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What changed in Stellus Capital Investment Corp's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Stellus Capital Investment Corp's 2022 and 2023 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 2023 report.

+433 added−454 removedSource: 10-K (2024-03-04) vs 10-K (2023-02-28)

Top changes in Stellus Capital Investment Corp's 2023 10-K

433 paragraphs added · 454 removed · 377 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

121 edited+2 added−10 removed236 unchanged
Biggest changeIn the future, we may adjust opportunistically the percentage of our assets held in various types of loans, our principal loan sources and the industries to which we have greatest exposure, based on market conditions, the credit cycle, available financing and our desired risk/return profile. 4 Table of Contents The following table provides a summary of our portfolio investments as of December 31, 2022: ​ ​ ​ ​ ​ ​ As of ​ ​ December 31, 2022 ​ ​ ($ in millions) Number of investments in portfolio companies ​ 85 ​ Fair value (a) ​ $ 844.7 ​ Cost ​ $ 875.8 ​ % of portfolio at fair value – first lien debt (b) ​ 87.0 % % of portfolio at fair value – second lien debt ​ 5.4 % % of portfolio at fair value – unsecured debt ​ 0.6 % % of portfolio at fair value – equity ​ 7.0 % Weighted-average annual yield (c) ​ 10.4 % (a) As of December 31, 2022, $763.8 million of our debt investments at fair value were at floating interest rates, which represented approximately 97% of our total portfolio of debt investments at fair value.
Biggest changeThe following table provides a summary of our portfolio investments as of December 31, 2023: ​ ​ ​ ​ ​ ​ As of ​ ​ December 31, 2023 ​ ​ ($ in millions) Number of investments in portfolio companies ​ 93 ​ Fair value (a) ​ $ 874.5 ​ Cost ​ $ 902.1 ​ % of portfolio at fair value – first lien debt (b) ​ 88.6 % % of portfolio at fair value – second lien debt ​ 2.5 % % of portfolio at fair value – unsecured debt ​ 0.7 % % of portfolio at fair value – equity ​ 8.2 % Weighted-average annual yield (c) ​ 11.1 % (a) As of December 31, 2023, $784.6 million of our debt investments at fair value were at floating interest rates, which represented approximately 98% of our total portfolio of debt investments at fair value.
Each potential investment opportunity that an investment professional determines merits consideration is presented and evaluated at a weekly meeting during which Stellus Capital Management’s senior investment professionals discuss the merits and risks of a potential investment opportunity as well as the due diligence process and the pricing and structure.
Each potential investment opportunity that an investment professional determines merits consideration is presented and evaluated at a weekly meeting during which Stellus Capital Management’s senior investment professionals discuss the merits and risks of the potential investment opportunity as well as the due diligence process and the pricing and structure.
In addition, portfolio investments that are not publicly traded or whose market price is not readily available are valued at fair value as determined in good faith by our Board based on the input of our Stellus Capital Management’s investment professionals and our Board’s audit committee.
In addition, portfolio investments that are not publicly traded or whose market price is not readily available are valued at fair value as determined in good faith by our Board based on the input of Stellus Capital Management’s investment professionals and our Board’s audit committee.
In following these approaches, the types of factors that are taken into account in fair value pricing our investments include, as relevant, but are not limited to: ● available current market data, including relevant and applicable market trading and transaction comparables; ● applicable market yields and multiples; ● financial covenants; ● call protection provisions; ● information rights; ● the nature and realizable value of any collateral; ● the portfolio company’s ability to make payments, its earnings and discounted cash flows and the markets in which it does business; ● comparisons of financial ratios of peer companies that are public; ● comparable merger and acquisition transactions; and ● the principal market and enterprise values.
In following these approaches, the types of factors that are taken into account in fair value pricing our investments include, as relevant, but are not limited to: ● available current market data, including relevant and applicable market trading and transaction comparables; ● applicable market yields and multiples; ● financial covenants; ● call protection provisions; ● information rights; ● the nature and realizable value of any collateral; ● the portfolio company’s ability to make payments, its earnings and discounted cash flows and the markets in which it does business; ● comparisons to financial ratios of peer companies that are public; ● comparable merger and acquisition transactions; and ● the principal market and enterprise values.
If additional funds are unavailable or not available on favorable terms, our ability to grow may be impaired. ● The time and resources that 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 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.
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. 23 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: ● 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.
If the SBIC subsidiaries are unable to obtain a waiver, compliance with the SBA regulations may cause us to fail to maintain our tax treatment as a RIC, which would result in us becoming subject to U.S. federal income tax. 32 Table of Contents Certain of our investment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things, (a) treat dividends that would otherwise constitute qualified dividend income as non-qualified dividend income, (b) treat dividends that would otherwise be eligible for the corporate dividends received deduction as ineligible for such treatment, (c) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (d) convert lower-taxed long term capital gain into higher-taxed short-term capital gain or ordinary income, (e) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited), (f) cause us to recognize income or gain without a corresponding receipt of cash, (g) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (h) adversely alter the characterization of certain complex financial transactions and (i) produce income that will not be qualifying income for purposes of the 90% Income Test.
If the SBIC subsidiaries are unable to obtain a waiver, compliance with the SBA regulations may cause us to fail to maintain our tax treatment as a RIC, which would result in us becoming subject to U.S. federal income tax. 31 Table of Contents Certain of our investment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things, (a) treat dividends that would otherwise constitute qualified dividend income as non-qualified dividend income, (b) treat dividends that would otherwise be eligible for the corporate dividends received deduction as ineligible for such treatment, (c) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (d) convert lower-taxed long term capital gain into higher-taxed short-term capital gain or ordinary income, (e) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited), (f) cause us to recognize income or gain without a corresponding receipt of cash, (g) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (h) adversely alter the characterization of certain complex financial transactions and (i) produce income that will not be qualifying income for purposes of the 90% Income Test.
Any inability of Stellus Capital Management to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business. ● Our incentive fee may induce Stellus Capital Management to make speculative investments. ● We may be obligated to pay Stellus Capital Management incentive compensation even if we incur a loss and may pay more than 20.0% of our net capital gains because we cannot recover payments made in previous years. ● We will be subject to U.S. federal income tax at corporate rates and may default under our revolving credit facility if we are unable to maintain our tax treatment as a RIC under Subchapter M of the Code. ● We may have difficulty paying our required distributions if we recognize income before, or without, receiving cash representing such income. ● Because we finance our investments with borrowed money, the potential for gain or loss on amounts invested in us is magnified and may increase the risk of investing in us. 3 Table of Contents ● Substantially all of our assets are subject to security interests under the Credit Facility (as defined below) or claims of the SBA with respect to SBA-guaranteed debentures we may issue and, if we default on our obligations thereunder, we may suffer adverse consequences, including foreclosure on our assets. ● Most of our portfolio investments are recorded at fair value as determined in good faith by our board of directors (the “ Board ”) and, as a result, there may be uncertainty as to the value of our portfolio investments . ● If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.
Any inability of Stellus Capital Management to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business. ● Our incentive fee may induce Stellus Capital Management to make speculative investments. ● We may be obligated to pay Stellus Capital Management incentive compensation even if we incur a loss and may pay more than 20.0% of our net capital gains because we cannot recover payments made in previous years. ● We will be subject to U.S. federal income tax at corporate rates and may default under our revolving credit facility if we are unable to maintain our tax treatment as a RIC under Subchapter M of the Code. ● We may have difficulty paying our required distributions if we recognize income before, or without, receiving cash representing such income. ● Because we finance our investments with borrowed money, the potential for gain or loss on amounts invested in us is magnified and may increase the risk of investing in us. ● Substantially all of our assets are subject to security interests under the Credit Facility (as defined below) or claims of the SBA with respect to SBA-guaranteed debentures we may issue and, if we default on our obligations thereunder, we may suffer adverse consequences, including foreclosure on our assets. ● Most of our portfolio investments are recorded at fair value as determined in good faith by our board of directors (the “ Board ”) and, as a result, there may be uncertainty as to the value of our portfolio investments . ● If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.
Our Board also considered the investment selection process expected to be employed by Stellus Capital Management, including the flow of transaction opportunities resulting from its investment team’s significant experience in originating, structuring and managing loans and debt securities through market cycles; the employment of Stellus Capital Management’s investment strategy, rigorous due diligence process, investment structuring, and ongoing relationships with and monitoring of portfolio companies, in light of the investment objective of the Company.
Our Board also considered the investment selection process expected to be employed by Stellus Capital Management, including the flow of transaction opportunities resulting from its investment team’s significant experience in originating, structuring and managing loans and debt securities through market cycles, and the employment of Stellus Capital Management’s investment strategy, rigorous due diligence process, investment structuring, and ongoing relationships with and monitoring of portfolio companies, in light of our investment objective.
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 also 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 Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC 820”).
We seek to achieve our investment objective by: ● accessing the extensive origination channels that have been developed and established by the Stellus Capital Management senior investment professionals that 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 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.
Regulation as a Small Business Investment Company Our wholly-owned subsidiaries’ SBIC licenses allow them to incur leverage by issuing SBA-guaranteed debentures, subject to customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten-year maturity.
Regulation as a Small Business Investment Company Our wholly owned subsidiaries’ SBIC licenses allow them to incur leverage by issuing SBA-guaranteed debentures, subject to customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and a ten-year maturity.
Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash.
Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount (“OID”), debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash.
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 28 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 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.
(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)). ​ 22 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 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.
For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial assistance and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement (as described below), and any interest expense and any distributions paid on any issued and outstanding preferred stock, but excluding the incentive fee).
For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial assistance and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement, and any interest expense and any distributions paid on any issued and outstanding preferred stock, but excluding the incentive fee).
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 our senior investment professionals and Stellus Capital Management; ● at least twice annually, the valuation for each portfolio investment is reviewed by an independent valuation firm; and ● the audit committee of our Board then reviews these preliminary valuations; ● 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 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.
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.
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.
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 34 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 35 years of investing, corporate finance, restructuring, consulting and accounting experience and have worked together at several companies.
Under present SBA regulations, eligible small businesses (together with their affiliates) include businesses that have a 33 Table of Contents tangible net worth not exceeding $24.0 million and have average annual net income after U.S federal income taxes not exceeding $8.0 million (average net income to be computed without benefit of any carryover loss) for the two most recent fiscal years.
Under present SBA regulations, eligible small businesses (together with their affiliates) include businesses that have a 32 Table of Contents tangible net worth not exceeding $24.0 million and have average annual net income after U.S federal income taxes not exceeding $8.0 million (average net income to be computed without benefit of any carryover loss) for the two most recent fiscal years.
In considering the factors discussed above, individual directors may have given different weights to different factors. 25 Table of Contents Based on the information reviewed and the discussions, the Board, including a majority of the independent directors, concluded that the investment management fee rates and terms are reasonable in relation to the services to be provided and approved the Investment Advisory Agreement as being in the best interests of our stockholders.
