credit Facility.
In addition, the occurrence of a Change of Control Repurchase Event enabling the holders of the Notes Payable to require the mandatory purchase of the Notes Payable will constitute an event of default under our Credit Facility, entitling the lenders to accelerate any indebtedness outstanding under our Credit Facility at that time and to terminate our Credit Facility.
Stellus Capital Management’s investment committee, which provides oversight over our investment activities, is provided to us by Stellus Capital Management under the Investment Advisory Agreement. Stellus Capital Management’s investment committee consists of four members, including Messrs. Ladd, and D’Angelo, each a member of our Board, Mr.
Stellus Capital Management’s investment committee, which provides oversight over our investment activities, is provided to us by Stellus Capital Management under the Investment Advisory Agreement. Stellus Capital Management’s investment committee consists of four members, including Messrs. Ladd, and D’Angelo, each a member of our Board and a senior investment professional of Stellus Capital Management, Mr.
A proposal, approved by our stockholders at our 2023 annual stockholders meeting, authorizes us to sell shares equal to up to 25% of our outstanding common stock below the then current net asset value per share of our common stock in one or more offerings.
A proposal approved by our stockholders at our 2024 annual stockholders meeting authorizes us to sell shares equal to up to 25% of our outstanding common stock below the then-current net asset value per share of our common stock in one or more offerings.
The terms of the indenture and the 2026 Notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have a material adverse impact on an investment in the 2026 Notes.
The terms of the indenture and the Notes Payable do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have a material adverse impact on an investment in the Notes Payable.
Huskinson, Chief Fnancial Officer and Chief Compliance Officer for us and Stellus Capital Management, and Mr. Davis, a senior investment professional of Stellus Capital Management. The loss of one or more of the members of Stellus Capital Management’s investment committee may limit our ability to achieve our investment objective and operate our business.
Huskinson, Chief Financial Officer and Chief Compliance Officer for us and Stellus Capital Management, and Mr. Davis, a senior investment professional of Stellus Capital Management. The loss of one or more of the members of Stellus Capital Management’s investment committee may limit our ability to achieve our investment objective and operate our business.
None of our subsidiaries are or will be a guarantor of the 2026 Notes, and the 2026 Notes are not required to be guaranteed by any subsidiary we may acquire or create in the future. Any assets of our subsidiaries are not directly available to satisfy the claims of our creditors, including holders of the 2026 Notes.
None of our subsidiaries are or will be a guarantor of the Notes Payable, and the Notes Payable are not required to be guaranteed by any subsidiary we may acquire or create in the future. Any assets of our subsidiaries are not directly available to satisfy the claims of our creditors, including holders of the Notes Payable.
Because the Credit Facility has, the indenture governing the 2026 Notes has, and any future credit facilities will likely have, customary cross-default provisions, if the indebtedness under the 2026 Notes, the Credit Facility or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due.
Because the Credit Facility has, the indenture governing the Notes Payable has, and any future credit facilities will likely have, customary cross-default provisions, if the indebtedness under the Notes Payable, the Credit Facility or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due.
There can be no assurance these market conditions will not continue or worsen in the future , including as a result of inflation and rising interest rates, the wars in Ukraine and Russia and the Middle East, and health epidemics and pandemics .
There can be no assurance these market conditions will not continue or worsen in the future , including as a result of inflation and fluctuating interest rates, the wars in Ukraine and Russia and the Middle East, and health epidemics and pandemics .
Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors of our subsidiaries will have priority over our equity interests in such entities (and therefore the claims of our creditors, including holders of the 2026 Notes) with respect to the assets of such entities.
Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors of our subsidiaries will have priority over our equity interests in such entities (and therefore the claims of our creditors, including holders of the Notes Payable) with respect to the assets of such entities.
The extent of the impact of any public health emergency, such as the COVID-19 pandemic, on our and our portfolio companies’ operational and financial performance will depend on many factors, including the duration and scope of such public health emergency, the actions taken by governmental authorities to contain its financial and economic impact, the extent of any related travel advisories and restrictions implemented, the impact of such public health emergency on overall supply and demand, goods and services, investor liquidity, consumer confidence and levels of economic activity and the extent of its disruption to important global, regional and local supply chains and economic markets, all of which are highly uncertain and cannot be predicted.
The extent of the impact of any public health emergency on our and our portfolio companies’ operational and financial performance will depend on many factors, including the duration and scope of such public health emergency, the actions taken by governmental authorities to contain its financial and economic impact, the extent of any related travel advisories and restrictions implemented, the impact of such public health emergency on overall supply and demand, goods and services, investor liquidity, consumer confidence and levels of economic activity and the extent of its disruption to important global, regional and local supply chains and economic markets, all of which are highly uncertain and cannot be predicted.
The indebtedness under the Credit Facility is effectively senior to the 2026 Notes to the extent of the value of the assets securing such indebtedness. The 2026 Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries. The 2026 Notes are obligations exclusively of Stellus Capital Investment Corporation, and not of any of our subsidiaries.
The indebtedness under the Credit Facility is effectively senior to the Notes Payable to the extent of the value of the assets securing such indebtedness. The Notes Payable are structurally subordinated to the indebtedness and other liabilities of our subsidiaries. The Notes Payable are obligations exclusively of Stellus Capital Investment Corporation, and not of any of our subsidiaries.
As of December 31, 2023, substantially all of our assets were pledged as collateral under the Credit Facility or are subject to a superior claim over the holders of our common stock by the SBA pursuant to the SBA-guaranteed debentures.
As of December 31, 2024, substantially all of our assets were pledged as collateral under the Credit Facility or are subject to a superior claim over the holders of our common stock by the SBA pursuant to the SBA-guaranteed debentures.
While we engage in actions to reduce our exposure 53 Table of Contents resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure or destruction of data, or other cybersecurity incidents, with increased costs and other consequences, including those described above. In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future.
While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure or destruction of data, or other cybersecurity incidents, with increased costs and other consequences, including those described above. In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future.
In addition, a decreased U.S. government credit rating could create broader financial turmoil and uncertainty, which may weigh heavily on our financial performance and the value of our common stock. 54 Table of Contents Deterioration in the economic conditions in the Eurozone and other regions or countries globally and the resulting instability in global financial markets may pose a risk to our business.
In addition, a decreased U.S. government credit rating could create broader financial turmoil and uncertainty, which may weigh heavily on our financial performance and the value of our common stock. Deterioration in the economic conditions in the Eurozone and other regions or countries globally and the resulting instability in global financial markets may pose a risk to our business.
Although the underwriter has informed us that it intends to make a market in the 2026 Notes, it is not obligated to do so, and the underwriter may discontinue any market-making in the 2026 Notes at any time at its sole discretion.
Although the underwriter has informed us that it intends to make a market in the Notes Payable, it is not obligated to do so, and the underwriter may discontinue any market-making in the Notes Payable at any time at its sole discretion.
Such OID, which could be significant relative to our overall investment activities, and increases in loan balances as a result of contracted PIK arrangements are included in income before we receive any corresponding cash payments. We also may be required to include in income certain other amounts that we will not receive in cash.
Such OID, which could be significant relative to our overall investment activities, and increases in loan balances as a result of contracted PIK arrangements are included in income before we receive any 40 Table of Contents corresponding cash payments. We also may be required to include in income certain other amounts that we will not receive in cash.
We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Use of these hedging instruments may expose us to counter-party credit risk.
We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Use of these hedging instruments may expose us to counter- 45 Table of Contents party credit risk.
In addition, restrictions and provisions in our Credit Facility, the 2026 Notes and any future credit facilities, as well as in the terms of any debt securities we issue, may limit our ability to make distributions in certain circumstances.
In addition, restrictions and provisions in our Credit Facility, the Notes Payable and any future credit facilities, as well as in the terms of any debt securities we issue, may limit our ability to make distributions in certain circumstances.
Accordingly, we cannot assure you that a liquid trading market will develop or be maintained for the 2026 Notes, that you will be able to sell your 2026 Notes at a particular time or that the price you receive when you sell will be favorable.
Accordingly, we cannot assure you that a liquid trading market will develop or be maintained for the Notes Payable, that you will be able to sell your Notes Payable at a particular time or that the price you receive when you sell will be favorable.
Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during cyclical economic downturns. Under certain circumstances, 37 Table of Contents the use of additional leverage may increase the likelihood of our default on our borrowings, which would disfavor holders of our common stock.
Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during cyclical economic downturns. Under certain circumstances, the use of additional leverage may increase the likelihood of our default on our borrowings, which would disfavor holders of our common stock.
There also are instances where creditors can lose their ranking and priority if they are considered to have taken over management of a borrower. 61 Table of Contents To the extent that portfolio companies in which we have invested through a unitranche facility are involved in bankruptcy proceedings, the outcome of such proceedings may be uncertain.
There also are instances where creditors can lose their ranking and priority if they are considered to have taken over management of a borrower. To the extent that portfolio companies in which we have invested through a unitranche facility are involved in bankruptcy proceedings, the outcome of such proceedings may be uncertain.
Smaller leveraged companies also may have less predictable operating results and may require substantial additional capital to support their operations, finance their expansion or maintain their competitive position. 56 Table of Contents We may hold the loans and debt securities of leveraged companies that may, due to the significant operating volatility typical of such companies, enter into bankruptcy proceedings.
Smaller leveraged companies also may have less predictable operating results and may require substantial additional capital to support their operations, finance their expansion or maintain their competitive position. We may hold the loans and debt securities of leveraged companies that may, due to the significant operating volatility typical of such companies, enter into bankruptcy proceedings.
We may choose to redeem the 2026 Notes when prevailing interest rates are relatively low. The 2026 Notes are redeemable in whole or in part upon certain conditions at any time or from time to time at our option.
We may choose to redeem the Notes Payable when prevailing interest rates are relatively low. The Notes Payable are redeemable in whole or in part upon certain conditions at any time or from time to time at our option.
Consequently, real or anticipated changes in our credit ratings will generally affect the market value of the 2026 Notes. These credit ratings may not reflect the potential impact of risks relating to the structure or marketing of the 2026 Notes.
Consequently, real or anticipated changes in our credit ratings will generally affect the market value of the Notes Payable. These credit ratings may not reflect the potential impact of risks relating to the structure or marketing of the Notes Payable.
For example, we believe some of our competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of 38 Table of Contents investments and establish more relationships than us.
For example, we believe some of our competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us.
Consequently, we will be unable to prevent any damage to goodwill that may occur as a result of the activities of Stellus Capital 49 Table of Contents Management or others. Furthermore, in the event the license agreement is terminated, we will be required to change our name and cease using “Stellus Capital” as part of our name.
Consequently, we will be unable to prevent any damage to goodwill that may occur as a result of the activities of Stellus Capital Management or others. Furthermore, in the event the license agreement is terminated, we will be required to change our name and cease using “Stellus Capital” as part of our name.
Similarly, Stellus Capital Management and its affiliates may have other clients with similar, different or competing investment objectives. In serving in these multiple capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in the best interests of us or our stockholders.
Similarly, Stellus Capital Management and its affiliates may have other clients with similar, different or competing investment objectives. In serving in these multiple capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may 37 Table of Contents not be in the best interests of us or our stockholders.
Moreover, such deleveraging of our company could significantly impair our ability to effectively operate our business in the manner in which we have historically operated. As a result, we could be forced to 43 Table of Contents curtail or cease new investment activities and lower or eliminate the dividends that we have historically paid to our stockholders.
Moreover, such deleveraging of our company could significantly impair our ability to effectively operate our business in the manner in which we have historically operated. As a result, we could be forced to curtail or cease new investment activities and lower or eliminate the dividends that we have historically paid to our stockholders.
We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates to the extent permitted by the 1940 Act.
We may utilize instruments such as forward contracts, currency options and 44 Table of Contents interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates to the extent permitted by the 1940 Act.
The perceived value of our investment portfolio may be affected by a number of factors including perceived prospects for individual companies we invest in, market conditions for common stock generally, for initial public offerings and other exit events for venture capital backed companies, and the mix of companies in our investment 63 Table of Contents portfolio over time.
The perceived value of our investment portfolio may be affected by a number of factors including perceived prospects for individual companies we invest in, market conditions for common stock generally, for initial public offerings and other exit events for venture capital backed companies, and the mix of companies in our investment portfolio over time.