In considering the factors discussed above, individual directors may have given different weights to different factors. 24 Table of Contents Based on the information reviewed and the discussions, the Board, including a majority of the independent directors, concluded that the investment management fee rates and terms are reasonable in relation to the services to be provided and approved the Investment Advisory Agreement as being in the best interests of our stockholders.
In addition, our SBIC subsidiaries may also be limited in their ability to make distributions to us if they do not have sufficient capital, in accordance with SBA regulations.
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.
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. 26 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) .
We received the Order from the SEC, which permits us to co-invest with investment funds managed by Stellus Capital Management or an adviser that is controlled, controlling, or under common control with Stellus Capital Management, where doing so is consistent with our investment strategy as well as applicable law (including the terms and conditions of the exemptive order issued by the SEC).
We received the Order from the SEC, which permits us to co-invest with investment funds managed by Stellus Capital Management or an adviser that is controlled, controlling, or under common control with Stellus Capital Management, where doing so is consistent with our investment strategy as well as applicable law (including the terms and conditions of the Order).
Stellus Capital Management’s policies and procedures for voting proxies for its investment advisory clients are intended to comply with Section 206 of, and Rule 206(4)-6 under, the Advisers Act. 29 Table of Contents Proxy Policies . Stellus Capital Management votes proxies relating to our portfolio securities in what it perceives to be the best interest of our stockholders.
Stellus Capital Management’s policies and procedures for voting proxies for its investment advisory clients are intended to comply with Section 206 of, and Rule 206(4)-6 under, the Advisers Act. 28 Table of Contents Proxy Policies . Stellus Capital Management votes proxies relating to our portfolio securities in what it perceives to be the best interest of our stockholders.
With an average of over 34 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 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.
Our Board also considered Stellus Capital Management’s personnel and their prior experience in connection with the types of investments made by us, 24 Table of Contents including such personnel’s corporate relationships and relationships with private equity firms, investment banks, restructuring advisors, law firms, boutique advisory firms and distressed/specialty lenders.
Our Board also considered Stellus Capital Management’s personnel and their prior experience in connection with the types of investments made by us, including such 23 Table of Contents personnel’s corporate relationships and relationships with private equity firms, investment banks, restructuring advisors, law firms, boutique advisory firms and distressed/specialty lenders.
“Risk Factors — Risks Relating to our Business and Structure — Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage” in this Annual Report on Form 10-K.
Risk Factors — Risks Relating to our Business and Structure — Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage” in this Annual Report on Form 10-K.
A smaller enterprise is a business (together with their 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 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.
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.
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.
We co-invest, subject to the conditions in the Order, with private credit funds managed by Stellus Capital Management that have an investment strategy that is similar or identical to our investment strategy, and the 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 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.
The senior investment professionals of Stellus Capital Management have an average of over 34 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 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.
Under the 1940 Act and the rules thereunder, “eligible portfolio companies” include (1) private domestic operating companies, (2) public domestic operating companies whose securities are not listed on a national securities exchange (e.g., the New York Stock Exchange), and (3) public domestic operating companies having a market capitalization of less than $250 million.
Under the 1940 Act and the rules thereunder, “eligible portfolio companies” include (1) private domestic operating companies, (2) public domestic operating companies whose securities are not listed on a national securities exchange (e.g., the New York Stock Exchange, or “NYSE”), and (3) public domestic operating companies having a market capitalization of less than $250 million.
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 16 Table of Contents calendar quarter, exceeds a 2.0% (which is 8.0% annualized) hurdle rate and a “catch-up” provision, for the benefit off 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 Stellus Capital Management, measured as of the end of each calendar quarter.
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.
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.
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. ​ 34 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. ​ 33 Table of Contents
Public domestic operating companies whose securities are quoted on the over-the-counter bulletin board or through Pink Sheets LLC are not listed on a national securities exchange and therefore are eligible portfolio companies. 27 Table of Contents (2) Securities of any eligible portfolio company which we control.
Public domestic operating companies whose securities are quoted on the over-the-counter bulletin board or through Pink Sheets LLC are not listed on a national securities exchange and therefore are eligible portfolio companies. 26 Table of Contents (2) Securities of any eligible portfolio company which we control.
This rigorous process, combined with our broad origination capabilities, has allowed the Stellus Capital Management team to be prudent in selecting opportunities in which to make an investment. All potential investment opportunities undergo an initial informal review by Stellus Capital Management’s investment professionals.
This rigorous process, combined with its broad origination capabilities, has allowed the Stellus Capital Management team to be prudent in selecting opportunities in which to make an investment. All potential investment opportunities undergo an initial informal review by Stellus Capital Management’s investment professionals.
We may receive fees for these services and will reimburse Stellus Capital Management or an affiliate of Stellus Capital Management for its allocated costs in providing such assistance, subject to the review by our Board, including our independent directors.
We may receive fees for these services and will reimburse Stellus Capital Management or an affiliate of Stellus Capital Management, as applicable, for its allocated costs in providing such assistance, subject to the review by our Board, including our independent directors.
(2) Represents 1.75% annualized base management fee. ​ 20 Table of Contents 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 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) 21 Table of Contents 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%) 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.
While our Board has not elected to designate Stellus Capital Management as the valuation designee, we have adopted certain revisions to our valuation policies and procedures in order comply with the applicable requirements of Rule 2a-5 and Rule 31a-4. ​ As a BDC, we will generally invest in illiquid loans and securities including debt and equity securities of private middle-market companies.
While our Board has not elected to designate Stellus Capital Management as the valuation designee, we 12 Table of Contents have adopted certain revisions to our valuation policies and procedures in order comply with the applicable requirements of Rule 2a-5 and Rule 31a-4. ​ As a BDC, we will generally invest in illiquid loans and securities, including debt and equity securities of private middle-market companies.
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%.
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%.
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.
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.
In addition, we co-invest with private credit funds managed by Stellus Capital Management 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 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.
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%.
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%.
We will be subject to a 4% nondeductible U.S. federal excise tax on our undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (a) 98% of our net ordinary income for each calendar year, (b) 98.2% of our capital gain net income for the one-year period ending December 31 , and (c) any income and capital gain net income that we recognized in preceding years, but were not distributed during such years and on which we paid no U.S. federal income tax, or the Excise Tax Avoidance Requirement.
We will be subject to a 4% nondeductible U.S. federal excise tax on our undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (a) 98% of our net ordinary income for each calendar year, (b) 98.2% of our capital gain net income for the one-year period ending December 31 , and (c) any income and capital gain net income that we recognized in preceding years, but were not distributed during such years and on which we paid no U.S. federal income tax (the “Excise Tax Avoidance Requirement”).
Pursuant to the Investment Advisory Agreement , we have agreed to pay Stellus Capital Management a fee for investment advisory and management services consisting of two components — a base management fee and an incentive fee. The cost of both the base management fee and the incentive fee are borne by our stockholders.
Pursuant to the Investment Advisory Agreement , we have agreed to pay Stellus Capital Management a fee for investment advisory and management services consisting of two components — a base management fee and an incentive fee. The cost of both the base management fee and the incentive fee is borne by our stockholders.
We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see Item 1A.
We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see “Item 1A.
As of December 31, 2022, we were in compliance with the RIC requirements. As a RIC, we generally will not be subject to U.S. federal income tax on any income we timely distribute to our stockholders.
As of December 31, 2023, we were in compliance with the RIC requirements. As a RIC, we generally will not be subject to U.S. federal income tax on any income we timely distribute to our stockholders.
We also expect to benefit from Stellus Capital Management’s due diligence, credit analysis, origination and transaction execution experience and capabilities, including the support provided with respect to those functions by Mr. Huskinson, who serves as our Chief Financial Officer and Chief Compliance Officer, and his staff of nine finance and operations professionals.
We also expect to benefit from Stellus Capital Management’s due diligence, credit analysis, origination and transaction execution experience and capabilities, including the support provided with respect to those functions by W. Todd Huskinson, who serves as our Chief Financial Officer and Chief Compliance Officer, and his staff of nine finance and operations professionals.
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 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.
We and Stellus Capital Management are each required to adopt and implement written policies and procedures reasonably designed to prevent violation of relevant federal securities laws, review these policies and procedures annually for their adequacy and the effectiveness of their implementation, and designate a Chief Compliance Officer to be responsible for administering the policies and procedures. 30 Table of Contents Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 (“the Sarbanes-Oxley Act”) imposes a wide variety of regulatory requirements on publicly held companies and their insiders.
We and Stellus Capital Management are each required to adopt and implement written policies and procedures reasonably designed to prevent violation of relevant federal securities laws, review these policies and procedures annually for their adequacy and the effectiveness of their implementation, and designate a Chief Compliance Officer to be responsible for administering the policies and procedures. 29 Table of Contents Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) imposes a wide variety of regulatory requirements on publicly held companies and their insiders.
We believe that such co-investments may afford it additional investment opportunities and an ability to achieve greater diversification. As a BDC, we are required to comply with certain regulatory requirements.
We believe that such co-investments may afford us additional investment opportunities and an ability to achieve greater diversification. As a BDC, we are required to comply with certain regulatory requirements.
In order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things: ● continue to qualify as a BDC under the 1940 Act at all times during each year; ● derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities, or other income derived with respect to 31 Table of Contents our business of investing in such stock or securities, and net income derived from interests in “qualified publicly traded partnerships” (which generally are partnerships that are traded on an established securities market or tradable on a secondary market, other than partnerships that derive 90% of their income from interest, dividends and other permitted RIC income), or the 90% Income Test; and ● diversify our holdings so that at the end of each quarter of the taxable year: o at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and o no more than 25% of the value of our assets is invested in (i) the securities, other than U.S. government securities or securities of other RICs, of one issuer , (ii) the securities, other than securities of other RICs, of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses , or (iii) the securities of one or more qualified publicly traded partnerships, or the Diversification Tests .
In order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things: ● continue to qualify as a BDC under the 1940 Act at all times during each year; ● derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities, or other income derived with respect to 30 Table of Contents our business of investing in such stock or securities, and net income derived from interests in “qualified publicly traded partnerships” (which generally are partnerships that are traded on an established securities market or tradable on a secondary market, other than partnerships that derive 90% of their income from interest, dividends and other permitted RIC income) (the “90% Income Test”); and ● diversify our holdings so that at the end of each quarter of the taxable year: o at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and o no more than 25% of the value of our assets is invested in (i) the securities, other than U.S. government securities or securities of other RICs, of one issuer , (ii) the securities, other than securities of other RICs, of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses , or (iii) the securities of one or more qualified publicly traded partnerships (the “Diversification Tests”) .
We expect the large amount of uninvested capital commitments will drive buyout activity over the next several years, which should, in turn, create lending opportunities for us. Attractive Environment to Lend To Middle-Market Companies The current strength of the U.S. economy provides an attractive environment to lend to middle-market companies.
We expect the large amount of uninvested capital commitments will drive buyout activity over the next several years, which should, in turn, create lending opportunities for us. 5 Table of Contents Attractive Environment to Lend To Middle-Market Companies The current strength of the U.S. economy provides an attractive environment to lend to middle-market companies.
We believe that Stellus Capital Management’s broad network of deal origination contacts will afford us with a continuous source of investment opportunities. 8 Table of Contents These origination relationships provide access not only to potential investment opportunities but also to market intelligence on trends across the credit markets.
We believe that Stellus Capital Management’s broad network of deal origination contacts will afford us with a continuous source of investment opportunities. These origination relationships provide access not only to potential investment opportunities but also to market intelligence on trends across the credit markets.
As a condition of the SEC's COVID-19 relief, our Board will be required to ratify the re-approval of the Investment Management Agreement at its next in-person meeting .
As a condition of the SEC's COVID-19 relief, our Board will be required to ratify the re-approval of the Investment Advisory Agreement at its next in-person meeting .
For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest or, in certain cases, with increasing interest rates or issued with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year.
For example, if we hold debt obligations that are treated under applicable tax rules as having OID (such as debt instruments with PIK interest or, in certain cases, with increasing interest rates or issued with warrants), we must include in income each year a portion of the OID that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year.
The credit approval memorandum updates the prescreen memorandum with more deal specific detail, including an update to the diligence process and any changes in the structure and pricing of the proposed investment. Investment Committee Each new investment opportunity must be unanimously approved by Stellus Capital Management’s investment committee.
The credit approval memorandum updates the prescreen 10 Table of Contents memorandum with more deal-specific detail, including an update to the diligence process and any changes in the structure and pricing of the proposed investment. Investment Committee Each new investment opportunity must be unanimously approved by Stellus Capital Management’s investment committee.
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.
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.
Privacy Principles We are committed to maintaining the privacy of our stockholders and to safeguarding their nonpublic personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.
Privacy Principles We are committed to maintaining the privacy of our stockholders and to safeguarding their non-public personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.
On May 9, 2022, the Company received an exemptive order (the “Order”) from the Securities and Exchange Commission (“SEC”) that superseded the prior co-investment exemptive relief orders granted to us by the SEC that permits us to co-invest with additional types of private funds, other BDCs, and registered investment companies managed by Stellus Capital Management or an adviser that is controlled, controlling, or under common control with 1 Table of Contents Stellus Capital Management , subject to the conditions included therein.
On May 9, 2022, we and certain of our affiliates received an exemptive order (the “Order”) from the Securities and Exchange Commission (“SEC”) that superseded the prior co-investment exemptive relief orders granted to us by the SEC that permits us to co-invest with additional types of private funds, other BDCs, and registered investment companies managed by Stellus Capital Management or an adviser that is controlled, controlling, or under common 1 Table of Contents control with Stellus Capital Management, subject to the conditions included therein.
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.
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.
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.
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.
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”) .
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”) .
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.
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.
We do not disclose any nonpublic 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 permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent or third-party administrator).
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.
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.
We restrict access to nonpublic 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 nonpublic 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 intend to maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our stockholders.
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.
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 Company adopted a derivatives policy by Rule 18f-4’s August 2022 compliance date, and complies with the recordkeeping requirements. Managerial Assistance As a BDC, we offer, and must provide upon request, managerial assistance to our portfolio companies.
We adopted a derivatives policy by Rule 18f-4’s August 2022 compliance date, and comply with the recordkeeping requirements. Managerial Assistance As a BDC, we offer, and must provide upon request, managerial assistance to our portfolio companies.
Board Approval of the Investment Advisory Agreement Our Board, including a majority of our independent directors, approved the Investment Advisory Agreement at its first meeting, held on September 24, 2012, and approved the annual continuation of the Investment Advisory Agreement on January 11, 2023 by virtual means in reliance on relief provided by the SEC in response to the COVID-19 pandemic.
Board Approval of the Investment Advisory Agreement Our Board, including a majority of our independent directors, approved the Investment Advisory Agreement at its first meeting, held on September 24, 2012, and approved the annual continuation of the Investment Advisory Agreement on January 10, 2024 by virtual means in reliance on relief provided by the SEC in response to the COVID-19 pandemic.
Our investment philosophy emphasizes capital preservation through superior credit selection and risk mitigation. We expect our portfolio to provide downside protection through conservative cash flow and asset coverage requirements, priority in the capital structure and information requirements. We also anticipate benefiting from equity participation through 7 Table of Contents equity co-investments.
Our investment philosophy emphasizes capital preservation through superior credit selection and risk mitigation. We expect our portfolio to provide downside protection through conservative cash flow and asset coverage requirements, priority in the capital structure and information requirements. We also anticipate benefiting from equity participation through equity co-investments.
Taking into account such information, our Board determined that the advisory fee structure under the Investment Advisory Agreement was reasonable with respect to any economies of scale that may be realized as the Company grows. ● Limited Potential for Additional Benefits Derived by Stellus Capital Management.
Taking into account such information, our Board determined that the advisory fee structure under the Investment Advisory Agreement was reasonable with respect to any economies of scale that may be realized as we grow. ● Limited Potential for Additional Benefits Derived by Stellus Capital Management.
When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Board will use the pricing indicated by the external event to corroborate and/or assist us in our valuation.
When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Board will use the pricing indicated by the external event to corroborate and/or assist in determining the valuation.
This accounting statement requires us to assume that the portfolio investment is assumed to be sold in the principal market to market participants, or in the absence of a principal market, 13 Table of Contents the most advantageous market, which may be a hypothetical market.
This accounting statement requires us to assume that the portfolio investment is assumed to be sold in the principal market to market participants, or in the absence of a principal market, the most advantageous market, which may be a hypothetical market.
Because any original issue discount accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash amount.
Because any OID accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash amount.
SBA regulations also prohibit, without prior SBA approval, include restrictions on a “change of control” or “change in ownership” of transfer of an SBIC (as such terms are defined in the SBA regulations) and require that SBICs invest idle funds in accordance with SBA regulations.
SBA regulations also prohibit, without prior SBA approval, a “change of control” or “change in ownership” of an SBIC (as such terms are defined in the SBA regulations) and require that SBICs invest idle funds in accordance with SBA regulations.
However, under the 1940 Act, we are not permitted in certain circumstances to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. See Item 1A. “Regulation as a Business Development Company — Senior Securities” in this Annual Report on Form 10-K.
However, under the 1940 Act, we are not permitted in certain circumstances to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. See “Item 1. Business Regulation as a Business Development Company — Senior Securities” in this Annual Report on Form 10-K.
Senior unsecured loans are generally less volatile than subordinated loans due to their priority over subordinated loans. Subordinated Loans Subordinated loans are structured as unsecured, subordinated loans that provide for relatively high, fixed interest rates that provide us with significant current interest income.
Senior unsecured loans are generally less volatile than subordinated loans due to their priority over subordinated loans. 9 Table of Contents Subordinated Loans Subordinated loans are structured as unsecured, subordinated loans that provide for relatively high, fixed interest rates that provide us with significant current interest income.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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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.
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.
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) 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) 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) 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) 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 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.
All distributions will be made at the discretion of our Board and will depend on our earnings, financial condition, maintenance of RIC status, compliance with applicable BDC, SBA regulations and such other factors as our Board may deem relative from time to time. We cannot assure you that we will make distributions to our stockholders in the future.
All distributions will be made at the discretion of our Board and will depend on our earnings, financial condition, maintenance of RIC status, compliance with applicable BDC requirements and SBA regulations and such other factors as our Board may deem relative from time to time. We cannot assure you that we will make distributions to our stockholders in the future.
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 will 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 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).
Such a failure could have a material adverse effect on us and our stockholders. Legislative or regulatory tax changes could have any adverse impact on us and our stockholders. At any time, the federal income tax laws governing RICs or the administrative interpretations of those laws or regulations may be amended.
Such a failure could have a material adverse effect on us and our stockholders. Legislative or regulatory tax changes could have an adverse impact on us and our stockholders. At any time, the federal income tax laws governing RICs or the administrative interpretations of those laws or regulations may be amended.
If Section 18(a)(1)(B) 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 67 Table of Contents 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 ● create restrictions on the payment of dividends or other amounts to us from our subsidiaries.
As a BDC, we may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates, including our officers, trustees, Stellus Capital Management, principal underwriters and certain of their affiliates, without the prior approval of the members of our Board who are not interested persons and, in some cases, prior approval by the SEC through an exemptive order (other than pursuant to current regulatory guidance).
As a BDC, we may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates, including our officers, directors, Stellus Capital Management, principal underwriters and certain of their affiliates, without the prior approval of the members of our Board who are not interested persons and, in some cases, prior approval by the SEC through an exemptive order (other than pursuant to current regulatory guidance).
The market price of our securities may fluctuate significantly. The market price and liquidity of the market for our securities may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance.
The market price and liquidity of the market for our securities may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance.
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 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 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.
Our management and incentive fees may induce Stellus Capital Management to incur additional leverage. Generally, the management and incentive fees payable by us to Stellus Capital Management may create an incentive for Stellus Capital Management to use the additional available leverage.
Our management and incentive fees may induce Stellus Capital Management to incur additional leverage. Generally, the management and incentive fees payable by us to Stellus Capital Management may create an incentive for Stellus Capital Management to use any additional available leverage.
Our net asset value could be adversely affected if our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such loans and securities. ​ We adjust quarterly the valuation of our portfolio to reflect our Boards’ determination of the fair value of each investment in our portfolio.
Our net asset value could be adversely affected if our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such loans and securities. ​ We adjust quarterly the valuation of our portfolio to reflect our Board’s determination of the fair value of each investment in our portfolio.
Investors are urged to consult with their tax advisor regarding tax legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our securities. 48 Table of Contents Any failure to comply with SBA regulations could have an adverse effect on our SBIC subsidiaries’ operations.
Investors are urged to consult with their tax advisor regarding tax legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our securities. 47 Table of Contents Any failure to comply with SBA regulations could have an adverse effect on our SBIC subsidiaries’ operations.
In order for us to continue to qualify for RIC tax treatment and to minimize corporate-level taxes, we are required to distribute substantially all of our net ordinary income and net capital gain income, including income from certain 49 Table of Contents of our subsidiaries, which includes the income from our SBIC subsidiaries.
In order for us to continue to qualify for RIC tax treatment and to minimize corporate-level taxes, we are required to distribute substantially all of our net ordinary income and net capital gain income, including income 48 Table of Contents from certain of our subsidiaries, which includes the income from our SBIC subsidiaries.
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.
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 amount of leverage that we employ will depend on Stellus Capital Management’s and our Boards’ assessment of market and other factors at the time of any proposed borrowing. We cannot assure you that we will be able to obtain credit at all or on terms acceptable to us.
The amount of leverage that we employ will depend on Stellus Capital Management’s and our Board’s assessment of market and other factors at the time of any proposed borrowing. We cannot assure you that we will be able to obtain credit at all or on terms acceptable to us.
A proposal, approved by our stockholders at our 2020 annual stockholders meeting, authorizes us to sell shares equal to up to 25% of our outstanding common stock of our 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 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 BDC that enters into reverse repurchase agreements or similar financing transactions could either comply with the asset coverage requirements of Section 18 when engaging in reverse repurchase agreements or (ii) chose to treat such agreements as derivatives transactions under the adopted rule.