There is no active trading market for the 2026 Notes. If an active trading market does not develop for the 2026 Notes, you may not be able to sell them. The 2026 Notes are debt securities for which there currently is no trading market.
There is no active trading market for the Notes Payable. If an active trading market does not develop for the Notes Payable, you may not be able to sell them. The Notes Payable are debt securities for which there currently is no trading market.
We would not be able to borrow under our Credit Facility to finance such a repurchase of the 2026 Notes, and we expect that any future credit facility would have similar limitations.
We would not be able to borrow under our Credit Facility to finance such a repurchase of the Notes Payable, and we expect that any future credit facility would have similar limitations.
If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under the 2026 Notes or our other debt.
If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under the Notes Payable or our other debt.
We may not be able to repurchase the 2026 Notes upon a Change of Control Repurchase Event. We may not be able to repurchase the 2026 Notes upon a Change of Control Repurchase Event (as defined in the supplemental indenture governing the 2026 Notes) because we may not have sufficient funds.
We may not be able to repurchase the Notes Payable upon a Change of Control Repurchase Event. We may not be able to repurchase the Notes Payable upon a Change of Control Repurchase Event (as defined in the supplemental indenture governing the Notes Payable) because we may not have sufficient funds.
If we 46 Table of Contents are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on the price of our securities.
If we are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on the price of our securities.
If either of our SBIC subsidiaries fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit its use of debentures, declare outstanding debentures immediately due and payable, and/or limit it from making new investments.
If either of our SBIC subsidiaries fails to comply with 47 Table of Contents applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit its use of debentures, declare outstanding debentures immediately due and payable, and/or limit it from making new investments.
The achievement of our investment objective on a cost-effective basis will depend upon Stellus Capital Management’s execution of our investment process, its ability to provide 36 Table of Contents competent, attentive and efficient services to us and, to a lesser extent, our access to financing on acceptable terms.
The achievement of our investment objective on a cost-effective basis will depend upon Stellus Capital Management’s execution of our investment process, its ability to provide competent, attentive and efficient services to us and, to a lesser extent, our access to financing on acceptable terms.
The involvement of our interested directors in the valuation process may create conflicts of interest. We make many of our portfolio investments in the form of loans and securities that are not publicly traded and for which no market-based price quotation is available.
The involvement of our interested directors in the valuation process may create conflicts of interest. We make many of our portfolio investments in the form of loans and securities that are not publicly traded and for which no market quotation is readily available.
As a result, because the base management fee that we pay to 41 Table of Contents Stellus Capital Management is based on the value of our gross assets, the receipt by us of PIK interest will result in an increase in the amount of the base management fee payable by us.
As a result, because the base management fee that we pay to Stellus Capital Management is based on the value of our gross assets, the receipt by us of PIK interest will result in an increase in the amount of the base management fee payable by us.
We may choose to redeem the 2026 Notes from time to time, especially if prevailing interest rates are lower than the rate borne by the 2026 Notes.
We may choose to redeem the Notes Payable from time to time, especially if prevailing interest rates are lower than the rate borne by the Notes Payable.
In such cases, we may be unable to exercise rights we may otherwise have to protect our interests as security holders in such portfolio company. If we make subordinated investments, the obligors or the portfolio companies may not generate sufficient cash flow to service their debt obligations to us.
In such cases, we may be unable to exercise rights we may otherwise have to protect our interests as security holders in such portfolio company. 61 Table of Contents If we make subordinated investments, the obligors or the portfolio companies may not generate sufficient cash flow to service their debt obligations to us.
We do not intend to list the 2026 Notes on any securities exchange or for quotation of the 2026 Notes on any automated dealer quotation system.
We do not intend to list the Notes Payable on any securities exchange or for quotation of the Notes Payable on any automated dealer quotation system.
These developments, along with the United States government’s credit and deficit concerns, global economic uncertainties and market volatility and the impacts of COVID-19, could cause interest rates to be volatile, which may negatively impact our ability to access the debt markets and capital markets on favorable terms.
These developments, along with the United States government’s credit and deficit concerns, global economic uncertainties and market volatility, could cause interest rates to be volatile, which may negatively impact our ability to access the debt markets and capital markets on favorable terms.
In the past, we have entered into certain hedging transactions to mitigate our exposure to adverse fluctuations in interest rates, and we may do so again in the future. However, we cannot assure you that such transactions will be successful in mitigating our exposure to interest rate risk.
In the past, we have entered into certain hedging transactions to mitigate our 35 Table of Contents exposure to adverse fluctuations in interest rates, and we may do so again in the future. However, we cannot assure you that such transactions will be successful in mitigating our exposure to interest rate risk.
Ladd and D’Angelo, each an interested member of our Board, has a direct pecuniary interest in Stellus Capital Management.
Ladd and D’Angelo, each an interested member of our Board, have a direct pecuniary interest in Stellus Capital Management.
If we are not able to obtain such cash from other sources, we may fail to maintain our tax treatment as a RIC and thus be subject to income tax.
If we are not able to obtain such cash from other sources, we may fail to maintain our tax treatment as a RIC and thus be subject to U.S. federal income tax.

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Item 1C. Cybersecurity

Cybersecurity — threats and controls disclosure

3 edited+0 added−1 removed5 unchanged
Biggest changeAs part of our risk management process, we conduct assessment and penetration testing, including regular trainings completed by employees of Stellus Capital Management who provide services to us pursuant to the Administration Agreement. ​ Material Impact of Cybersecurity Risks ​ As of the date of this Annual Report on Form 10-K, we are not aware of any material risks from cybersecurity threats that have materially affected, or are reasonably likely to materially affect, us, including our business strategy, results of operations, or financial condition.
Biggest changeMaterial Impact of Cybersecurity Risks As of the date of this Annual Report on Form 10-K, we are not aware of any material risks from cybersecurity threats that have materially affected, or are reasonably likely to materially affect, us, including our business strategy, results of operations, or financial condition. However, future incidents could have a material impact on our business.
Additional information about the cybersecurity risks that we face is discussed in Item 1A of Part I, “Risk Factors,” in this Annual Report on Form 10-K under the heading “ We, Stellus Capital Management and our portfolio companies are subject to risks associated with “phishing” and other cyber-attacks. ” Oversight of Cybersecurity Risks ​ 68 Table of Contents Our cybersecurity risks and associated mitigation strategies are evaluated by our management and the Information Security Team as needed, but no less frequently than annually.
Additional information about the cybersecurity risks that we face is discussed in Item 1A of Part I, “Risk Factors,” in this Annual Report on Form 10-K under the heading “ We, Stellus Capital Management and our portfolio companies are subject to risks associated with “phishing” and other cyber-attacks. ” Oversight of Cybersecurity Risks Our cybersecurity risks and associated mitigation strategies are evaluated by our management and the Information Security Team as needed, but no less frequently than annually.
At times we may also engage assessors, consultants, auditors or other third parties to assist with assessing, identifying and managing cybersecurity risk.
At times we may also engage assessors, consultants, auditors or other third parties to assist with assessing, identifying and managing cybersecurity risk. As part of our risk management process, we conduct assessment and penetration testing, including regular trainings completed by employees of Stellus Capital Management who provide services to us pursuant to the Administration Agreement.
Removed
However, future incidents could have a material impact on our business.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

1 edited+0 added−0 removed2 unchanged
Biggest changeWhile 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 4. Mine Safety Disclosures Not applicable. ​ 69 Table of Contents PART II
Biggest changeWhile 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 4. Mine Safety Disclosures Not applicable. ​ 68 Table of Contents PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

20 edited+5 added−1 removed5 unchanged
Biggest changeThe following table sets forth, for each fiscal quarter of the three most recent fiscal years, the range of high and low closing prices of our common stock as reported on the NYSE and the sales price as a percentage of our net asset value (“NAV”). ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Premium or Premium or ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Discount of ​ Discount of ​ ​ NAV Per ​ Closing Sales Price (2) ​ High Sales ​ Low Sales Fiscal Year Ended ​ Share (1) High Low NAV (3) NAV (3) December 31, 2023 ​ ​ ​ ​ Fourth quarter ​ $ 13.26 ​ $ 13.73 ​ $ 12.34 3.54 % (6.94) % Third quarter ​ $ 13.19 ​ $ 15.27 ​ $ 13.60 15.77 % 3.11 % Second quarter ​ $ 13.67 ​ $ 15.00 ​ $ 13.64 9.73 % (0.22) % First quarter ​ $ 13.87 ​ $ 15.97 ​ $ 13.14 15.14 % (5.26) % December 31, 2022 ​ ​ ​ ​ Fourth quarter ​ $ 14.02 ​ $ 13.96 ​ $ 11.98 (0.43) % (14.55) % Third quarter ​ $ 14.15 ​ $ 14.08 ​ $ 11.44 (0.49) % (19.15) % Second quarter ​ $ 14.07 ​ $ 14.20 ​ $ 11.13 0.92 % (20.90) % First quarter ​ $ 14.03 ​ $ 14.15 ​ $ 13.08 0.86 % (6.77) % December 31, 2021 ​ ​ ​ ​ Fourth quarter ​ $ 14.03 ​ $ 14.65 ​ $ 12.38 4.42 % (11.76) % Third quarter ​ $ 13.17 ​ $ 13.61 ​ $ 12.45 3.34 % (5.47) % Second quarter ​ $ 13.34 ​ $ 13.66 ​ $ 12.40 2.40 % (7.05) % First quarter ​ $ 11.55 ​ $ 12.70 ​ $ 10.18 9.96 % (11.86) % (1) NAV is determined as of the last date in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low sales prices.
Biggest changeThe following table sets forth, for each fiscal quarter of the three most recent fiscal years, the range of high and low closing prices of our common stock as reported on the NYSE and the sales price as a percentage of our net asset value (“NAV”). ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Premium or Premium or ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Discount of ​ Discount of ​ ​ NAV Per ​ Closing Sales Price (2) ​ High Sales ​ Low Sales Fiscal Year Ended ​ Share (1) High Low NAV (3) NAV (3) December 31, 2024 ​ ​ ​ ​ Fourth quarter ​ $ 13.46 ​ $ 14.33 ​ $ 13.14 6.46 % (2.38) % Third quarter ​ $ 13.55 ​ $ 14.41 ​ $ 13.39 6.35 % (1.18) % Second quarter ​ $ 13.36 ​ $ 14.35 ​ $ 12.97 7.41 % (2.92) % First quarter ​ $ 13.41 ​ $ 13.48 ​ $ 12.56 0.52 % (6.34) % December 31, 2023 ​ ​ ​ ​ Fourth quarter ​ $ 13.26 ​ $ 13.73 ​ $ 12.34 3.54 % (6.94) % Third quarter ​ $ 13.19 ​ $ 15.27 ​ $ 13.60 15.77 % 3.11 % Second quarter ​ $ 13.67 ​ $ 15.00 ​ $ 13.64 9.73 % (0.22) % First quarter ​ $ 13.87 ​ $ 15.97 ​ $ 13.14 15.14 % (5.26) % December 31, 2022 ​ ​ ​ ​ Fourth quarter ​ $ 14.02 ​ $ 13.96 ​ $ 11.98 (0.43) % (14.55) % Third quarter ​ $ 14.15 ​ $ 14.08 ​ $ 11.44 (0.49) % (19.15) % Second quarter ​ $ 14.07 ​ $ 14.20 ​ $ 11.13 0.92 % (20.90) % First quarter ​ $ 14.03 ​ $ 14.15 ​ $ 13.08 0.86 % (6.77) % (1) NAV is determined as of the last date in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low sales prices.
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 our investment objective and strategies.
Under the 2023 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 our investment objective and strategies.
Use of Proceeds from Recent Sales of Registered Securities 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 principals thereunder.
Use of Proceeds from Recent Sales of Registered Securities On November 16, 2021, we 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 principals thereunder.
Under the 2021 Equity Distribution Agreement, the Company may issue and sell, from time to time, up to $50,000,000 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 our investment objective and strategies.
Under the 2021 Equity Distribution Agreement, we could issue and sell, from time to time, up to $50,000,000 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 our investment objective and strategies.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is traded on the NYSE under the symbol “SCM.” As of March 4, 2024, we had nine stockholders of record, which did not include stockholders for whom shares are held in nominee or street name.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is traded on the NYSE under the symbol “SCM.” As of March 4, 2025, we had eight stockholders of record, which did not include stockholders for whom shares are held in nominee or street name.
On August 11, 2023, we 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 principals thereunder.
On August 11, 2023, we 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 principals thereunder.
The NAVs shown are based on outstanding shares at the end of each period. (2) Closing sales price is determined as the high or low closing sales price noted within the respective quarter, not adjusted for dividends. (3) Calculated as of the respective high or low sales price divided by the quarter-end NAV.
The NAVs shown are based on outstanding shares at the end of each period. (2) Closing sales price is determined as the high or low closing sales price noted within the respective quarter, not adjusted for dividends.
In September 2023, we sold 1,272,745 shares of common stock through the ATM Program for net proceeds of $17,477,976, which was used to repay borrowings under the Credit Facility.
In August 2023, we sold 294,993 shares of common stock through the ATM Program for net proceeds of $4,092,986, which was used to repay borrowings under the Credit Facility. In September 2023, we sold 1,272,745 shares of common stock through the ATM Program for net proceeds of $17,477,976, which was used to repay borrowings under the Credit Facility.
We generally intend to pay distributions to our stockholders out of assets legally available for distribution. Our distributions and their frequency, if any, will be determined by our Board. From January 2014 through March 2020, we paid aggregate monthly distributions of $0.1133 per share on our common shares.
We generally intend to pay distributions to our stockholders out of assets legally available for distribution. Our distributions and their frequency, if any, will be determined by our Board. For the period January 2022 through March 2022, we paid monthly distributions of $0.0933 per share on our common shares.
Purchases of Equity Securities Dividend Reinvestment Plan During the year ended December 31, 2023, as a part of our distribution reinvestment plan ("DRIP"), we purchased 152,097 shares of our common stock for an average price per share of $13.84 in the open market in order to satisfy the reinvestment portion of our dividends.
Purchases of Equity Securities Dividend Reinvestment Plan During the year ended December 31, 2024, as a part of our distribution reinvestment plan ("DRIP"), we purchased 182,184 shares of our common stock for an average price per share of $13.68 in the open market in order to satisfy the 70 Table of Contents reinvestment portion of our dividends.
In November 2021, we sold 31,592 shares of common stock through the ATM Program for net proceeds of $442,770, which was used to repay borrowings under the Credit Facility. In March 2022, we sold 14,924 shares of common stock through the ATM Program for net proceeds of $205,870, which was used to repay borrowings under the Credit Facility.
In March 2022, we sold 14,924 shares of common stock through the ATM Program for net proceeds of $205,870, which was used to repay borrowings under the Credit Facility. In April 2022, we sold 13,416 shares of common stock through the ATM Program for net proceeds of $185,144, which was used to repay borrowings under the Credit Facility.
In April 2023, we sold 587,363 shares of common stock through the ATM Program for net proceeds of $8,027,626, which was used to repay borrowings under the Credit Facility. In May 2023, we sold 730,424 shares of common stock through the ATM Program for net proceeds of $10,471,012, which was used to repay borrowings under the Credit Facility.
In May 2023, we sold 730,424 shares of common stock through the ATM Program for net proceeds of $10,471,012, which was used to repay borrowings under the Credit Facility. In June 2023, we sold 991,734 shares of common stock through the ATM Program for net proceeds of $13,566,642, which was used to repay borrowings under the Credit Facility.
The stock price performance included in the above graph is not necessarily indicative of future stock price performance. ​ Item 6. [Reserved] ​ 73 Table of Contents
The stock price performance included in the above graph is not necessarily indicative of future stock price performance. ​
In January 2023, we sold 33,812 shares of common stock through the ATM Program for net proceeds of $459,187, which was used to repay borrowings under the Credit Facility. In March 2023, we sold 547,802 shares of common stock through the ATM Program for net proceeds of $7,832,670, which was used to repay borrowings under the Credit Facility.
In November 2022, we sold 120,834 shares of common stock through the ATM Program for net proceeds of $1,648,854, which was used to repay borrowings under the Credit Facility. In January 2023, we sold 33,812 shares of common stock through the ATM Program for net proceeds of $459,187, which was used to repay borrowings under the Credit Facility.
The following chart outlines such purchases of our common stock during the year ended December 31, 2023: ​ ​ ​ ​ ​ ​ ​ ​ Total Number Average Price ​ ​ of Shares ​ Paid Per Period ​ Purchased ​ Share January 1, 2023 – January 31, 2023 9,770 ​ $ 13.28 February 1, 2023 – February 28, 2023 9,956 ​ 15.61 March 1, 2023 – March 31, 2023 11,093 ​ 13.88 April 1, 2023 – April 30, 2023 11,986 ​ 13.73 May 1, 2023 – May 31, 2023 9,865 ​ 15.03 June 1, 2023 – June 30, 2023 10,586 ​ 13.93 July 1, 2023 – July 31, 2023 11,978 ​ 14.57 August 1, 2023 – August 31, 2023 16,490 ​ 14.29 September 1, 2023 – September 30, 2023 12,563 ​ 13.91 October 1, 2023 – October 31, 2023 15,894 ​ 13.34 November 1, 2023 – November 30, 2023 16,249 ​ 12.88 December 1, 2023 – December 31, 2023 15,667 ​ 12.77 Total 152,097 ​ $ 13.84 ​ 71 Table of Contents Price Range of Common Stock Our shares of common stock are traded on the NYSE under the symbol “SCM.” In connection with our initial public offering, our shares of common stock began trading on November 8, 2012, and before that date, there was no established trading market for shares of our common stock.
The following chart outlines such purchases of our common stock during the year ended December 31, 2024: ​ ​ ​ ​ ​ ​ ​ ​ Total Number Average Price ​ ​ of Shares ​ Paid Per Period ​ Purchased ​ Share January 1, 2024 – January 31, 2024 16,071 ​ $ 12.87 February 1, 2024 – February 29, 2024 15,969 ​ 12.95 March 1, 2024 – March 31, 2024 16,111 ​ 13.09 April 1, 2024 – April 30, 2024 15,830 ​ 13.42 May 1, 2024 – May 31, 2024 15,081 ​ 14.21 June 1, 2024 – June 30, 2024 15,767 ​ 13.81 July 1, 2024 – July 31, 2024 15,487 ​ 14.36 August 1, 2024 – August 31, 2024 15,260 ​ 13.95 September 1, 2024 – September 30, 2024 15,318 ​ 13.71 October 1, 2024 – October 31, 2024 14,209 ​ 14.11 November 1, 2024 – November 30, 2024 12,705 ​ 13.95 December 1, 2024 – December 31, 2024 14,376 ​ 13.89 Total 182,184 ​ $ 13.68 ​ Price Range of Common Stock Our shares of common stock are traded on the NYSE under the symbol “SCM.” In connection with our initial public offering, our shares of common stock began trading on November 8, 2012, and before that date, there was no established trading market for shares of our common stock.
Since our shares of common stock began trading on November 8, 2012, in connection with our initial public offering, our shares of common stock have traded at times at a discount to the net assets attributable to those shares of common stock. 72 Table of Contents Stock Performance Graph This graph compares the return on our shares of common stock with that of the Standard & Poor’s 500 Stock Index, the Russell 2000 Financial Services Index, and the Raymond James BDC Index, for the period from inception through December 31, 2023.
Stock Performance Graph This graph compares the return on our shares of common stock with that of the Standard & Poor’s 500 Stock Index, the Russell 2000 Financial Services Index, and the Raymond James BDC Index, for the period from inception through December 31, 2024.
In June 2023, we sold 991,734 shares of common stock through the ATM Program for net proceeds of $13,566,642, which was used to repay borrowings under the Credit Facility. In August 2023, we sold 294,993 shares of common stock through the ATM Program for net proceeds of $4,092,986, which was used to repay borrowings under the Credit Facility.
In July 2024, we sold 1,150 shares of common stock through the ATM Program for net proceeds of $15,633, which was used to repay borrowings under the Credit Facility. In August 2024, we sold 707,610 shares of common stock through the ATM Program for net proceeds of $9,631,798, which was used to repay borrowings under the Credit Facility.
In April 2022, we sold 13,416 shares of common stock through the ATM Program for net proceeds of $185,144, which was used to repay borrowings under the Credit Facility. 70 Table of Contents In November 2022, we sold 120,834 shares of common stock through the ATM Program for net proceeds of $1,648,854, which was used to repay borrowings under the Credit Facility.
In March 2023, we sold 547,802 shares of common stock through the ATM Program for net proceeds of $7,832,670, which was used to repay borrowings under the Credit Facility. 69 Table of Contents In April 2023, we sold 587,363 shares of common stock through the ATM Program for net proceeds of $8,027,626, which was used to repay borrowings under the Credit Facility.
Payment of dividends on our common shares is within the discretion of the Board, and depends on, among other factors, net earnings, capital requirements and our financial condition. However, we intend to continue to pay comparable dividends to stockholders in the future. Recent Sales of Unregistered Securities None.
However, we intend to continue to pay comparable dividends to stockholders in the future. Recent Sales of Unregistered Securities None.
For the period October 2021 through December 2021, we paid monthly distributions of $0.0933 per share on our common shares. For the period January 2022 through March 2022, we paid monthly distributions of $0.0933 per share on our common shares. For the period April 2022 through December 2023, we paid monthly distributions of $0.1133 per share on our common shares.
For the period April 2022 through December 2024, we paid monthly distributions of $0.1333 per share on our common shares. Payment of dividends on our common shares is within the discretion of the Board, and depends on, among other factors, net earnings, capital requirements and our financial condition.
Removed
For the period April 2020 through December 2020, we paid quarterly distributions of $0.25 per share on our common shares. For the period January 2021 through June 2021, we paid monthly distributions of $0.0833 per share on our common shares. For the period July 2021 through September 2021, we paid monthly distributions of $0.1000 per share on our common shares.
Added
In May 2024, we sold 1,154,611 shares of common stock through the ATM Program for net proceeds of $15,859,129, which was used to repay borrowings under the Credit Facility. In June 2024, we sold 700,745 shares of common stock through the ATM Program for net proceeds of $9,531,069, which was used to repay borrowings under the Credit Facility.
Added
In September 2024, we sold 349,606 shares of common stock through the ATM Program for net proceeds of $4,727,126, which was used to repay borrowings under the Credit Facility. In October 2024, we sold 18,374 shares of common stock through the ATM Program for net proceeds of $247,994, which was used to repay borrowings under the Credit Facility.
Added
In November 2024, we sold 183,199 shares of common stock through the ATM Program for net proceeds of $2,501,729, which was used to repay borrowings under the Credit Facility. In December 2024, we sold 240,181 shares of common stock through the ATM Program for net proceeds of $3,282,112, which was used to repay borrowings under the Credit Facility.
Added
(3) Calculated as of the respective high or low sales price divided by the quarter-end NAV. 71 Table of Contents On March 3 2025, the last reported closing sales price of our common stock on the NYSE was $15.50 per share, which represented a premium of approximately 15.2% to the NAV per share reported by us as of December 31, 2024.