A BDC that enters into reverse repurchase agreements or similar financing transactions may either comply with the asset coverage requirements of Section 18 when engaging in reverse repurchase agreements or (ii) chose to treat such agreements as derivatives transactions under the adopted rule.
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 your investment in the 2026 Notes.
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.
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 68 Table of Contents 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 2026 Notes.
In the event that material nonpublic information is obtained with respect to such companies, or we become subject to trading restrictions under the internal trading policies of those companies or as a result of applicable law or regulations, we could be prohibited for a period of time from purchasing or selling the securities of such companies, and this prohibition may have an adverse effect on us.
In the event that material non-public information is obtained with respect to such companies, or we become subject to trading restrictions under the internal trading policies of those companies or as a result of applicable law or regulations, we could be prohibited for a period of time from purchasing or selling the securities of such companies, and this prohibition may have an adverse effect on us.
Under the adopted rule, a BDC may enter into an unfunded commitment agreement that is not a derivatives transaction, such as an agreement to provide financing to a portfolio company, if the BDC has a reasonable belief, at the time it enters into such an agreement, that it will have sufficient cash and cash equivalents to meet its obligations with respect to all of its unfunded commitment agreements, in each case as it becomes due.
A BDC may enter into an unfunded commitment agreement that is not a derivatives transaction, such as an agreement to provide financing to a portfolio company, if the BDC has a reasonable belief, at the time it enters into such an agreement, that it will have sufficient cash and cash equivalents to meet its obligations with respect to all of its unfunded commitment agreements, in each case as it becomes due.
As of December 31, 2022, 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, 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.
Such an attack could cause 54 Table of Contents interruptions or malfunctions in our operations, which could result in financial losses, litigation, regulatory penalties, client dissatisfaction or loss, reputational damage, and increased costs associated with mitigation of damages and remediation. Third parties with which we do business may also be sources of cybersecurity or other technological risks.
Such an attack could cause interruptions or malfunctions in our operations, which could result in financial losses, litigation, regulatory penalties, client dissatisfaction or loss, reputational damage, and increased costs associated with mitigation of damages and remediation. Third parties with which we do business may also be sources of cybersecurity or other technological risks.
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.
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.
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.
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.
As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our investments: ● available current market data, including relevant and applicable market trading and transaction comparables; ● applicable market yields and multiples; ● security covenants; 58 Table of Contents ● call protection provisions; ● information rights; ● the nature and realizable value of any collateral; ● the portfolio company’s ability to make payments, its earnings and discounted cash flows and the markets in which it does business; ● comparisons of financial ratios of peer companies that are public; ● comparable merger and acquisition transactions; and ● the principal market and enterprise values.
As part of the valuation process, our Board may take into account the following types of factors, if relevant, in determining the fair value of our investments: ● available current market data, including relevant and applicable market trading and transaction comparables; ● applicable market yields and multiples; ● security covenants; ● call protection provisions; ● information rights; ● the nature and realizable value of any collateral; ● the portfolio company’s ability to make payments, its earnings and discounted cash flows and the markets in which it does business; ● comparisons of financial ratios of peer companies that are public; ● comparable merger and acquisition transactions; and ● the principal market and enterprise values.
In addition, restrictions and provisions in our Credit Facility, the 2026 Notes (as defined below) 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 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.
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 53 Table of Contents Act, including obtaining common stockholder approval.
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.
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.
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.
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.
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.
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.
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.
Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our level of risk, because we prefer other 59 Table of Contents opportunities or because we are inhibited by compliance with BDC requirements of the 1940 Act or the desire to maintain our qualification as a RIC.
Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our level of risk, because we prefer other opportunities or because we are inhibited by compliance with BDC requirements of the 1940 Act or the desire to maintain our qualification as a RIC.
If the holders of the 2026 Notes exercise their right to require us to repurchase Notes upon a Change of Control Repurchase Event, the financial effect of this repurchase could cause a default under our current and future debt instruments, and we may not have sufficient funds to repay any such accelerated indebtedness.
If the holders of the 2026 Notes exercise their right to require us to repurchase 67 Table of Contents Notes upon a Change of Control Repurchase Event, the financial effect of this repurchase could cause a default under our current and future debt instruments, and we may not have sufficient funds to repay any such accelerated indebtedness.
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.
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.
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.
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.
These developments, along with the United States government’s credit and deficit concerns, global economic 56 Table of Contents 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 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.
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 69 Table of Contents 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 of any changes in our credit ratings.
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.
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.
Leveraged companies may experience bankruptcy or similar financial distress. The bankruptcy process has a number of significant inherent risks. Many events in a bankruptcy proceeding are the product of contested matters and adversary 57 Table of Contents proceedings and are beyond the control of the creditors. A bankruptcy filing by a portfolio company may adversely and permanently affect that company.
Leveraged companies may experience bankruptcy or similar financial distress. The bankruptcy process has a number of significant inherent risks. Many events in a bankruptcy proceeding are the product of contested matters and adversary proceedings and are beyond the control of the creditors. A bankruptcy filing by a portfolio company may adversely and permanently affect that company.
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.
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.
If a U.S. stockholder 42 Table of Contents sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale.
If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale.
If such proceeds were not sufficient to repay amounts outstanding under the loan obligations secured by the second priority liens, then we, to the extent not repaid 62 Table of Contents from the proceeds of the sale of the collateral, will only have an unsecured claim against the portfolio company’s remaining assets, if any.
If such proceeds were not sufficient to repay amounts outstanding under the loan obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the portfolio company’s remaining assets, if any.
As a result, the 2026 Notes are effectively subordinated to any secured indebtedness we or our subsidiaries have incurred and may incur in the future (or any indebtedness that is initially unsecured as to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness.
As a result, the 2026 Notes are effectively subordinated to any secured indebtedness we or our subsidiaries have incurred and may incur in the future (or any indebtedness that is initially unsecured as to which we subsequently grant security) to 64 Table of Contents the extent of the value of the assets securing such indebtedness.
The illiquidity of our investments may make it difficult for us to sell such investments to access capital if required, and as a result, we could realize significantly less than the value at which we have recorded our investments 35 Table of Contents if we were required to sell them for liquidity purposes.
The illiquidity of our investments may make it difficult for us to sell such investments to access capital if required, and as a result, we could realize significantly less than the value at which we have recorded our investments if we were required to sell them for liquidity purposes.
In addition, any projected future decreases in our portfolio companies’ operating results due to inflation could adversely impact the fair value of those investments. Any decreases in the fair value of our investments could result in future realized or unrealized losses and therefore reduce our net assets resulting from operations.
In addition, any 35 Table of Contents projected future decreases in our portfolio companies’ operating results due to inflation could adversely impact the fair value of those investments. Any decreases in the fair value of our investments could result in future realized or unrealized losses and therefore reduce our net assets resulting from operations.
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 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.
In some cases, the debtor company may not be able to reorganize and may be required to liquidate assets. The debt of companies in financial 63 Table of Contents reorganization will, in most cases, not pay current interest, may not accrue interest during reorganization and may be adversely affected by an erosion of the issuer’s fundamental value.
In some cases, the debtor company may not be able to reorganize and may be required to liquidate assets. The debt of companies in financial reorganization will, in most cases, not pay current interest, may not accrue interest during reorganization and may be adversely affected by an erosion of the issuer’s fundamental value.
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 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.
Any failure to manage our business and our future growth effectively could have a material adverse effect on our business, financial condition, results of operations and cash flows. 38 Table of Contents There are significant potential conflicts of interest that could negatively affect our investment returns.
Any failure to manage our business and our future growth effectively could have a material adverse effect on our business, financial condition, results of operations and cash flows. There are significant potential conflicts of interest that could negatively affect our investment returns.
Any new laws, regulations or interpretations may take effect retroactively and could adversely affect the taxation of us or our stockholders. Therefore, changes in tax laws, regulations or administrative interpretations or any amendments thereto could diminish the value of an investment in our shares or the value or the resale potential of our investments.
Any new laws, 40 Table of Contents regulations or interpretations may take effect retroactively and could adversely affect the taxation of us or our stockholders. Therefore, changes in tax laws, regulations or administrative interpretations or any amendments thereto could diminish the value of an investment in our shares or the value or the resale potential of our investments.
An event of default under the Credit Facility or any other borrowing facility 45 Table of Contents could result in an accelerated maturity date for all amounts outstanding thereunder, which could have a material adverse effect on our business and financial condition.
An event of default under the Credit Facility or any other borrowing facility could result in an accelerated maturity date for all amounts outstanding thereunder, which could have a material adverse effect on our business and financial condition.
These service providers’ reliance on mobile or cloud technology or any failure by mobile technology and cloud service providers to adequately safeguard their systems and prevent cyber-attacks could disrupt their operations and result in misappropriation, corruption or loss 55 Table of Contents of personal, confidential or proprietary information.
These service providers’ reliance on mobile or cloud technology or any failure by mobile technology and cloud service providers to adequately safeguard their systems and prevent cyber-attacks could disrupt their operations and result in misappropriation, corruption or loss of personal, confidential or proprietary information.
With respect to all investments, we may lose some investment opportunities if we do not match our competitors’ pricing, terms and structure. However, if we match our competitors’ pricing, terms and structure, we may experience decreased net 40 Table of Contents interest income, lower yields and increased risk of credit loss.
With respect to all investments, we may lose some investment opportunities if we do not match our competitors’ pricing, terms and structure. However, if we match our competitors’ pricing, terms and structure, we may experience decreased net interest income, lower yields and increased risk of credit loss.
Stellus Capital Management and some of its affiliates, including our officers and our non-independent directors, are not prohibited from raising money for, or managing, another investment entity that makes the same types of investments as those we target.
Stellus Capital Management and some of its affiliates, including our officers and our interested directors, are not prohibited from raising money for, or managing, another investment entity that makes the same types of investments as those we target.
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.
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.
Such original issue discount, 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 corresponding cash payments. We also may be required to include in income certain other amounts that we will not receive in cash.
We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company. Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio.
We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company. 58 Table of Contents Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio.
The non-binding nature of consensus pricing and/or quotes accompanied by disclaimers materially reduces the reliability of such information. We have retained the services of independent service providers to review 46 Table of Contents the valuation of these loans and securities.
The non-binding nature of consensus pricing and/or quotes accompanied by disclaimers materially reduces the reliability of such information. We have retained the services of independent service providers to review the valuation of these loans and securities.
Therefore, the number of our non-performing assets is likely to increase, and the value of our portfolio is likely to decrease during such periods. Adverse economic conditions may decrease the value of collateral securing some of our loans and debt securities and the value of our equity investments.
Therefore, the number of our non-performing assets is likely to increase, and the value of our portfolio is likely to decrease during such periods. Adverse economic conditions may decrease the 55 Table of Contents value of collateral securing some of our loans and debt securities and the value of our equity investments.