Added
Since our shares of common stock began trading on November 8, 2012, in connection with our initial public offering, our shares of common stock have traded at times at a discount to the NAV attributable to those shares of common stock.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

102 edited+16 added−14 removed59 unchanged
Biggest changeAs of December 31, 2023, we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded commitments should the need arise. 76 Table of Contents The following is a summary of geographical concentration of our investment portfolio as of December 31, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ % of Total ​ ​ ​ ​ ​ ​ ​ ​ Investments at ​ ​ Cost ​ Fair Value ​ Fair Value ​ Texas $ 182,531,256 $ 175,311,724 20.04 % California ​ 175,207,692 ​ 167,713,589 19.18 % Florida ​ 93,155,844 ​ 92,297,574 10.55 % Pennsylvania ​ 49,939,315 ​ 50,188,102 5.74 % Illinois ​ 58,633,617 ​ 49,834,429 5.70 % Arizona ​ 42,136,322 ​ 44,558,279 5.10 % Ohio ​ 31,805,370 ​ 34,370,277 3.93 % Colorado ​ 31,525,420 ​ 30,971,079 3.54 % Wisconsin ​ 27,452,444 ​ 26,190,771 3.00 % Washington ​ 24,321,085 ​ 24,540,695 2.81 % Georgia ​ 9,100,050 ​ 18,885,409 2.16 % Maryland ​ 16,676,194 ​ 16,718,728 1.91 % New York ​ 14,692,043 ​ 14,931,263 1.71 % Indiana ​ 14,235,403 ​ 14,488,700 1.66 % North Carolina ​ 13,891,930 ​ 14,532,532 1.66 % District of Columbia ​ 13,030,899 ​ 14,006,563 1.60 % New Jersey ​ 10,461,226 ​ 11,191,295 1.28 % Michigan ​ 10,664,100 ​ 10,736,783 1.23 % Massachusetts ​ 10,151,621 ​ 10,515,487 1.20 % Tennessee ​ 9,390,657 ​ 9,379,311 1.07 % Missouri ​ 8,862,512 ​ 8,850,162 1.01 % Canada ​ 8,700,383 ​ 8,813,132 1.01 % Idaho ​ 8,405,946 ​ 8,470,065 0.97 % Minnesota ​ 5,976,818 ​ 5,907,639 0.68 % Louisiana ​ 5,538,823 ​ 5,536,231 0.63 % South Carolina ​ 4,946,375 ​ 5,083,862 0.58 % United Kingdom ​ 20,710,205 ​ 437,002 0.05 % ​ ​ $ 902,143,550 ​ $ 874,460,683 100.00 % ​ 77 Table of Contents The following is a summary of geographical concentration of our investment portfolio as of December 31, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ % of Total ​ ​ ​ ​ ​ ​ ​ ​ Investments at ​ ​ Cost ​ Fair Value ​ Fair Value Texas ​ $ 191,422,143 ​ $ 171,165,597 20.26 % California ​ 167,833,384 ​ 165,340,017 19.57 % Florida ​ 60,593,839 ​ 59,421,775 7.03 % Illinois ​ 64,421,998 ​ 53,218,615 6.30 % Arizona ​ 43,129,283 ​ 44,277,625 5.24 % Pennsylvania ​ 42,899,504 ​ 41,889,344 4.96 % Ohio ​ 34,223,452 ​ 37,333,236 4.42 % Washington ​ 28,978,375 ​ 28,480,471 3.37 % New Jersey ​ 25,395,054 ​ 25,140,343 2.98 % Wisconsin ​ 27,533,402 ​ 24,271,761 2.87 % District of Columbia ​ 17,236,556 ​ 21,124,347 2.50 % Georgia ​ 10,919,642 ​ 19,692,757 2.33 % South Carolina ​ 19,089,373 ​ 18,654,782 2.21 % Maryland ​ 16,824,077 ​ 16,576,554 1.96 % Minnesota ​ ​ 16,972,086 ​ ​ 15,952,072 1.89 % United Kingdom ​ ​ 20,530,087 ​ ​ 14,445,481 1.71 % Colorado ​ 15,204,934 ​ 14,295,470 1.69 % Indiana ​ 14,346,082 ​ 14,245,432 1.69 % Canada ​ 13,333,737 ​ 13,266,669 1.57 % North Carolina ​ 10,461,551 ​ 10,649,232 1.26 % Massachusetts ​ ​ 10,215,356 ​ ​ 10,527,659 1.25 % Idaho ​ 9,873,093 ​ 9,863,103 1.17 % Missouri ​ 9,142,111 ​ 9,656,287 1.14 % New York ​ 5,096,152 ​ 5,096,008 0.61 % Michigan ​ 147,906 ​ 149,001 0.02 % ​ ​ $ 875,823,177 ​ $ 844,733,638 100.00 % ​ 78 Table of Contents The following is a summary of industry concentration of our investment portfolio as of December 31, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ % of Total ​ ​ ​ ​ ​ ​ ​ ​ Investments at ​ Cost Fair Value Fair Value ​ Services: Business ​ $ 198,018,290 ​ $ 207,963,749 23.78 % Healthcare & Pharmaceuticals ​ ​ 100,724,952 ​ ​ 102,915,887 11.77 % High Tech Industries ​ ​ 90,795,799 ​ ​ 91,992,012 10.52 % Media: Advertising, Printing & Publishing ​ ​ 57,640,321 ​ ​ 58,741,061 6.72 % Consumer Goods: Non-Durable ​ ​ 63,145,301 ​ ​ 52,938,611 6.05 % Beverage, Food, & Tobacco ​ ​ 42,554,582 ​ ​ 45,074,817 5.15 % Consumer Goods: Durable ​ ​ 49,046,730 ​ ​ 43,725,324 5.00 % Capital Equipment ​ ​ 32,517,673 ​ ​ 33,879,801 3.87 % Services: Consumer ​ ​ 33,976,976 ​ ​ 33,260,111 3.80 % Construction & Building ​ ​ 30,319,119 ​ ​ 30,486,411 3.49 % Aerospace & Defense ​ ​ 46,745,104 ​ ​ 24,541,921 2.81 % Environmental Industries ​ ​ 24,219,811 ​ ​ 22,997,844 2.63 % Media: Broadcasting & Subscription ​ ​ 17,952,103 ​ ​ 20,760,920 2.37 % Transportation & Logistics ​ ​ 17,235,150 ​ ​ 17,661,859 2.02 % Chemicals, Plastics, & Rubber ​ ​ 18,338,366 ​ ​ 17,569,176 2.01 % Metals & Mining ​ ​ 16,580,562 ​ ​ 16,625,000 1.90 % Containers, Packaging, & Glass ​ ​ 17,432,252 ​ ​ 15,539,555 1.78 % Utilities: Oil & Gas ​ ​ 9,943,041 ​ ​ 10,000,000 1.14 % Education ​ ​ 10,251,179 ​ ​ 8,367,469 0.96 % FIRE: Real Estate ​ ​ 17,285,138 ​ ​ 6,175,994 0.71 % Media: Diversified & Production ​ ​ 5,662,174 ​ ​ 5,763,247 0.66 % Finance ​ ​ 569,039 ​ ​ 5,736,868 0.66 % Hotel, Gaming, & Leisure ​ ​ — ​ ​ 890,968 0.10 % Energy: Oil & Gas ​ ​ 1,189,888 ​ ​ 852,078 0.10 % Total ​ $ 902,143,550 ​ $ 874,460,683 100.00 % ​ 79 Table of Contents The following is a summary of industry concentration of our investment portfolio as of December 31, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ % of Total ​ ​ ​ ​ ​ ​ ​ ​ Investments at ​ ​ Cost ​ Fair Value ​ Fair Value Services: Business ​ $ 207,234,534 ​ $ 218,866,572 25.91 % Healthcare & Pharmaceuticals ​ 86,469,854 ​ 88,103,319 10.43 % Media: Advertising, Printing & Publishing ​ 52,830,447 ​ 52,525,839 6.22 % Consumer Goods: Non-Durable ​ 54,683,102 ​ 51,280,593 6.07 % Consumer Goods: Durable ​ 45,601,928 ​ 44,529,176 5.27 % Aerospace & Defense ​ 48,137,394 ​ 39,526,086 4.68 % Software ​ 37,582,855 ​ 37,975,255 4.50 % Capital Equipment ​ 33,538,647 ​ 33,801,951 4.00 % Beverage, Food, & Tobacco ​ 34,000,918 ​ 32,755,054 3.88 % Construction & Building ​ 26,948,135 ​ 26,406,849 3.13 % Environmental Industries ​ 27,771,798 ​ 26,247,936 3.11 % Services: Consumer ​ 43,302,101 ​ 24,616,706 2.92 % Media: Broadcasting & Subscription ​ 18,615,052 ​ 21,445,307 2.54 % Chemicals, Plastics, & Rubber ​ 18,487,206 ​ 17,903,999 2.12 % Transportation & Logistics ​ 16,768,763 ​ 17,161,972 2.03 % Metals & Mining ​ 16,708,750 ​ 16,464,001 1.95 % Containers, Packaging, & Glass ​ 17,436,600 ​ 13,977,250 1.65 % Retail ​ ​ 13,303,536 ​ ​ 13,217,256 1.56 % High Tech Industries ​ 14,126,954 ​ 12,648,347 1.50 % Automotive ​ 11,252,581 ​ 11,342,751 1.34 % Education ​ 11,057,921 ​ 10,498,760 1.24 % Utilities: Oil & Gas ​ 9,921,469 ​ 9,800,000 1.16 % Energy: Oil & Gas ​ ​ 7,314,230 ​ ​ 7,355,074 0.87 % FIRE: Real Estate ​ 15,642,093 ​ 5,866,397 0.69 % Media: Diversified & Production ​ 5,517,409 ​ 5,534,710 0.66 % Finance ​ 1,568,900 ​ 4,082,579 0.48 % Hotel, Gaming, & Leisure ​ — ​ 799,899 0.09 % ​ ​ $ 875,823,177 ​ $ 844,733,638 100.00 % ​ 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.
Biggest changeAs of December 31, 2024, we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded commitments should the need arise. 75 Table of Contents The following is a summary of geographical concentration of our investment portfolio as of December 31, 2024: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ % of Total ​ ​ ​ ​ ​ ​ ​ ​ Investments at ​ ​ ​ Cost ​ Fair Value ​ Fair Value Texas $ 159,028,754 $ 154,041,942 16.15 % California ​ 160,285,777 ​ 152,583,692 16.00 % Florida ​ 108,434,730 ​ 104,718,969 10.98 % Illinois ​ 66,486,029 ​ 56,591,435 5.94 % Pennsylvania ​ 53,271,774 ​ 54,438,594 5.71 % Arizona ​ 43,552,887 ​ 46,839,063 4.91 % New York ​ 36,116,358 ​ 36,306,098 3.81 % Ohio ​ 33,645,676 ​ 35,847,804 3.76 % Canada ​ 32,107,256 ​ 32,375,749 3.40 % Colorado ​ 31,283,806 ​ 28,218,186 2.96 % Wisconsin ​ 27,935,159 ​ 23,352,084 2.45 % District of Columbia ​ 22,711,852 ​ 26,654,283 2.80 % Georgia ​ 12,391,680 ​ 23,345,077 2.45 % North Carolina ​ 20,946,327 ​ 22,314,018 2.34 % Tennessee ​ 20,490,429 ​ 20,703,772 2.17 % Massachusetts ​ 19,965,590 ​ 20,559,398 2.16 % Missouri ​ 18,590,476 ​ 18,712,569 1.96 % Iowa ​ 13,486,486 ​ 13,486,486 1.41 % Idaho ​ 11,763,648 ​ 11,830,192 1.24 % New Jersey ​ 11,181,815 ​ 11,754,323 1.23 % Michigan ​ 11,389,446 ​ 11,510,608 1.21 % Louisiana ​ 9,216,389 ​ 9,371,830 0.98 % Virginia ​ 9,293,896 ​ 9,373,367 0.98 % Washington ​ 8,193,234 ​ 8,216,962 0.86 % Maryland ​ 7,529,294 ​ 7,526,300 0.79 % Minnesota ​ 6,448,091 ​ 6,452,144 0.68 % South Carolina ​ 4,836,178 ​ 4,984,667 0.52 % Indiana ​ 743,770 ​ 920,343 0.10 % United Kingdom ​ 461,899 ​ 467,733 0.05 % Total Investments ​ $ 961,788,706 ​ $ 953,497,688 100.00 % ​ 76 Table of Contents The following is a summary of geographical concentration of our investment portfolio as of December 31, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ % of Total ​ ​ ​ ​ ​ ​ ​ ​ Investments ​ ​ Cost ​ Fair Value ​ at Fair Value Texas $ 182,531,256 $ 175,311,724 20.04 % California ​ 175,207,692 ​ 167,713,589 19.18 % Florida ​ 93,155,844 ​ 92,297,574 10.55 % Pennsylvania ​ 49,939,315 ​ 50,188,102 5.74 % Illinois ​ 58,633,617 ​ 49,834,429 5.70 % Arizona ​ 42,136,322 ​ 44,558,279 5.10 % Ohio ​ 31,805,370 ​ 34,370,277 3.93 % Colorado ​ 31,525,420 ​ 30,971,079 3.54 % Wisconsin ​ 27,452,444 ​ 26,190,771 3.00 % Washington ​ 24,321,085 ​ 24,540,695 2.81 % Georgia ​ 9,100,050 ​ 18,885,409 2.16 % Maryland ​ 16,676,194 ​ 16,718,728 1.91 % New York ​ 14,692,043 ​ 14,931,263 1.71 % Indiana ​ 14,235,403 ​ 14,488,700 1.66 % North Carolina ​ 13,891,930 ​ 14,532,532 1.66 % District of Columbia ​ 13,030,899 ​ 14,006,563 1.60 % New Jersey ​ 10,461,226 ​ 11,191,295 1.28 % Michigan ​ 10,664,100 ​ 10,736,783 1.23 % Massachusetts ​ 10,151,621 ​ 10,515,487 1.20 % Tennessee ​ 9,390,657 ​ 9,379,311 1.07 % Missouri ​ 8,862,512 ​ 8,850,162 1.01 % Canada ​ 8,700,383 ​ 8,813,132 1.01 % Idaho ​ 8,405,946 ​ 8,470,065 0.97 % Minnesota ​ 5,976,818 ​ 5,907,639 0.68 % Louisiana ​ 5,538,823 ​ 5,536,231 0.63 % South Carolina ​ 4,946,375 ​ 5,083,862 0.58 % United Kingdom ​ 20,710,205 ​ 437,002 0.05 % Total Investments ​ $ 902,143,550 ​ $ 874,460,683 100.00 % ​ 77 Table of Contents The following is a summary of industry concentration of our investment portfolio as of December 31, 2024: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ % of Total ​ ​ ​ ​ ​ ​ ​ ​ Investments at ​ ​ ​ Cost ​ Fair Value ​ Fair Value Services: Business ​ $ 219,665,133 ​ $ 234,908,112 24.64 % High Tech Industries ​ 91,135,577 ​ ​ 93,468,792 9.81 % Healthcare & Pharmaceuticals ​ 85,300,317 ​ ​ 85,478,418 8.97 % Media: Advertising, Printing & Publishing ​ 71,318,416 ​ ​ 72,291,584 7.58 % Beverage & Food ​ 64,052,951 ​ ​ 68,902,142 7.23 % Consumer Goods: Non-Durable ​ 67,123,135 ​ ​ 54,473,282 5.71 % Services: Consumer ​ 49,388,222 ​ ​ 46,066,301 4.83 % Capital Equipment ​ 41,322,214 ​ ​ 43,647,466 4.58 % Consumer Goods: Durable ​ 43,393,413 ​ ​ 42,094,390 4.41 % Chemicals, Plastics, & Rubber ​ 36,693,101 ​ ​ 36,907,602 3.87 % Construction & Building ​ 32,374,992 ​ ​ 32,979,859 3.46 % Aerospace & Defense ​ 26,014,106 ​ ​ 21,624,091 2.27 % Environmental Industries ​ 18,903,681 ​ ​ 18,282,056 1.92 % Transportation & Logistics ​ 17,244,131 ​ ​ 17,532,488 1.84 % Retail ​ 14,799,085 ​ ​ 14,723,620 1.54 % Media: Broadcasting & Subscription ​ 12,170,577 ​ ​ 14,314,711 1.50 % Containers, Packaging, & Glass ​ 18,007,571 ​ ​ 12,911,794 1.35 % Energy: Oil & Gas ​ 11,353,959 ​ ​ 10,728,031 1.13 % Hotel, Gaming, & Leisure ​ 7,113,661 ​ ​ 8,142,050 0.85 % FIRE: Real Estate ​ 17,934,808 ​ ​ 7,652,436 0.80 % Media: Diversified & Production ​ 5,822,637 ​ ​ 5,934,853 0.62 % Education ​ 10,537,738 ​ ​ 5,341,151 0.56 % Finance ​ 119,281 ​ ​ 5,092,459 0.53 % Total Investments ​ $ 961,788,706 ​ $ 953,497,688 100.00 % ​ 78 Table of Contents The following is a summary of industry concentration of our investment portfolio as of December 31, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ % of Total ​ ​ ​ ​ ​ ​ ​ ​ Investments ​ ​ Cost ​ Fair Value ​ at Fair Value Services: Business ​ $ 198,018,290 ​ $ 207,963,749 23.78 % Healthcare & Pharmaceuticals ​ 100,724,952 ​ ​ 102,915,887 11.77 % High Tech Industries ​ 90,795,799 ​ ​ 91,992,012 10.52 % Media: Advertising, Printing & Publishing ​ 57,640,321 ​ ​ 58,741,061 6.72 % Consumer Goods: Non-Durable ​ 63,145,301 ​ ​ 52,938,611 6.05 % Beverage, Food, & Tobacco ​ 42,554,582 ​ ​ 45,074,817 5.15 % Consumer Goods: Durable ​ 49,046,730 ​ ​ 43,725,324 5.00 % Capital Equipment ​ 32,517,673 ​ ​ 33,879,801 3.87 % Services: Consumer ​ 33,976,976 ​ ​ 33,260,111 3.80 % Construction & Building ​ 30,319,119 ​ ​ 30,486,411 3.49 % Aerospace & Defense ​ 46,745,104 ​ ​ 24,541,921 2.81 % Environmental Industries ​ 24,219,811 ​ ​ 22,997,844 2.63 % Media: Broadcasting & Subscription ​ 17,952,103 ​ ​ 20,760,920 2.37 % Transportation & Logistics ​ 17,235,150 ​ ​ 17,661,859 2.02 % Chemicals, Plastics, & Rubber ​ 18,338,366 ​ ​ 17,569,176 2.01 % Metals & Mining ​ 16,580,562 ​ ​ 16,625,000 1.90 % Containers, Packaging, & Glass ​ 17,432,252 ​ ​ 15,539,555 1.78 % Utilities: Oil & Gas ​ 9,943,041 ​ ​ 10,000,000 1.14 % Education ​ 10,251,179 ​ ​ 8,367,469 0.96 % FIRE: Real Estate ​ 17,285,138 ​ ​ 6,175,994 0.71 % Media: Diversified & Production ​ 5,662,174 ​ ​ 5,763,247 0.66 % Finance ​ 569,039 ​ ​ 5,736,868 0.66 % Hotel, Gaming, & Leisure ​ — ​ ​ 890,968 0.10 % Energy: Oil & Gas ​ 1,189,888 ​ ​ 852,078 0.10 % Total Investments ​ $ 902,143,550 ​ $ 874,460,683 100.00 % ​ At December 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 approximately $23.2 million and $21.2 million, respectively.
Under the 1940 Act, we are allowed to incur a maximum asset coverage ratio of 150% if certain requirements are met, including the approval of a "required majority" (as such term is defined in Section 57(o) of the 1940 Act) of Board and the approval of our stockholders.
Under the 1940 Act, we are allowed to incur a maximum asset coverage ratio of 150% if certain requirements are met, including the approval of a "required majority" (as such term is defined in Section 57(o) of the 1940 Act) the of Board and the approval of our stockholders.
Also, as a BDC, we generally are required to meet an asset coverage coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, over the aggregate amount of our senior securities, which includes 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).
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 our senior securities, which includes 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).
We bear all other out-of-pocket costs and expenses of our operations and transactions, which may include: ● organization and offering costs; ● valuing our assets and calculating our net asset value (including the cost and expenses of any independent valuation firm); ● fees and expenses payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments; ● interest payable on debt, if any, incurred to finance our investments and expenses related to unsuccessful portfolio acquisition efforts; ● base management and incentive fees; ● offerings of our common stock and other securities; ● a dministration fees and expenses, if any, payable under the Administration Agreement (including our allocable portion of Stellus Capital Management’s overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our Chief Compliance Officer and Chief Financial Officer and his respective staffs); ● transfer agent, dividend agent and custodial fees and expenses; ● U.S. federal and state registration fees; ● all costs of registration and listing our securities on any securities exchange; 83 Table of Contents ● U.S. federal, state and local taxes; ● independent directors’ fees and expenses; ● costs of preparing and filing reports or other documents required by the SEC or other regulators; ● costs of any reports, proxy statements or other notices to stockholders, including printing costs; ● costs and fees associated with any fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums; ● direct costs and expenses of administration and operation, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; ● proxy voting expenses; and ● all other expenses incurred by us or Stellus Capital Management in connection with administering our business.
We bear all other out-of-pocket costs and expenses of our operations and transactions, which may include: ● organization and offering costs; ● valuing our assets and calculating our net asset value (including the cost and expenses of any independent valuation firm); ● fees and expenses payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments; ● interest payable on debt, if any, incurred to finance our investments and expenses related to unsuccessful portfolio acquisition efforts; ● base management and incentive fees; ● offerings of our common stock and other securities; ● a dministration fees and expenses, if any, payable under the Administration Agreement (including our allocable portion of Stellus Capital Management’s overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our Chief Compliance Officer and Chief Financial Officer and his respective staffs); ● transfer agent, dividend agent and custodial fees and expenses; ● U.S. federal and state registration fees; ● all costs of registration and listing our securities on any securities exchange; 82 Table of Contents ● U.S. federal, state and local taxes; ● independent directors’ fees and expenses; ● costs of preparing and filing reports or other documents required by the SEC or other regulators; ● costs of any reports, proxy statements or other notices to stockholders, including printing costs; ● costs and fees associated with any fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums; ● direct costs and expenses of administration and operation, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; ● proxy voting expenses; and ● all other expenses incurred by us or Stellus Capital Management in connection with administering our business.
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 1940 Act .
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 lower 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 1940 Act .
See Note 1 to the Consolidated Financial Statements contained herein for a detailed discussion of our investment portfolio valuation process and procedures. Due to the inherent uncertainty in the valuation process, our determination of fair value for our investment portfolio may differ materially from the values that would have been determined had a ready market for the securities existed.
See Note 1 to the Consolidated Financial Statements contained herein for a detailed discussion of our investment portfolio valuation process and procedures. Due to the inherent uncertainty in the valuation process, our Board’s determination of fair value for our investment portfolio may differ materially from the values that would have been determined had a ready market for the securities existed.
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 SBIC subsidiaries guaranteed by the SBA from the definition of senior securities in the asset coverage test under the 1940 Act. We were in compliance with the asset coverage ratio requirements at all times.
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 SBIC subsidiaries guaranteed by the SBA from the definition of senior securities in the asset coverage test under the 1940 Act. We were in compliance with the asset coverage ratio requirement at all times.
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).
To qualify for RIC tax treatment, we generally 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).
The 2026 Notes 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.
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.
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.
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 lower 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.
The composition of our investments at cost and fair value as of December 31, 2023 was as follows: ​ ​ ​ ​ ​ ​ ​ ​ Cost Fair Value Senior Secured – First Lien (1) ​ $ 793,819,152 ​ $ 774,789,320 Senior Secured – Second Lien ​ 42,269,568 ​ ​ 21,957,500 Unsecured Debt ​ 6,138,183 ​ ​ 5,956,280 Equity ​ 59,916,647 ​ ​ 71,757,583 Total Investments ​ $ 902,143,550 ​ $ 874,460,683 (1) Includes unitranche investments, which account for 4.5% of our portfolio at fair value.
The composition of our investments at cost and fair value as of December 31, 2023 was as follows: ​ ​ ​ ​ ​ ​ ​ ​ Cost Fair Value Senior Secured – First Lien (1) ​ $ 793,819,152 ​ $ 774,789,320 Senior Secured – Second Lien ​ 42,269,568 ​ 21,957,500 Unsecured Debt ​ 6,138,183 ​ 5,956,280 Equity ​ 59,916,647 ​ 71,757,583 Total Investments at Fair Value ​ $ 902,143,550 ​ $ 874,460,683 (1) Includes unitranche investments, which accounted for 4.5% of our portfolio at fair value.
The exemptive relief provides us with increased flexibility under the 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.
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.
The forward-looking statements contained in this Annual Report on Form 10-K involve risks and uncertainties, including statements as to: ● our future operating results; ● our business prospects and the prospects of our portfolio companies; ● the effect of investments that we expect to make; ● our contractual arrangements and relationships with third parties; ● actual and potential conflicts of interest with Stellus Capital Management; ● the dependence of our future success on the general economy and its effect on the industries in which we invest; ● the impact of interest rate volatility, including the decommissioning of LIBOR and rising interest rates, on our business and our portfolio companies; ● the ability of our portfolio companies to achieve their objectives; ● the use of borrowed money to finance a portion of our investments; ● the adequacy of our financing sources and working capital; ● the timing of cash flows, if any, from the operations of our portfolio companies; ● the ability of Stellus Capital Management to locate suitable investments for us and to monitor and administer our investments; ● the ability of Stellus Capital Management to attract and retain highly talented professionals; ● our ability to maintain our qualification as a RIC and as a BDC; and ● the effect of future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to BDCs or RICs.
The forward-looking statements contained in this Annual Report on Form 10-K involve risks and uncertainties, including statements as to: ● our future operating results; ● our business prospects and the prospects of our portfolio companies; ● the effect of investments that we expect to make; ● our contractual arrangements and relationships with third parties; ● actual and potential conflicts of interest with Stellus Capital Management; ● the dependence of our future success on the general economy and its effect on the industries in which we invest; ● the impact of interest rate volatility on our business and our portfolio companies; ● the ability of our portfolio companies to achieve their objectives; ● the use of borrowed money to finance a portion of our investments; ● the adequacy of our financing sources and working capital; ● the timing of cash flows, if any, from the operations of our portfolio companies; ● the ability of Stellus Capital Management to locate suitable investments for us and to monitor and administer our investments; ● the ability of Stellus Capital Management to attract and retain highly talented professionals; ● our ability to maintain our qualification as a RIC and as a BDC; and ● the effect of future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to BDCs or RICs.
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.
Recent Accounting Pronouncements See Note 1 to our 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.
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. 74 Table of Contents Overview We were organized as a Maryland corporation on May 18, 2012 and formally commenced operations on November 7, 2012.
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. 73 Table of Contents Overview We were organized as a Maryland corporation on May 18, 2012 and formally commenced operations on November 7, 2012.
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 December 31, 2023 and 2022, the SBA-guaranteed debentures would be deemed to be Level 3, as defined in Note 6 to our Consolidated Financial Statements.
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 December 31, 2024 and 2023, the SBA-guaranteed debentures would be deemed to be Level 3, as defined in Note 6 to our Consolidated Financial Statements.
The increase in operating expenses for the year ended December 31, 2022 as compared to the year ended December 31, 2021 was due to (1) higher interest expense as a result of higher outstanding balances on our SBA-guaranteed debentures, as well as rising interest rates , (2) higher management fees due to a larger investment portfolio and (3) higher incentive fees due to portfolio performance.
The increase in operating expenses for the year ended December 31, 2023, as compared to the year ended December 31, 2022, was due to (1) higher interest expense as a result of higher outstanding balances on our SBA-guaranteed debentures, as well as rising interest rates , (2) higher management fees due to a larger investment portfolio and (3) higher incentive fees due to portfolio performance.
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.
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, November 21, 2023, and October 30, 2024, with Zions Bancorporation, N.A., dba Amegy Bank and various other lenders.
Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio. Comparison of the Years Ended December 31, 2023, 2022, and 2021 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.
Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio. Comparison of the Years Ended December 31, 2024, 2023, and 2022 Revenues We generate revenue in the form of interest income on debt investments and capital gains and distributions, if any, on investment securities that we may acquire in portfolio companies.
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.
The Credit Facility provides for borrowings up to a maximum of $315.0 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.
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.
Nonetheless, we have observed and continue to observe supply chain interruptions, labor resource shortages, commodity inflation, fluctuating 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.
Pursuant to the Third Amendment and Commitment Increase 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%.
Pursuant to the Fourth Amendment to 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 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%.
For a description of our critical accounting policies, see Note 1, “Summary of Significant Accounting Policies” to our Consolidated Financial Statements included in this report. We consider the most significant accounting policies to be those related to our Valuation of Portfolio Investments and Revenue Recognition.
For a description of our critical accounting policies, see Note 1 to our Consolidated Financial Statements included in this report. We consider the most significant accounting policies to be those related to our valuation of portfolio investments and revenue recognition.
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.
Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, 86 Table of Contents 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.
These prepaid loan fees are presented on our Consolidated Statement of Assets and Liabilities as a deduction from the debt liability attributable to the Credit Facility. Interest is paid monthly or quarterly in arrears.
These prepaid loan fees are presented on our Consolidated Statements of Assets and Liabilities as a deduction from the debt liability attributable to the Credit Facility. Interest on the Credit Facility is paid monthly or quarterly in arrears.
Our financing activities for the year ended December 31, 2023 used cash of $4.7 million primarily from stockholder distibutions and net payments on our Credit Facility, offset by proceeds from our ATM Program.
Our financing activities for the year ended December 31, 2023 used cash of $4.7 million primarily from stockholder distributions and net payments on our Credit Facility, offset by proceeds from our ATM Program.
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 Code . To maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. As of December 31, 2023, we were in compliance with the RIC requirements.
We have elected to be treated, qualify, and intend to continue to qualify annually for tax purposes as a RIC under Subchapter M of 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 December 31, 2024, we were in compliance with the RIC requirements.
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 87 Table of Contents 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.
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 1.00, (iii) maintaining a minimum stockholder’s equity, and (iv) maintaining a minimum interest coverage ratio of at least 1.75 to 1.00.
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 have incurred costs of $6.6 million in connection with the current Credit Facility, which were capitalized and are being amortized over the life of the facility.
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 have incurred costs of $7.3 million in connection with the current Credit Facility, which were capitalized and are being amortized over the life of the facility.
The following table summarizes the interest expense and amortized loan fees on the Credit Facility for the years ended December 31, 2023, 2022, and 2021 (dollars in millions): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ December 31, 2023 ​ December 31, 2022 ​ December 31, 2021 ​ Interest expense ​ $ 14.7 ​ $ 9.2 ​ $ 5.2 ​ Loan fee amortization ​ 0.7 ​ 0.6 ​ 0.6 Total interest and financing expenses ​ $ 15.4 ​ $ 9.8 ​ $ 5.8 ​ Weighted average interest rate ​ 7.9 % 4.4 % 2.8 % Effective interest rate (including fee amortization) ​ 8.3 % 4.8 % 3.3 % Average debt outstanding ​ $ 186.1 ​ $ 204.3 ​ $ 176.9 ​ Cash paid for interest and unused fees ​ $ 14.5 ​ $ 9.0 ​ $ 5.3 ​ ​ SBA-guaranteed debentures Due to the SBIC subsidiaries’ status as licensed SBICs, we can issue debentures guaranteed by the SBA at favorable interest rates.
The following table summarizes the interest expense and amortized loan fees on the Credit Facility for the years ended December 31, 2024, 2023, and 2022 (dollars in millions): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ December 31, 2024 ​ December 31, 2023 ​ December 31, 2022 ​ Interest expense ​ $ 13.6 ​ $ 14.7 ​ $ 9.2 ​ Loan fee amortization ​ ​ 1.1 ​ 0.7 ​ 0.6 Total interest and financing expenses ​ $ 14.7 ​ $ 15.4 ​ $ 9.8 ​ Weighted average interest rate ​ 8.3 % 7.9 % 4.4 % Effective interest rate (including fee amortization) ​ 8.9 % 8.3 % 4.8 % Average debt outstanding ​ $ 164.3 ​ $ 186.1 ​ $ 204.3 ​ Cash paid for interest and unused fees ​ $ 13.5 ​ $ 14.5 ​ $ 9.0 ​ ​ SBA-guaranteed debentures Due to the SBIC subsidiaries’ status as licensed SBICs, we can issue debentures guaranteed by the SBA at favorable interest rates.
(Provision) Benefit for Taxes on Unrealized (Appreciation) Depreciation on Investments We have direct wholly owned subsidiaries that have elected to be treated as corporations for U.S. federal income tax purposes (the “Taxable Subsidiaries”) , and as a result, the income of the Taxable Subsidiaries is subject to U.S. federal income tax at corporate rates .
Benefit (Provision) for Taxes on Unrealized Depreciation(Appreciation) on Investments We have direct wholly owned subsidiaries that have elected to be treated as corporations for U.S. federal income tax purposes (the "Taxable Subsidiaries") , and as a result, the income of the Taxable Subsidiaries is subject to U.S. federal income tax imposed at corporate rates .
Net realized losses during the year ended December 31, 2023 resulted primarily from losses from the realization of our debt investments in certain portfolio companies, partially offset from gains from the realization of our equity investments.
Net realized losses during the year ended December 31, 2024 resulted primarily from losses from the realization of our debt investments in certain portfolio companies, partially offset from gains from the realization of certain equity investments.
Additionally, $0.3 million of costs from a prior credit facility will continue to be amortized over the life of the Credit Facility. As of December 31, 2023 and 2022, $3.5 million and $1.5 million of such prepaid loan structure fees and administration fees had yet to be amortized, respectively.
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 December 31, 2024 and 2023, $3.1 million and $3.5 million of such prepaid loan structure fees and administration fees had yet to be amortized, respectively.
The increase in interest income from the year ended December 31, 2021 to the year ended December 31, 2022 was due primarily to growth in the overall investment portfolio and rising interest rates.
The increase in interest income from the year ended December 31, 2022 to the year ended December 31, 2023 was due primarily to growth in the overall investment portfolio and rising interest rates .
In this regard, if our common stock trades at a price below our then-current net asset value per share, we may be limited 86 Table of Contents 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.
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.
Net change in unrealized appreciation (depreciation) on investments and cash equivalents, including foreign currency translations, for the year ended December 31, 2023, 2022, and 2021 totaled $2.8 million, ($17.5) million, and ($6.9) million, respectively. The change in unrealized appreciation in 2023 was primarily due to realizations on investments previously written down.
Net change in unrealized appreciation (depreciation) on investments and cash equivalents, including foreign currency translations, for the year ended December 31, 2024, 2023, and 2022 totaled $19.6 million, $2.8 million, and ($17.5) million, respectively. The change in unrealized appreciation in 2024 was primarily due to realizations on investments previously written down.
To the extent our taxable earnings for a fiscal taxable year fall 91 Table of Contents 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.
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 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.
We used, and expect to continue to use, 85 Table of Contents 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.
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.
A proposal approved by our stockholders at our 2024 annual stockholders meeting authorizes us to sell up to 25% of our outstanding common stock 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 our 2024 annual stockholders 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.
This authorization will expire on the earlier of June 20, 2025, the one-year anniversary of our 2024 annual stockholders meeting, or the date of our 2025 annual stockholders 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.
ASC 820 requires us to assume that the portfolio investment is to be sold in the principal market to independent market participants, which may be a hypothetical market. Market participants are defined as buyers and 92 Table of Contents sellers in the principal market that are independent, knowledgeable and willing and able to transact.
ASC 820 requires us to assume that the portfolio investment is to be sold in the principal market to independent market participants, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal market that are independent, knowledgeable and willing and able to transact.
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 December 31, 2023, our asset coverage ratio was 223%.
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 December 31, 2024, our asset coverage ratio was 234%.
If we maintain our qualification as a RIC, we must also satisfy certain distribution requirements each calendar year to avoid a U.S. 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.
If we maintain our qualification as a RIC, we must also satisfy certain distribution requirements each calendar year to avoid a U.S. federal excise tax on our undistributed earnings of a RIC. As of December 31, 2024, we had $45.4 million of undistributed taxable income that will be carried forward toward distributions paid during the year ending December 31, 2025.
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. 82 Table of Contents The following shows the breakdown of investment income for the years ended December 31, 2023, 2022, and 2021 (in millions). ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ December 31, 2023 ​ December 31, 2022 ​ December 31, 2021 Interest income (1) ​ $ 96.9 ​ $ 70.8 ​ $ 60.7 PIK interest ​ ​ 3.8 ​ ​ 1.4 ​ ​ 0.9 Miscellaneous fees (1) ​ 5.1 ​ 2.9 ​ 2.1 Total ​ $ 105.8 ​ $ 75.1 ​ $ 63.7 (1) For the years ended December 31, 2023, 2022, and 2021, we recognized $2.7 million, $1.2 million and $2.8 million of non-recurring income, respectively.
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. 81 Table of Contents The following shows the breakdown of investment income for the years ended December 31, 2024, 2023, and 2022 (in millions). ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ December 31, 2024 ​ December 31, 2023 ​ December 31, 2022 Interest income (1) ​ $ 95.4 ​ $ 96.9 ​ $ 70.8 PIK interest ​ ​ 3.3 ​ ​ 3.8 ​ ​ 1.4 Miscellaneous fees (1) ​ ​ 6.0 ​ 5.1 ​ 2.9 Total ​ $ 104.7 ​ $ 105.8 ​ $ 75.1 (1) For the years ended December 31, 2024, 2023, and 2022, we recognized $2.5 million, $2.7 million and $1.2 million of non-recurring income, respectively.