As a result, we can offer no assurance that rising interest rates would not have a material adverse effect on our net investment income in the event we use debt to finance our investments. In this period of rising interest rates, our cost of funds have increased, which may reduce our net investment income.
As a result, we can offer no assurance that rising interest rates would not have a material adverse effect on our net investment income in the event we use debt to finance our investments. In the most recent period of rising interest rates, our cost of funds has increased, which may reduce our net investment income.
The U.S. debt ceiling and budget deficit concerns have raised the possibility of additional credit-rating downgrades and economic slowdowns in the United States and globally. Legislation passed in December 2021 suspends the debt ceiling through early 2023, unless Congress takes further legislative action to extend it.
The U.S. debt ceiling and budget deficit concerns have raised the possibility of additional credit-rating downgrades and economic slowdowns in the United States and globally. Legislation passed in June 2023 suspends the debt ceiling through early 2025, unless Congress takes further legislative action to extend it.
We may have difficulty paying our required distributions if we recognize income before, or without, receiving cash representing such income. For U.S. federal income tax purposes, we include in income certain amounts that we have not yet received in cash, such as the accrual of original issue discount.
We may have difficulty paying our required distributions if we recognize income before, or without, receiving cash representing such income. For U.S. federal income tax purposes, we include in income certain amounts that we have not yet received in cash, such as the accrual of OID.
As a non-accelerated filer, we are not required to comply with the auditor attestation requirements of the Sarbanes-Oxley Act. As of January 1, 2020, we are a non-accelerated filer under the Exchange Act and, therefore, we are not required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.
As a non-accelerated filer, we are not required to comply with the auditor attestation requirements of the Sarbanes-Oxley Act. We are a non-accelerated filer under the Exchange Act and, therefore, we are not required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.
Many of the portfolio companies in which we make, and expect to make, investments, including those currently included in our portfolio, are likely to be susceptible to economic slowdowns or recessions, including those resulting from the COVID-19 pandemic and may be unable to repay our loans during such periods.
Many of the portfolio companies in which we have invested or expect to make investments are likely to be susceptible to economic slowdowns or recessions, including those resulting from the COVID-19 pandemic, and may be unable to repay our loans during such periods.
In addition, continuous sales of common stock below net asset value may have a negative impact on total returns and could have a negative impact on the market price of our shares of common 43 Table of Contents stock.
In addition, continuous sales of common stock below net asset value may have a negative impact on total returns and could have a negative impact on the market price of our shares of common stock.
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, including the impact of COVID-19, or other relevant factors.
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.
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 war in Ukraine and Russia, 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 rising interest rates, the wars in Ukraine and Russia and the Middle East, and health epidemics and pandemics .
Our ability to make follow-on investments may also be limited by our compliance with the conditions under the exemptive relief order we received from the SEC related to co-investments with investment funds managed by Stellus Capital Management or Stellus Capital Management’s allocation policy.
Our ability to make follow-on investments may also be limited by our compliance with the conditions under the Order we received from the SEC related to co-investments with investment funds managed by Stellus Capital Management (or an affiliate thereof) or Stellus Capital Management’s allocation policy.
No certainty can be provided, that we will satisfy the asset diversification requirements or the other requirements necessary 41 Table of Contents to maintain our tax treatment as a RIC.
No certainty can be provided, that we will satisfy the asset diversification requirements or the other requirements necessary to maintain our tax treatment as a RIC.
If the BDC cannot meet this test, it is required to treat unfunded commitments as a derivatives transaction subject to the 64 Table of Contents requirements of the rule. Collectively, these requirements may limit our ability to use derivatives and/or enter into certain other financial contracts.
If the BDC cannot meet this test, it is required to treat unfunded commitments as a derivatives transaction subject to the requirements of the SEC rules. Collectively, these requirements may limit our ability to use derivatives and/or enter into certain other financial contracts.
For example, Stellus Capital Management currently manages private credit funds that have investment strategies that are similar, overlapping or identical to our investment strategy and with which we co-invest. In addition, pursuant to sub-advisory arrangements, Stellus Capital Management provides non-discretionary advisory services to the D. E.
For example, Stellus Capital Management and/or its affiliates currently manage a private BDC and other private credit funds that have investment strategies that are similar, overlapping or identical to our investment strategy and with which we co-invest. In addition, pursuant to sub-advisory arrangements, Stellus Capital Management provides non-discretionary advisory services to the D. E.
Upon the issuance of any debt securities guaranteed by the SBA, if we are unable to meet the financial obligations under our 4.875% notes due 2026 or (the “2026 Notes”), as issued on January 14, 2021, or the Credit Facility, the SBA, as a creditor, would have a superior claim to the assets of our SBIC subsidiaries over our stockholders in the event we liquidate or the SBA exercises its remedies under such debentures as the result of a default by us.
If we are unable to meet the financial obligations under our 4.875% notes due 2026 or (the “2026 Notes”), as issued on January 14, 2021, or the Credit Facility, the SBA, as a creditor, has a superior claim to the assets of our SBIC subsidiaries over our stockholders in the event we liquidate or the SBA exercises its remedies under such debentures as the result of a default by us.
In addition, the 2026 Notes will rank pari passu with, or equal to, all outstanding and future unsecured, unsubordinated indebtedness issued by us and our general liabilities (total liabilities, less debt). As of December 31, 2022 we had $199.2 million in outstanding indebtedness under our Credit Facility.
In addition, the 2026 Notes rank pari passu with, or equal to, all outstanding and future unsecured, unsubordinated indebtedness issued by us and our general liabilities (total liabilities, less debt). As of December 31, 2023 we had $160.1 million in outstanding indebtedness under our Credit Facility.
Our investments in portfolio companies that operate in the healthcare & pharmaceuticals industry represent 10.40% of our total portfolio as of December 31, 2022. Any of our portfolio companies operating in the healthcare information and services industry are subject to extensive government regulation and certain other risks particular to that industry.
Our investments in portfolio companies that operate in the healthcare & pharmaceuticals industry represent 11.77% of our total portfolio as of December 31, 2023. Any of our portfolio companies operating in the healthcare information and services industry are subject to extensive government regulation and certain other risks particular to that industry.
Consequently, the 2026 Notes are structurally subordinated to all indebtedness and other liabilities, including trade payables, of any of our existing or future subsidiaries, including the SBIC subsidiaries. As of December 31, 2022, our subsidiaries had total indebtedness outstanding of $313.6 million.
Consequently, the 2026 Notes are structurally subordinated to all indebtedness and other liabilities, including trade payables, of any of our existing or future subsidiaries, including the SBIC subsidiaries. As of December 31, 2023, our subsidiaries had total indebtedness outstanding of $325.0 million.
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 three fiscal years, since the onset of the COVID-19 pandemic .
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 .
Our investments in the business services industry are subject to unique risks relating to technological developments, regulatory changes and changes in customer preferences. Our investments in portfolio companies that operate in the business services industry represent 25.90% of our total portfolio as of December 31, 2022.
Our investments in the business services industry are subject to unique risks relating to technological developments, regulatory changes and changes in customer preferences. Our investments in portfolio companies that operate in the business services industry represent 23.78% of our total portfolio as of December 31, 2023.
The reorganization of a company can involve substantial legal, professional and administrative costs to a lender and the borrower. It is subject to unpredictable and lengthy delays and during the process a company’s competitive position may erode, key management may depart and a company may not be able to invest adequately.
The reorganization of a company can involve substantial legal, professional and administrative costs to a lender and the borrower. Bankruptcy and reorganization proceedings are frequently subject to unpredictable and lengthy delays, and during the process, the debtor company’s competitive position may erode, key management may depart and the debtor company may not be able to invest adequately.
Complying with Section 404 requires a rigorous compliance program as well as adequate time and resources. We may not be able to complete our internal control evaluation, testing and any required remediation in a timely 47 Table of Contents fashion.
Complying with Section 404 of the Sarbanes-Oxley Act requires a rigorous compliance program as well as adequate time and resources. We may not be able to complete our internal control evaluation, testing and any required remediation in a timely fashion.
This approval will expire on the earlier of our 2023 annual stockholder meeting or June 23, 2023, the one-year anniversary of our 2022 annual stockholders meeting.
This approval will expire on the earlier of our 2024 annual stockholder meeting or June 22, 2024, the one-year anniversary of our 2023 annual stockholders meeting.

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Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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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. ​ 70 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. ​ 69 Table of Contents PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe following chart outlines such purchases of our common stock during the year ended December 31, 2022: ​ ​ ​ ​ ​ ​ ​ ​ Total Number Average Price ​ ​ of Shares ​ Paid Per Period ​ Purchased ​ Share January 1, 2022 – January 31, 2022 6,962 ​ $ 13.13 February 1, 2022 – February 28, 2022 8,251 ​ 13.85 March 1, 2022 – March 31, 2022 8,157 ​ 13.99 April 1, 2022 – April 30, 2022 8,236 ​ 14.01 May 1, 2022 – May 31, 2022 9,121 ​ 12.85 June 1, 2022 – June 30, 2022 10,076 ​ 11.87 July 1, 2022 – July 31, 2022 9,924 ​ 12.21 August 1, 2022 – August 31, 2022 9,008 ​ 13.97 September 1, 2022 – September 30, 2022 9,422 ​ 13.49 October 1, 2022 – October 31, 2022 10,174 ​ 12.58 November 1, 2022 – November 30, 2022 8,904 ​ 13.80 December 1, 2022 – December 31, 2022 9,788 ​ 13.35 Total 108,023 ​ $ 13.22 ​ Price Range of Common Stock Our shares of common stock are traded on the New York Stock Exchange (“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. 72 Table of Contents The 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, 2022 ​ ​ ​ ​ Fourth quarter ​ $ 14.02 ​ $ 13.96 ​ $ 11.98 (0.43) % (14.55) % Third quarter ​ $ 14.18 ​ $ 14.08 ​ $ 11.44 (0.71) % (19.32) % Second quarter ​ $ 14.32 ​ $ 14.20 ​ $ 11.13 (0.84) % (22.28) % First quarter ​ $ 14.59 ​ $ 14.15 ​ $ 13.08 (3.02) % (10.35) % December 31, 2021 ​ ​ ​ ​ Fourth quarter ​ $ 14.61 ​ $ 14.65 ​ $ 12.38 0.27 % (15.26) % Third quarter ​ $ 14.15 ​ $ 13.61 ​ $ 12.45 (3.82) % (12.01) % Second quarter ​ $ 14.07 ​ $ 13.66 ​ $ 12.40 (2.91) % (11.87) % First quarter ​ $ 14.03 ​ $ 12.70 ​ $ 10.18 (9.48) % (27.44) % December 31, 2020 ​ ​ ​ ​ Fourth quarter ​ $ 14.03 ​ $ 12.07 ​ $ 8.04 (13.97) % (42.69) % Third quarter ​ $ 13.17 ​ $ 8.94 ​ $ 7.22 (32.12) % (45.18) % Second quarter ​ $ 13.34 ​ $ 8.75 ​ $ 5.58 (34.41) % (58.17) % First quarter ​ $ 11.55 ​ $ 15.03 ​ $ 5.06 30.13 % (56.19) % (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, 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.