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 December 31, 2023 and December 31, 2022, we had cash and cash equivalents of $26.1 million and $48.0 million, respectively.
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 December 31, 2024 and December 31, 2023, we had cash and cash equivalents of $20.1 million and $26.1 million, respectively.
At December 31, 2023, 98% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as SOFR , and 2% bore interest at fixed rates.
At December 31, 2023, 97.7% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as SOFR, and 2.3% bore interest at fixed rates.
As of December 31, 2022, we had $28.6 million of undistributed taxable income that was carried forward toward distributions paid during the year ending December 31, 2023. We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income).
As of December 31, 2023, we had $37.0 million of undistributed taxable income that was 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).
As of December 31, 2022, we had loans to three portfolio companies that were on non-accrual status, which represented approximately 5.2% of our loan portfolio at cost and 2.3% at fair value. As of December 31, 2023 and December 31, 2022, $7.5 million and $4.8 million of income from investments on non-accrual had not been accrued, respectively.
As of December 31, 2023, we had loans to four portfolio companies that were on non-accrual status, which represented approximately 4.2% of our loan portfolio at cost and 1.3% at fair value. As of December 31, 2024 and December 31, 2023, $6.5 million and $7.5 million of income from investments on non-accrual had not been accrued, respectively.
Financial Condition, Liquidity and Capital Resources Cash Flows from Operating and Financing Activities Our operating activities used net cash of $17.3 million for the year ended December 31, 2023, primarily in connection with the purchase of portfolio investments, offset by sales and repayments of portfolio investments.
Financial Condition, Liquidity and Capital Resources Cash Flows from Operating and Financing Activities Our operating activities used net cash of $28.6 million for the year ended December 31, 2024, primarily in connection with the purchase of portfolio investments, offset by sales and repayments of portfolio investments.
For the years ended December 31, 2023 and 2021, we recognized tax benefit (expense) related to losses (gains) realized on certain debt (equity) investments held at our Taxable Subsidiaries of $3.0 million and ($3.0) million, respectively. There was no such tax expense for the year ended December 31, 2022.
For the years ended December 31, 2024 and 2023, we recognized tax benefit related to losses realized on certain equity investments held at our Taxable Subsidiaries of less than $0.1 million and $3.0 million, respectively. There was no such tax expense for the year ended December 31, 2022.
Unitranche structures may combine characteristics of first lien senior secured as well as second lien and/or subordinated loans. Our unitranche loans will expose us to the risks associated with second lien and subordinated loans to the extent we invest in the “last-out” tranche. As of December 31, 2022, we had $844.7 million (at fair value) invested in 85 companies.
Unitranche structures may combine characteristics of first lien senior secured as well as second lien and/or subordinated loans. Our unitranche loans will expose us to the risks associated with second lien and subordinated loans to the extent we invest in the “last-out” tranche. As of December 31, 2023, we had $874.5 million (at fair value) invested in 93 companies.
As of December 31, 2023, we were in compliance with these covenants. As of December 31, 2023 and December 31, 2022, the outstanding balance under the Credit Facility was $160.1 million and $199.2 million, respectively. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value.
As of December 31, 2024, we were in compliance with these covenants. As of December 31, 2024 and December 31, 2023, the outstanding balance under the Credit Facility was $175.4 million and $160.1 million, respectively. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value.
Our operating activities used net cash of $76.1 million for the year ended December 31, 2021, primarily in connection with the purchase of portfolio investments, offset by sales and repayments of portfolio investments.
Our operating activities used net cash of $17.3 million for the year ended December 31, 2023, primarily in connection with the purchase of portfolio investments, offset by sales and repayments of portfolio investments.
The weighted average yield on all of our investments, including non-income producing equity positions, as of December 31, 2023 and December 31, 2022 was approximately 11.1% and 10.4%, respectively. The weighted average yield was computed using the effective interest rates for all of our debt investments, including accretion of OID.
The weighted average yield on all of our investments, including non-income producing equity positions and debt investments on non-accrual status, as of December 31, 2024 and December 31, 2023 was approximately 9.7% and 11.1%, respectively. The weighted average yield was computed using the effective interest rates for all of our debt investments, including accretion of OID.
The U.S. federal income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in our Consolidated Financial Statements. 85 Table of Contents For the years ended December 31, 2023, 2022 and 2021, we recognized a deferred tax (provision) benefit related to unrealized appreciation on certain equity investments for income tax at our Taxable Subsidiaries of approximately ($127.0) thousand, ($213.2) thousand, and $510.9 thousand, respectively.
The U.S. federal income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in our Consolidated Financial Statements. 84 Table of Contents For the years ended December 31, 2024, 2023 and 2022, we recognized a deferred tax benefit (provision) related to unrealized depreciation (appreciation) on certain equity investments for income tax at our Taxable Subsidiaries of approximately $0.2 million, ($0.1) million, and ($0.2) million, respectively.
Investment Activity During the year ended December 31, 2023, we made $190.9 million of investments in 18 new portfolio companies and 28 existing portfolio companies. During the year ended December 31, 2023, we received an aggregate of $141.3 million in proceeds from repayments of our investments.
During the year ended December 31, 2024, we received an aggregate of $151.8 million in proceeds from repayments of our investments. During the year ended December 31, 2023, we made $190.9 million of investments in 18 new portfolio companies and 28 existing portfolio companies.
So long as we maintain our qualification as a RIC, we will not be subject to U.S. federal income tax 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.
So long as we maintain our qualification as a RIC, we will not be subject to U.S. federal income tax to the extent that we timely distribute our investment company taxable income and realized net capital gains to stockholders as dividends.
As of December 31, 2023, we had loans to four portfolio companies that were on non-accrual status, which represented approximately 4.2% of our loan portfolio at cost and 1.3% at fair value.
As of December 31, 2024, we had loans to seven portfolio companies that were on non-accrual status, which represented approximately 8.3% of our loan portfolio at cost and 5.4% at fair value.
The following table summarizes the interest expense and amortized fees on the SBA-guaranteed debentures for the years ended December 31, 2023, 2022, and 2021 (dollars in millions): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ December 31, 2023 ​ December 31, 2022 ​ December 31, 2021 ​ Interest expense ​ $ 10.0 ​ $ 8.2 ​ $ 6.4 ​ Debenture fee amortization ​ 1.3 ​ 1.2 ​ 1.1 Total interest and financing expenses ​ $ 11.3 ​ $ 9.4 ​ $ 7.5 ​ Weighted average interest rate ​ 3.2 % 2.8 % 2.8 % Effective interest rate (including fee amortization) ​ 3.5 % 3.3 % 3.3 % Average debt outstanding ​ $ 318.8 ​ $ 288.2 ​ $ 227.8 ​ Cash paid for interest ​ $ 9.6 ​ $ 7.4 ​ $ 5.9 ​ ​ Notes Offering On August 21, 2017, we issued $42.5 million in aggregate principal amount of 5.75% fixed-rate notes due September 15, 2022 (the “2022 Notes”).
The following table summarizes the interest expense and amortized fees on the SBA-guaranteed debentures for the years ended December 31, 2024, 2023, and 2022 (dollars in millions): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ December 31, 2024 ​ December 31, 2023 ​ December 31, 2022 ​ Interest expense ​ $ 10.5 ​ $ 10.0 ​ $ 8.2 ​ Debenture fee amortization ​ ​ 1.0 ​ 1.3 ​ 1.2 Total interest and financing expenses ​ $ 11.5 ​ $ 11.3 ​ $ 9.4 ​ Weighted average interest rate ​ 3.2 % 3.2 % 2.8 % Effective interest rate (including fee amortization) ​ 3.5 % 3.5 % 3.3 % Average debt outstanding ​ $ 325.0 ​ $ 318.8 ​ $ 288.2 ​ Cash paid for interest ​ $ 10.5 ​ $ 9.6 ​ $ 7.4 ​ ​ Notes Payable On January 14, 2021, we issued $100.0 million in aggregate principal amount of the Notes Payable .
As of December 31, 2023 and December 31, 2022, our asset coverage ratio was 223% and 192%, respectively.
As of December 31, 2024 and December 31, 2023, our asset coverage ratio was 234% and 223%, respectively.
SBA-guaranteed debentures have fixed interest rates that equal prevailing 10-year Treasury Note rates plus a market spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the SBA-guaranteed debentures is not required to be paid before maturity but may be pre-paid at any time with no prepayment penalty.
Treasury Notes plus a market spread and have a maturity of ten years with interest payable semi-annually. The principal amount 87 Table of Contents of the SBA-guaranteed debentures is not required to be paid before maturity, but may be pre-paid at any time with no prepayment penalty.
As of December 31, 2023 and 2022, we have incurred $11.1 million and $10.9 million in financing costs related to the SBA-guaranteed debentures since the SBIC subsidiaries have received their licenses, respectively, which were recorded as prepaid loan fees.
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 December 31, 2024 and 2023, $3.7 million and $4.7 million of prepaid financing costs had yet to be amortized, respectively.
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 private middle-market companies (typically those with $5.0 million to $50.0 million of EBITDA) through first lien (including unitranche), second lien, and unsecured debt financing, oftentimes with a corresponding equity investment. 75 Table of Contents As of December 31, 2023, we had $874.5 million (at fair value) invested in 93 companies.
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. ​ 74 Table of Contents Portfolio Composition and Investment Activity Portfolio Composition We originate and invest primarily in privately held lower middle-market companies (typically those with $5.0 million to $50.0 million of EBITDA) through first lien (including unitranche), second lien, and unsecured debt financing, often with a corresponding equity investment.
The change in unrealized depreciation in 2022 was primarily due to write downs on specific investments. The change in unrealized depreciation in 2021 was primarily due to realizations on equity investments previously written up.
The change in unrealized appreciation in 2023 was primarily due to realizations on investments previously written down. The change in unrealized depreciation in 2022 was primarily due to write downs on specific investments.
Liquidity and Capital Resources Our liquidity and capital resources are derived from the Credit Facility, 2026 Notes, offerings of our common stock, SBA-guaranteed debentures and cash flows from operations, including investment sales and repayments, and income earned.
Liquidity and Capital Resources Our liquidity and capital resources are derived from the Credit Facility, Notes Payable, SBA-guaranteed debentures and cash flows from operations, including investment sales and repayments, the ATM Program, and income earned.
Interest on the 2026 Notes is payable semi-annually beginning September 30, 2021. We used the net proceeds from the 2026 Notes offering to fully redeem the 2022 Notes and repay a portion of the amount outstanding under the Credit Facility.
Interest on the Notes Payable is payable semi-annually beginning September 30, 2021. We used the net proceeds from the Notes Payable offering to fully redeem the 5.75% fixed-rate notes due September 15, 2022 and repay a portion of the amount outstanding under the Credit Facility. The Notes Payable are institutional, non-traded notes.
As of December 31, 2022, our only off-balance sheet arrangements consisted of $27.5 million of unfunded commitments to provide debt financing to 52 existing portfolio companies and $0.3 million in unfunded equity commitments to one existing portfolio company.
As of December 31, 2024, our only off-balance sheet arrangements consisted 89 Table of Contents of $41.0 million of unfunded commitments to provide debt financing to 70 existing portfolio companies and $0.3 million in unfunded equity commitments to one existing portfolio company.
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 Taxable Subsidiaries are not consolidated with us for U.S. federal income tax purposes and may independently generate income, gains, deductions or losses for U.S. federal income tax purposes as a result of their ownership of certain portfolio investments .
At December 31, 2022, our average portfolio company investment at amortized cost and fair value was approximately $10.3 million and $9.9 million, respectively, and our largest portfolio company investment at amortized cost and fair value was approximately $20.4 million and $21.1 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.
As of December 31, 2023, a tax receivable related to the tax benefit on realized losses of $1.6 million was included on the Consolidated Statement of Assets and Liabilities. As of December 31, 2023 and 2022, a deferred tax liability of $188.9 thousand and $61.9 thousand, respectively, was included in Consolidated Statement of Assets and Liabilities.
As of December 31, 2024 and 2023, a tax receivable related to the tax benefit on realized losses of $1.3 million and $1.6 million, respectively, was included on the Consolidated Statements of Assets and Liabilities. As of December 31, 2023, a deferred tax liability of $0.2 million was included in Consolidated Statements of Assets and Liabilities.