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 2022, we paid monthly distributions of $0.1133 per share on our common shares.
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.
The graph and other information furnished under this Part II Item 5 of this Annual Report on Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of 1934 (the “1934 Act”).
The graph and other information furnished under this Part II, Item 5 of this Annual Report on Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act.
The stock price performance included in the above graph is not necessarily indicative of future stock price performance. ​ Item 6. [Reserved] ​ 74 Table of Contents
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
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. 73 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 February 27, 2023.
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.
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 “Equity Distribution Agreement”) with Keef Bruyette & Woods, Inc. and Raymond James & Associates, Inc., as sales agents and/or principal thereunder.
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.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “SCM.” As of January 31, 2023, 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, 2024, we had nine stockholders of record, which did not include stockholders for whom shares are held in nominee or street name.
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 the financial condition of the Company. However, the Company intends to continue to pay comparable dividends to stockholders in the future.
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.
Under the 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 common stock, par value $0.001 per share, with the intention to use the net proceeds from this at-the-market sales program (the “ATM Program”) to repay certain outstanding indebtedness and make investments in portfolio companies in accordance with its investment objective and strategies In November 2021, the Company 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.
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.
In March 2022, the Company 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, the Company 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 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 November 2022, the Company 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. ​ 71 Table of Contents Purchases of Equity Securities Dividend Reinvestment Plan During the year ended December 31, 2022, as a part of our DRIP, we purchased 108,023 shares of our common stock for an average price per share of $13.08 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, 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.
Removed
Recent Sales of Unregistered Securities During the years ended December 31, 2022 and 2021, we did not issue shares of common stock under the distribution reinvestment program (“DRIP”). During the year ended December 31, 2020, we issued a total of 21,666 shares of common stock under DRIP.
Added
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.
Removed
Issuances under the DRIP are not subject to the registration requirements of the Securities Act of 1933, as amended. The aggregate value of the shares of our common stock issued under the DRIP for the year ended December 31, 2020 was $228,943.
Added
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.
Added
Upon execution of the 2023 Equity Distribution Agreement, we no longer sold any shares under the 2021 Equity Distribution Agreement. We refers to the issuance and sale of shares under the Equity Distribution Agreements as the "ATM Program".
Added
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.
Added
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.
Added
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.
Added
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.
Added
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.
Added
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.

Item 7. Management's Discussion & Analysis

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

111 edited+10 added−12 removed54 unchanged
Biggest changeThe following is a summary of geographical concentration of our investment portfolio as of December 31, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ % of Total ​ ​ Cost ​ Fair Value ​ Investments 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 geographical concentration of our investment portfolio as of December 31, 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ % of Total ​ ​ ​ ​ ​ ​ ​ ​ Investments ​ ​ Cost ​ Fair Value ​ at fair value California ​ $ 153,793,390 ​ $ 157,446,299 20.37 % Texas ​ 161,550,893 ​ 142,657,160 18.46 % Illinois ​ 69,780,236 ​ 71,066,882 9.20 % Pennsylvania ​ 42,866,707 ​ 42,604,002 5.51 % Washington ​ 41,067,458 ​ 40,790,941 5.28 % Ohio ​ 36,551,789 ​ 38,218,517 4.94 % Arizona ​ 31,165,320 ​ 31,117,284 4.03 % New York ​ 25,161,998 ​ 27,334,823 3.54 % Wisconsin ​ 25,880,018 ​ 25,893,643 3.35 % New Jersey ​ 25,518,474 ​ 23,548,670 3.05 % United Kingdom ​ 21,320,828 ​ 19,537,231 2.53 % Georgia ​ 11,066,059 ​ 19,045,442 2.46 % Maryland ​ ​ 16,838,603 ​ ​ 16,974,999 ​ 2.20 % Minnesota ​ ​ 15,922,220 ​ ​ 15,688,073 ​ 2.03 % Colorado ​ 15,151,135 ​ 14,980,283 1.94 % South Carolina ​ 13,270,660 ​ 13,270,530 1.71 % Canada ​ 13,418,371 ​ 13,265,324 1.71 % Florida ​ ​ 12,966,130 ​ ​ 13,220,344 ​ 1.71 % District of Columbia ​ 11,798,134 ​ 13,137,892 1.70 % Missouri ​ 9,871,933 ​ 10,600,866 1.37 % North Carolina ​ 10,503,957 ​ 10,360,521 1.34 % Massachusetts ​ 10,281,055 ​ 10,348,341 1.34 % Puerto Rico ​ 8,760,589 ​ 1,149,047 0.15 % Virginia ​ 500,000 ​ 616,212 0.08 % ​ ​ $ 785,005,957 ​ $ 772,873,326 100.00 % ​ 79 Table of Contents The following is a summary of industry concentration of our investment portfolio as of December 31, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ % of Total ​ ​ Cost ​ Fair Value ​ Investments 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 % Total ​ $ 875,823,177 ​ $ 844,733,638 100.00 % ​ 80 Table of Contents The following is a summary of industry concentration of our investment portfolio as of December 31, 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ % of Total ​ ​ ​ ​ ​ ​ ​ ​ Investments ​ ​ Cost ​ Fair Value ​ at fair value Services: Business ​ $ 167,253,835 ​ $ 177,242,299 22.93 % Healthcare & Pharmaceuticals ​ 104,933,428 ​ 99,584,343 12.89 % Aerospace & Defense ​ 66,503,939 ​ 63,467,579 8.21 % Media: Advertising, Printing & Publishing ​ 53,136,718 ​ 51,125,659 6.62 % Media: Broadcasting & Subscription ​ 39,319,912 ​ 42,892,137 5.55 % Consumer Goods: Durable ​ 36,216,806 ​ 36,537,445 4.73 % Beverage, Food, & Tobacco ​ 34,089,805 ​ 33,791,047 4.37 % Consumer Goods: Non-Durable ​ 30,597,444 ​ 29,447,632 3.81 % Construction & Building ​ 27,333,360 ​ 27,282,504 3.53 % Environmental Industries ​ 26,826,229 ​ 26,355,789 3.41 % Software ​ 21,498,947 ​ 23,841,617 3.08 % Services: Consumer ​ 40,034,415 ​ 22,682,119 2.93 % Transportation & Logistics ​ 18,583,797 ​ 18,934,004 2.45 % Containers, Packaging, & Glass ​ 17,557,212 ​ 17,710,907 2.29 % Metals & Mining ​ 16,838,603 ​ 16,974,999 2.20 % FIRE: Real Estate ​ ​ 15,694,701 ​ ​ 15,824,998 ​ 2.05 % Chemicals, Plastics, & Rubber ​ 14,638,210 ​ 14,288,322 1.85 % Education ​ 11,053,167 ​ 11,053,167 1.43 % Automotive ​ 11,064,612 ​ 10,800,000 1.40 % Energy: Oil & Gas ​ 11,098,912 ​ 10,461,417 1.35 % Utilities: Oil & Gas ​ 9,901,900 ​ 9,800,000 1.27 % Capital Equipment ​ 8,322,806 ​ 8,182,736 1.06 % Finance ​ 2,507,199 ​ 4,108,356 0.53 % Hotel, Gaming, & Leisure ​ — ​ 484,250 0.06 % ​ ​ $ 785,005,957 ​ $ 772,873,326 100.00 % ​ 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.
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.
Pursuant to the Third Amendment and Commitment Increase to Amended and Restated Senior Secured Revolving Credit Agreement the Credit Facility will bear interest, subject to the Company’s election, on a per annum basis equal to (i) term SOFR plus 2.50% (or 2.75% during certain periods in which the Company’s asset coverage ratio is equal to or below 1.90 to 1.00) plus a SOFR credit spread adjustment (0.10% for one-month term SOFR and 0.15% for three-month term SOFR), with a 0.25% SOFR floor, or (ii) 1.50% (or 1.75% during certain periods in which the Company’s asset coverage ratio is equal to or below 1.90 to 1.00) plus an alternate base rate based on the highest of the prime rate (subject to a 3% floor), Federal Funds Rate plus 0.50% and one month term SOFR plus 1.00%.
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%.
As of December 31, 2022, our only off-balance sheet arrangements consisted of $27.5 of unfunded commitments to provide debt financing to 52 existing portfolio companies and $0.3 in unfunded equity commitments to one existing portfolio company.
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.
Under the regulations applicable to SBIC funds, a single licensee can have outstanding SBA-guaranteed debentures, subject to a regulatory leverage limit, up to two times the amount of regulatory capital. As of both December 31, 2022 and 2021, the SBIC I subsidiary had $75.0 million in “regulatory capital”, as such term is defined by the SBA.
Under the regulations applicable to SBIC funds, a single licensee can have outstanding SBA-guaranteed debentures, subject to a regulatory leverage limit, up to two times the amount of regulatory capital. As of both December 31, 2023 and 2022, the SBIC I subsidiary had $75.0 million in “regulatory capital”, as such term is defined by the SBA.
In some cases, our debt investments may pay interest in-kind, or PIK interest. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments.
In some cases, our debt investments may pay PIK interest. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments.
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, 2022, 2021, and 2020 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, 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.
As of both December 31, 2022 and 2021, the SBIC II subsidiary had $87.5 million in regulatory capital. On August 12, 2014, we obtained exemptive relief from the SEC to permit us to exclude the SBA-guaranteed debentures from our asset coverage test under the 1940 Act.
As of both December 31, 2023 and 2022, the SBIC II subsidiary had $87.5 million in regulatory capital. On August 12, 2014, we obtained exemptive relief from the SEC to permit us to exclude the SBA-guaranteed debentures from our asset coverage test under the 1940 Act.
Provision for Taxes on Unrealized 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 at corporate 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 .
Non-recurring income was related to early repayments, the recognition of previously reserved income from a prior period, and amendments to specific loan positions. 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.
Non-recurring income was related to early repayments, the recognition of previously reserved income from a prior period, and amendments to specific loan positions. 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.
A proposal, approved by our stockholders at our 2022 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 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.
The Company redeemed all $48.9 million in aggregate principal amount of the 2022 Notes on February 12, 2021. The 2022 Notes were redeemed at 100% of their principal amount, plus the accrued and unpaid interest thereon through the redemption date.
We redeemed all $48.9 million in aggregate principal amount of the 2022 Notes on February 12, 2021. The 2022 Notes were redeemed at 100% of their principal amount, plus the accrued and unpaid interest thereon through the redemption date.
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 $4.0 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 $6.6 million in connection with the current Credit Facility, which were capitalized and are being amortized over the life of the facility.
On September 8, 2017, the Company issued an additional $6.4 million in aggregate principal amount of the 2022 Notes pursuant to a full exercise of the underwriters’ overallotment option.
On September 8, 2017, we issued an additional $6.4 million in aggregate principal amount of the 2022 Notes pursuant to a full exercise of the underwriters’ overallotment option.
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 90 Table of Contents outstanding principal, plus accrued and unpaid interest.
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.
Nonetheless, we have observed and continue to observe supply chain interruptions, labor resource shortages, commodity inflation, rising interest rates, economic sanctions in response to international conflicts and instances of geopolitical, economic and financial market instability in the United States and abroad.
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.
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, 2022 and 2021, $1.5 million and $1.9 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 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.
Also, as a BDC, we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, over the aggregate amount of the senior securities, which include all of our borrowings and any outstanding preferred stock, of at least 150% effective June 29, 2018 (at least 200% prior to June 29, 2018).
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).
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.
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.
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. 88 Table of Contents Interest is paid monthly or quarterly in arrears.
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.
This authorization will expire on the earlier of June 23, 2023, the one-year anniversary of our 2022 annual stockholders meeting, or our 2023 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 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.
SBA-guaranteed debentures drawn after October 1, 2019 incur upfront fees of 3.435%, which consists of a 1.00% commitment fee and a 2.435% issuance discount, which are amortized over the life of the SBA-guaranteed debentures.
SBA-guaranteed debentures drawn after October 1, 2019 88 Table of Contents incur upfront fees of 3.435%, which consists of a 1.00% commitment fee and a 2.435% issuance discount, which are amortized over the life of the SBA-guaranteed debentures.
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.
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.
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, 2022 and 2021, the SBA-guaranteed debentures would be deemed to be Level 3, as defined in Note 6.
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.
Financial condition, liquidity and capital resources Cash Flows from Operating and Financing Activities Our operating activities used net cash of $56.3 million for the year ended December 31, 2022, 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 $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.
As of December 31, 2022 and 2021, the SBIC subsidiaries had $313.6 million and $250.0 of the SBA-guaranteed debentures outstanding, respectively. SBA-guaranteed debentures drawn before October 1, 2019 incur upfront fees of 3.425%, which consists of a 1.00% commitment fee and a 2.425% issuance discount, which are amortized over the life of the SBA-guaranteed debentures.
As of December 31, 2023 and 2022, the SBIC subsidiaries had $325.0 million and $250.0 of the SBA-guaranteed debentures outstanding, respectively. SBA-guaranteed debentures drawn before October 1, 2019 incur upfront fees of 3.425%, which consists of a 1.00% commitment fee and a 2.425% issuance discount, which are amortized over the life of the SBA-guaranteed debentures.
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.
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.
The following table summarizes the interest expense and amortized fees on the SBA-guaranteed debentures for the years ended December 31, 2022, 2021, and 2020 (dollars in millions): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the years ended ​ ​ ​ December 31, 2022 ​ December 31, 2021 ​ December 31, 2020 ​ Interest expense ​ $ 8.2 ​ $ 6.4 ​ $ 5.4 ​ Debenture fee amortization ​ ​ 1.2 ​ 1.1 ​ 0.7 Total interest and financing expenses ​ $ 9.4 ​ $ 7.5 ​ $ 6.1 ​ Weighted average interest rate ​ 2.8 % 2.8 % 3.3 % Effective interest rate (including fee amortization) ​ 3.3 % 3.3 % 3.8 % Average debt outstanding ​ $ 288.2 ​ $ 227.8 ​ $ 161.6 ​ Cash paid for interest ​ $ 7.4 ​ $ 5.9 ​ $ 5.3 ​ ​ Notes Offering On August 21, 2017, the Company 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, 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”).
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, 2022, we had $28.6 million of undistributed taxable income that will be carried forward toward distributions paid during the year ending December 31, 2023.
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.
The following table summarizes the interest expense and amortized loan fees on the Credit Facility for the years ended December 31, 2022, 2021, and 2020 (dollars in millions): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the years ended ​ ​ ​ December 31, 2022 ​ December 31, 2021 ​ December 31, 2020 ​ Interest expense ​ $ 9.2 ​ $ 5.2 ​ $ 6.1 ​ Loan fee amortization ​ ​ 0.6 ​ 0.6 ​ 0.6 Total interest and financing expenses ​ $ 9.8 ​ $ 5.8 ​ $ 6.7 ​ Weighted average interest rate ​ 4.4 % 2.8 % 3.2 % Effective interest rate (including fee amortization) ​ 4.8 % 3.3 % 3.7 % Average debt outstanding ​ $ 204.3 ​ $ 176.9 ​ $ 181.9 ​ Cash paid for interest and unused fees ​ $ 9.0 ​ $ 5.3 ​ $ 6.3 ​ ​ SBA-guaranteed debentures Due to the SBIC subsidiaries’ status as licensed SBICs, we can issue debentures guaranteed by the SBA at favorable interest rates (“SBA-guaranteed debentures”).
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.
Qualifying 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.
Under the relevant SEC rules, the term “eligible portfolio company” includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and certain public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal place of business in the United States.
Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on September 18, 2025. Our obligations to the lenders are secured by a first priority security interest in our portfolio of securities and cash not held at the SBIC subsidiaries, but excluding short term investments.
Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on November 21, 2028. Our obligations to the lenders are secured by a first priority security interest in our portfolio of securities and cash not held at the SBIC subsidiaries, but excluding short term investments.
The forward-looking statements contained in this Annual Report on Form 10-K involve risks and uncertainties, related to the COVID-19 pandemic and otherwise, 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 London Interbank Offered Rate ("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 registered investment company (“RIC”) and as a business development company (“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, 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.
As of December 31, 2022, we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility (as defined below)) to fund such unfunded commitments should the need arise.
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.
Our operating activities used net cash of $3.5 million for the year ended December 31, 2020, primarily in connection with the purchase of portfolio investments, offset by sales and repayments of portfolio investments.
Our operating activities used net cash of $56.3 million for the year ended December 31, 2022, primarily in connection with the purchase of portfolio investments, offset by sales and repayments of portfolio investments.
Liquidity and Capital Resources Our liquidity and capital resources are derived from the Credit Facility, 2026 Notes, 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, 2026 Notes, offerings of our common stock, SBA-guaranteed debentures and cash flows from operations, including investment sales and repayments, and income earned.
On January 13, 2021, the Company caused notices to be issued to the holders of its 2022 Notes regarding the Company’s exercise of its option to redeem all of the issued and outstanding 2022 Notes, pursuant to the Second Supplemental Indenture dated as of August 21, 2017, between the Company and U.S. Bank National Association, as trustee.
On January 13, 2021, we caused notices to be issued to the holders of our 2022 Notes regarding our exercise of our option to redeem all of the issued and outstanding 2022 Notes, pursuant to the Second Supplemental Indenture dated as of August 21, 2017, between us and U.S. Bank National Association, as trustee.
As of both December 31, 2022 and 2021, our investment portfolio valued at fair value represented approximately 94% of our total assets. We are required to report our investments at fair value. We follow the provisions of ASC 820.
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.
The Company pays unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility. Interest is payable monthly or quarterly in arrears.
We pay unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility. Interest is payable monthly or quarterly in arrears.
The increase in operating expenses for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was due to (1) higher interest expense as a result of higher outstanding balances on our SBA-guaranteed debentures and 2026 Notes, (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, 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.
Credit Facility On October 11, 2017, the Company entered into a senior secured revolving credit agreement, as amended, dated as of October 10, 2017, that was amended and restated on December 21, 2021, February 28, 2022 and May 13, 2022, with Zions Bancorporation, N.A., dba Amegy Bank and various other lenders (the “Credit Facility”).
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.
For instance, as a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets.
For instance, as a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets. Qualifying assets include investments in “eligible portfolio companies” (as defined in the 1940 Act).
The Credit Facility, as amended and restated, provides for borrowings up to a maximum of $265.0 million on a committed basis with an accordion feature that allows us to increase the aggregate commitments up to $280.0 million, subject to new or existing lenders agreeing to participate in the increase and other customary conditions.
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.
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, 2022 and December 31, 2021, we had cash and cash equivalents of $48.0 million and $44.2 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, 2023 and December 31, 2022, we had cash and cash equivalents of $26.1 million and $48.0 million, respectively.
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 the second lien and subordinated loans to the extent we invest in the “last-out” tranche. As of December 31, 2021, we had $772.9 million (at fair value) invested in 73 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, 2022, we had $844.7 million (at fair value) invested in 85 companies.
The Credit Facility contains certain covenants, including but not limited to: (i) maintaining a minimum liquidity test of at least $10,000,000, including cash, liquid investments and undrawn availability, (ii) maintaining an asset coverage ratio of at least 1.67 to 1.00, (iii) maintaining a minimum stockholder’s equity, and (iv) maintaining a minimum interest coverage ratio of at least 2.00 to 1.00.
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.
As of December 31, 2022, we were in compliance with these covenants. As of December 31, 2022 and December 31, 2021, the outstanding balance under the Credit Facility was $199.2 million and $177.3 million, respectively. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value.
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, 2021, we had loans to three portfolio companies that were on non-accrual status, which represented approximately 4.2% of our loan portfolio at cost and 0.8% at fair value. As of December 31, 2022 and December 31, 2021, $4.8 million and $10.4 million of income from investments on non-accrual has not been accrued, respectively.
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.
For the year ended December 31, 2021, we recognized tax expense related gains realized on certain equity investments held at our taxable subsidiaries of $3.0 million. There was no such tax expense for the years ended December 31, 2022 and 2020.
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.
As of December 31, 2021, our only off-balance sheet arrangements consisted of $30.7 million of unfunded commitments to provide debt financing to 32 existing portfolio companies and $0.3 in unfunded equity commitments to one existing portfolio company.
As of December 31, 2023, our only off-balance sheet arrangements consisted of $36.7 million of unfunded commitments to provide debt financing to 56 existing portfolio companies and $0.3 million in unfunded equity commitments to one existing portfolio company.
Net Investment Income For the year ended December 31, 2022, net investment income was $28.6 million, or $1.46 per common share based on 19,552,931 weighted-average common shares outstanding. For the year ended December 31, 2021, net investment income was $19.8 million, or $1.01 per common share based on 19,489,750 weighted-average common shares outstanding.
For the year ended December 31, 2021, net investment income was $19.8 million, or $1.01 per common share based on 19,489,750 weighted-average common shares outstanding.
The fair value of the Credit Facility is determined in accordance with Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ ASC 820 ”) , which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions.
The fair value of the Credit Facility is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions.
As of December 31, 2022 and December 31, 2021, we had unfunded commitments of $27.8 million and $31.0 million, respectively, to provide debt financing for 52 and 32 portfolio companies, respectively.
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.