Net Increase in Net Assets Resulting from Operations Net increase in net assets resulting from operations totaled $17.5 million, or $0.80 per common share based on weighted-average common shares of 22,004,648 outstanding for the year ended December 31, 2023, $14.5 million, or $0.74 per common share based on weighted-average common shares of 19,552,931 outstanding for the year ended December 31, 2022, and $33.6 million, or $1.72 per common share based on weighted-average common hares of 19,489,750 outstanding for the year ended December 31, 2021.
Net increase in net assets resulting from operations totaled $17.5 million, or $0.80 per common share based on weighted-average common shares of 22,004,648 outstanding for the year ended December 31, 2023.
As a RIC, we generally will not have to pay corporate-level U.S. federal income tax on any income we distribute to our stockholders.
As a RIC, we generally will not be subject to U.S. federal income taxes on any income we distribute to our stockholders.
The following shows the breakdown of operating expenses for the years ended December 31, 2023, 2022, and 2021 (in millions). ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ December 31, 2023 December 31, 2022 December 31, 2022 Operating Expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Management fees $ 15.5 ​ $ 14.8 ​ $ 13.2 ​ Valuation fees ​ 0.4 ​ ​ 0.3 ​ ​ 0.3 ​ Administrative services expenses ​ 1.9 ​ ​ 1.8 ​ ​ 1.8 ​ Income incentive fees ​ 10.2 ​ ​ 3.8 ​ ​ 3.0 ​ Capital gains incentive (reversal) fee ​ (0.6) ​ ​ (2.8) ​ ​ 2.9 ​ Professional fees ​ 1.4 ​ ​ 1.1 ​ ​ 1.1 ​ Directors’ fees ​ 0.4 ​ ​ 0.3 ​ ​ 0.3 ​ Insurance expense ​ 0.5 ​ ​ 0.5 ​ ​ 0.5 ​ Interest expense and other fees ​ 32.0 ​ ​ 24.5 ​ ​ 18.7 ​ Income tax expense ​ 1.3 ​ ​ 1.2 ​ ​ 1.1 ​ Other general and administrative expenses ​ 0.9 ​ ​ 1.0 ​ ​ 1.0 ​ Total Operating Expenses ​ $ 63.9 ​ $ 46.5 ​ $ 43.9 ​ Income incentive fee waiver ​ ​ (0.3) ​ ​ — ​ ​ — ​ Total Operating Expenses, net of fee waivers ​ $ 63.6 ​ $ 46.5 ​ $ 43.9 ​ ​ The increase in operating expenses for the year ended December 31, 2023 as compared to the year ended December 31, 2022 was due to (1) higher interest expense as a result of higher outstanding balances on our SBA-guaranteed debentures, as well as rising interest rates , (2) higher management fees due to a larger investment portfolio and (3) higher incentive fees due to portfolio performance.
The following shows the breakdown of operating expenses for the years ended December 31, 2024, 2023, and 2022 (in millions). ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ ​ December 31, 2024 December 31, 2023 December 31, 2022 Operating Expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Management fees $ 15.7 ​ $ 15.5 ​ $ 14.8 ​ Valuation fees ​ 0.4 ​ ​ 0.4 ​ ​ 0.3 ​ Administrative services expenses ​ 1.9 ​ ​ 1.9 ​ ​ 1.8 ​ Income incentive fees ​ 10.0 ​ ​ 10.2 ​ ​ 3.8 ​ Capital gains incentive fee reversal ​ — ​ ​ (0.6) ​ ​ (2.8) ​ Professional fees ​ 1.2 ​ ​ 1.4 ​ ​ 1.1 ​ Directors’ fees ​ 0.4 ​ ​ 0.4 ​ ​ 0.3 ​ Insurance expense ​ 0.5 ​ ​ 0.5 ​ ​ 0.5 ​ Interest expense and other fees ​ 31.5 ​ ​ 32.0 ​ ​ 24.5 ​ Income tax expense ​ 1.8 ​ ​ 1.3 ​ ​ 1.2 ​ Other general and administrative expenses ​ 1.2 ​ ​ 0.9 ​ ​ 1.0 ​ Total Operating Expenses ​ $ 64.6 ​ $ 63.9 ​ $ 46.5 ​ Income incentive fee waiver ​ ​ (1.8) ​ ​ (0.3) ​ ​ — ​ Total Operating Expenses, net of fee waivers ​ $ 62.8 ​ $ 63.6 ​ $ 46.5 ​ ​ The decrease in operating expenses for the year ended December 31, 2024 , as compared to the year ended December 31, 2023 , was due to higher income incentive fee waivers due to the total return limitation, offset in part by higher income tax expense due to increase taxable spillover income.
As of December 31, 2023 and 2022, our investment portfolio valued at fair value represented approximately 96% and 94% of our total assets, respectively. We are required to report our investments at fair value. We follow the provisions of ASC 820.
As of December 31, 2024 and 2023, our investment portfolio at fair value represented approximately 97.2% and 96.3% of our total assets, respectively. We are required to report our investments for which market quotations are not readily available at fair value. We follow the provisions of ASC 820.
As of December 31, 2023 and December 31, 2022, we had unfunded commitments of $37.0 million and $27.8 million, respectively, to provide debt financing for 57 and 52 portfolio companies, respectively.
As of December 31, 2024 and December 31, 2023, we had unfunded commitments of $41.3 million and $37.0 million, respectively, to provide financing to 71 and 57 portfolio companies, respectively.
At the measurement date, the estimated fair value of the SBA-guaranteed debentures as prepared for disclosure purposes was $293.2 million. As of December 31, 2022, the carrying amount of the SBA-guaranteed debentures approximated their fair value.
As of December 31, 2024 and 2023, the carrying amount of the SBA-guaranteed debentures was $321.3 million and $320.3 million, respectively. At the measurement date, the estimated fair value of the SBA-guaranteed debentures as prepared for disclosure purposes was $312.0 million. As of December 31, 2023, the carrying amount of the SBA-guaranteed debentures approximated their fair value.
SBA-guaranteed Debentures The outstanding balance under SBA-guaranteed debentures as of March 4, 2024 was $325.0 million. 93 Table of Contents Dividend Declared On January 13, 2024, our Board declared a regular monthly distribution for each of January, February and March 2024 as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Ex-Dividend ​ Record ​ Payment ​ Amount per Declared Date Date Date Share 1/13/2024 ​ 1/30/2024 ​ 1/31/2024 ​ 2/15/2024 ​ $ 0.1333 1/13/2024 2/28/2024 ​ 2/29/2024 ​ 3/15/2024 ​ $ 0.1333 1/13/2024 3/28/2024 ​ 3/29/2024 ​ 4/15/2024 ​ $ 0.1333 ​ ​ ​
Dividend Declared On January 9, 2025, our Board declared a regular monthly distribution for each of January, February and March 2025 as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Ex-Dividend ​ Record ​ Payment ​ Amount per Declared Date Date Date Share 1/9/2025 ​ 1/31/2025 ​ 1/31/2025 ​ 2/14/2025 ​ $ 0.1333 1/9/2025 2/28/2025 ​ 2/28/2025 ​ 3/14/2025 ​ $ 0.1333 1/9/2025 3/31/2025 ​ 3/31/2025 ​ 4/15/2025 ​ $ 0.1333 ​ ​ ​ 92 Table of Contents
The net decrease in net assets resulting from operations for the year ended December 31, 2022 as compared to the year ended December 31, 2021 was primarily due to unrealized losses , offset by realized gains .
The net increase in net assets resulting from operations for the year ended December 31, 2024 as compared to the year ended December 31, 2023 was primarily due to a decrease in realized losses and increase on unrealized appreciation.
If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in shares of our common stock will be equal to the amount of cash that could have been received instead of stock.
In no event will any stockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash, except as described below. 90 Table of Contents If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in shares of our common stock will be equal to the amount of cash that could have been received instead of stock.
As of December 31, 2023, we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility ) to fund such unfunded commitments should the need arise.
As of December 31, 2024, we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility ) to fund such unfunded commitments should the need arise. RIC Status and Dividends We have elected to be treated and intend to qualify annually as a RIC under Subchapter M of the Code.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

6 edited+1 added−1 removed2 unchanged
Biggest changeAs of December 31, 2023 and December 31, 2022, 98% and 97% of the loans in our portfolio bore interest at floating rates, respectively. These floating rate loans typically bear interest in reference to SOFR, which is indexed to 30-day or 90-day SOFR rates, subject to an interest rate floor.
Biggest changeThese 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 December 31, 2024 and December 31, 2023, the weighted average interest rate floor on our floating rate loans was 1.46% and 1.26%, respectively.
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.
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.
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 years ended December 31, 2023 and 2022, we did not engage in interest rate hedging activities. ​ ​ 95 Table of Contents ​
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 years ended December 31, 2024 and 2023, we did not engage in interest rate hedging activities. ​ ​ 93 Table of Contents ​
See Note 2 to the Consolidated Financial Statements contained herein for more information on the incentive fee. (2) At December 31, 2023, the three-month SOFR rate was 533 basis points. This table assumes floating rates would not fall below zero. (3) Includes the impact of the 25 bps SOFR floor in place on the Credit Facility.
See Note 2 to the Consolidated Financial Statements contained herein for more information on the incentive fee. (2) At December 31, 2024, the three-month SOFR rate was 430 basis points. This table assumes floating rates would not fall below zero. (3) Includes the impact of the 25 -basis point SOFR floor in place on the Credit Facility.
As of December 31, 2023, we have facilitated an orderly transition of our LIBOR-based investments to SOFR. 94 Table of Contents Assuming that the Consolidated Statement of Assets and Liabilities as of December 31, 2023 were to remain constant and no actions were taken to alter the existing interest rate sensitivity, the following table shows the annual impact on net income of changes in interest rates: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ($ in millions) ​ Interest ​ Interest ​ Net Interest Change in Basis Points (2) ​ Income ​ ​ Expense (3) ​ ​ Income (1) Up 200 basis points ​ $ 15.9 ​ $ (3.2) ​ $ 12.7 Up 150 basis points ​ 11.9 ​ ​ (2.4) ​ 9.5 Up 100 basis points ​ 8.0 ​ ​ (1.6) ​ 6.4 Up 50 basis points ​ ​ 4.0 ​ ​ (0.8) ​ 3.2 Down 50 basis points ​ ​ (4.0) ​ ​ 0.8 ​ ​ (3.2) Down 100 basis points ​ ​ (8.0) ​ ​ 1.6 ​ ​ (6.4) Down 150 basis points ​ ​ (11.9) ​ ​ 2.4 ​ ​ (9.5) Down 200 basis points ​ ​ (15.9) ​ ​ 3.2 ​ ​ (12.7) (1) Excludes the impact of incentive fees based on pre-incentive fee net investment income.
Assuming that the Consolidated Statements of Assets and Liabilities as of December 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 ​ Interest ​ Net Interest Change in Basis Points (2) ​ Income ​ ​ Expense (3) ​ ​ Income (1) Up 200 basis points ​ $ 16.3 ​ $ (3.5) ​ $ 12.8 Up 150 basis points ​ 12.2 ​ ​ (2.6) ​ 9.6 Up 100 basis points ​ 8.2 ​ ​ (1.8) ​ 6.4 Up 50 basis points ​ ​ 4.1 ​ ​ (0.9) ​ 3.2 Down 50 basis points ​ ​ (4.1) ​ ​ 0.9 ​ ​ (3.2) Down 100 basis points ​ ​ (8.2) ​ ​ 1.8 ​ ​ (6.4) Down 150 basis points ​ ​ (12.2) ​ ​ 2.6 ​ ​ (9.6) Down 200 basis points ​ ​ (16.3) ​ ​ 3.5 ​ ​ (12.8) (1) Excludes the impact of incentive fees based on pre-incentive fee net investment income.
Item 7A. 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are subject to financial market risks, including changes in interest rates.
Removed
As of December 31, 2023 and December 31, 2022, the weighted average interest rate floor on our floating rate loans was 1.26% and 1.07%, respectively. ​ On July 1, 2023, the publication of all LIBOR settings as representative rates has ceased.
Added
In September 2024, the Federal Reserve began easing its policy, most recently lowering the federal funds rate to a target range of 4.25% - 4.50% in December 2024. As of December 31, 2024 and December 31, 2023, 94.5% and 97.7% of the loans in our portfolio bore interest at floating rates, respectively.

Other SCM 10-K year-over-year comparisons