The following table summarizes the interest expense and deferred financing costs on the 2026 years ended December 31, 2020 and 2021 (in millions): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the years ended ​ ​ December 31, 2022 ​ December 31, 2021 ​ Interest expense ​ $ 4.9 ​ $ 4.7 ​ Deferred financing costs ​ ​ 0.4 ​ 0.4 Total interest and financing expenses ​ $ 5.3 ​ $ 5.1 ​ Weighted average interest rate ​ 4.9 % 4.9 % Effective interest rate (including fee amortization) ​ 5.3 % 5.3 % Average debt outstanding ​ $ 100.0 ​ $ 100.0 (1) ​ Cash paid for interest ​ $ 4.9 ​ $ 3.5 ​ (1) Calculated for the period from January 14, 2021, the date of the 2026 Notes offering, through December 31, 2021. ​ Contractual Obligations ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2028 and ​ Total 2023 2024 2025 2026 2027 thereafter ​ ​ (in millions) Credit Facility payable ​ $ 199.2 $ — $ 33.2 $ 166.0 ​ $ — ​ $ — $ — Notes payable ​ ​ 100.0 ​ — ​ — ​ — ​ ​ 100.0 ​ ​ — ​ — SBA-guaranteed debentures ​ ​ 313.6 ​ — ​ — ​ 26.0 ​ ​ 39.0 ​ ​ — ​ ​ 248.6 Total ​ $ 612.8 ​ $ — ​ $ 33.2 ​ $ 192.0 ​ $ 139.0 ​ $ — ​ $ 248.6 ​ Off-Balance Sheet Arrangements We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies.
The following table summarizes the interest expense and deferred financing costs on the 2026 Notes for the years ended December 31, 2023, 2022, and 2021 (in millions): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the years ended ​ ​ ​ December 31, 2023 ​ December 31, 2022 ​ December 31, 2021 Interest expense ​ ​ $ 4.9 ​ $ 4.9 ​ $ 4.7 Deferred financing costs ​ ​ 0.4 ​ 0.4 ​ 0.4 ​ Total interest and financing expenses ​ ​ $ 5.3 ​ $ 5.3 ​ $ 5.1 ​ Weighted average interest rate ​ ​ 4.9 % 4.9 % 4.9 % (1) Effective interest rate (including fee amortization) ​ ​ 5.3 % 5.3 % 5.3 % (1) Average debt outstanding ​ ​ $ 100.0 ​ $ 100.0 ​ $ 100.0 (1) ​ Cash paid for interest ​ ​ $ 4.9 ​ $ 4.9 ​ $ 3.5 ​ (1) Calculated for the period from January 14, 2021, the date of the 2026 Notes offering, through December 31, 2021. 90 Table of Contents Contractual Obligations ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2029 and ​ Total 2024 2025 2026 2027 2028 thereafter ​ ​ (in millions) Credit Facility payable ​ $ 160.1 $ — $ — ​ $ — ​ $ 13.3 $ 146.7 $ — 2026 Notes payable ​ ​ 100.0 ​ — ​ — ​ 100.0 ​ ​ — ​ ​ — ​ — SBA-guaranteed debentures ​ ​ 325.0 ​ — ​ 26.0 ​ 39.0 ​ ​ — ​ ​ 82.5 ​ ​ 177.5 Total ​ $ 585.1 ​ $ — ​ $ 26.0 ​ $ 139.0 ​ $ 13.3 ​ $ 229.2 ​ $ 177.5 ​ Off-Balance Sheet Arrangements We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies.
As of 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, 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, 2021, our portfolio included approximately 84% of first lien debt (including unitranche investments), 7% of second lien debt, 1% of unsecured debt and 8% of equity investments at fair value.
As of December 31, 2023, our portfolio included approximately 89% of first lien debt (including unitranche investments), 2% of second lien debt, 1% of unsecured debt and 8% of equity investments at fair value.
The commitment to fund the revolver expires on September 18, 2024, after which the Company may no longer borrow under the Credit Facility and must begin repaying principal equal to 1/12 of the aggregate amount outstanding under the Credit Facility each month.
The commitment to fund the revolver expires on November 21, 2027, after which we may no longer borrow under the Credit Facility and must begin repaying principal equal to 1/12 of the aggregate amount outstanding under the Credit Facility each month.
At December 31, 2021, 96% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 4% bore interest at fixed rates. The weighted average yield on all of our debt investments as of December 31, 2022 and December 31, 2021 was approximately 11.1% and 8.0%, respectively.
At December 31, 2022, 97% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 3% bore interest at fixed rates. The weighted average yield on all of our debt investments as of December 31, 2023 and December 31, 2022 was approximately 11.9% and 11.1%, respectively.
Net realized losses during the year ended December 31, 2020 resulted primarily from the disposition of a loan in our portfolio, partially offset by gains from the realization of our equity investments in certain portfolio companies.
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.
On a stand-alone basis, the SBIC subsidiaries held $470.7 million and $403.3 million in assets at December 31, 2022 and 2021, respectively, which accounted for approximately 52.4% and 49.1% of our total consolidated assets at December 31, 2022 and 2021, respectively.
On a stand-alone basis, the SBIC subsidiaries held $485.2 million and $470.7 million in assets at December 31, 2023 and 2022, respectively, which accounted for approximately 53.4% and 52.4% of our total consolidated assets at December 31, 2023 and 2022, respectively.
The weighted average yield on all of our investments, including non-income producing equity positions, as of December 31, 2022 and December 31, 2021 was approximately 10.4% and 7.5%, respectively. The weighted average yield was computed using the effective interest rates for all of our debt investments, including accretion of original issue discount.
The weighted average yield 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.
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 87 Table of Contents the asset coverage test under the 1940 Act.
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.
As of December 31, 2022, we had $844.7 million (at fair value) invested in 85 companies. As of December 31, 2022, our portfolio included approximately 87% of first lien debt (including unitranche investments), 5% of second lien debt, 1% of unsecured debt and 7% of equity investments at fair value.
As of December 31, 2022, our portfolio included approximately 87% of first lien debt (including unitranche investments), 5% of second lien debt, 1% of unsecured debt and 7% of equity investments at fair value.
We have elected, qualified, and intend to continue to qualify annually to be treated for tax purposes as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) . To maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements.
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.
Once pooled, which occurs in March and September each year, the SBA-guaranteed debentures bear interest at a fixed rate that is set to the current 10-year treasury rate plus a spread at each pooling date. As of December 31, 2022 and 2021, the carrying amount of the SBA-guaranteed debentures approximated their fair value.
Once pooled, which occurs in March and September of each applicable year, the SBA-guaranteed debentures bear interest at a fixed rate that is set to the current 10-year treasury rate plus a spread at each pooling date. As of December 31, 2023, the carrying amount of the SBA-guaranteed debentures was $320.3 million.
During the year ended December 31, 2022, we received an aggregate of $127.5 million in proceeds from repayments of our investments. During the year ended December 31, 2021, we made $387.3 million of investments in 26 new portfolio companies and 37 existing portfolio companies.
During the year ended December 31, 2022, we made $211.0 million of investments in 22 new portfolio companies and 28 existing portfolio companies. During the year ended December 31, 2022, we received an aggregate of $127.5 million in proceeds from repayments of our investments.
At December 31, 2021, our average portfolio company investment at amortized cost and fair value was approximately $10.8 million and $10.6 million, respectively, and our largest portfolio company investment at amortized cost and fair value was approximately $21.3 million and $20.5 million, respectively.
At 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, 2022, 97% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR or SOFR , and 3% bore interest at fixed rates.
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.
Interest on the 2026 Notes is payable semi-annually beginning September 30, 2021. The Company 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. As of December 31, 2022, the aggregate carrying amount of the 2026 Notes was approximately $100.0 million.
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.
As of December 31, 2022, we have incurred $10.9 million in financing costs related to the SBA-guaranteed debentures since the SBIC subsidiaries have received their licenses, which were recorded as prepaid loan fees. As of 89 Table of Contents December 31, 2022 and 2021, $5.7 million and $5.4 million of prepaid financing costs had yet to be amortized, respectively.
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.
Net Increase in Net Assets Resulting from Operations Net increase in net assets resulting from operations totaled $14.5 million, or $0.74 per common share based on weighted-average shares of 19,552,931 outstanding for the year ended December 31, 2022, as compared to $33.6 million, or $1.72 per common share based on weighted-average shares of 19,489,750 outstanding for the year ended December 31, 2021, as compared to $20.2 million, or $1.04 per common share based on weighted-average shares of 19,471,500 outstanding for the year ended December 31, 2020.
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.
Prior to their redemption on February 12, 2021, the 2022 Notes were listed on New York Stock Exchange under the trading symbol “SCA”. As of December 31, 2021, the fair value of the 2022 Notes was $49.2 million. The 2026 Notes are institutional, non-traded notes. The 2026 Notes are carried at cost, which approximates fair value.
Prior to their redemption on February 12, 2021, the 2022 Notes were listed on New York Stock Exchange under the trading symbol “SCA”. The 2026 Notes are institutional, non-traded notes. As of December 31, 2023, the carrying amount of the 2026 Notes was $99.0 million.
You are advised to consult any additional 75 Table of Contents 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.
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.
Net change in unrealized (depreciation) appreciation on investments and cash equivalents for the year ended December 31, 2022, 2021, and 2020 totaled ($17.5) million, ($6.9) million, and $8.6 million, respectively. The change in unrealized depreciation in 2022 was primarily due to write downs on specific investments.
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.
One or more of these factors may contribute to increased market volatility and may have long- and short-term effects in the United States and worldwide financial markets. ​ Portfolio Composition and Investment Activity Portfolio Composition We originate and invest primarily in privately-held middle-market companies (typically those with $5.0 million to $50.0 million of EBITDA (earnings before interest, taxes, depreciation and amortization)) through first lien (including unitranche), second lien, and unsecured debt financing, often times with a corresponding equity investment.
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.
We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, the covenants contained in the Credit Facility may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement.
However, the covenants contained in the Credit Facility may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the Annual Distribution Requirement.
Our unitranche loans will expose us to the risks associated with the second lien and subordinated loans to the extent we invest in the “last-out” tranche. 77 Table of Contents Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms and conditions of the underlying loan agreements.
Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms and conditions of the underlying loan agreements.
We bear all other out-of-pocket costs and expenses of our operations and transactions, which may include: ● organization and offering; ● 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; ● 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 their respective staff); ● 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; ● 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. 84 Table of Contents The following shows the breakdown of operating expenses for the years ended December 31, 2022, 2021, and 2020 (in millions). ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the years ended ​ ​ December 31, 2022 December 31, 2021 December 31, 2020 Operating Expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ Management fees $ 14.8 ​ $ 13.2 ​ $ 11.1 Valuation fees ​ 0.3 ​ ​ 0.3 ​ ​ 0.3 Administrative services expenses ​ 1.8 ​ ​ 1.8 ​ ​ 1.8 Income incentive fees ​ 3.8 ​ ​ 3.0 ​ ​ 2.5 Capital gains incentive (reversal) fee ​ (2.8) ​ ​ 2.9 ​ ​ (0.4) Professional fees ​ 1.1 ​ ​ 1.1 ​ ​ 1.0 Directors’ fees ​ 0.3 ​ ​ 0.3 ​ ​ 0.4 Insurance expense ​ 0.5 ​ ​ 0.5 ​ ​ 0.3 Interest expense and other fees ​ 24.5 ​ ​ 18.7 ​ ​ 16.0 Income tax expense ​ 1.2 ​ ​ 1.1 ​ ​ 0.8 Other general and administrative expenses ​ 1.0 ​ ​ 1.0 ​ ​ 0.9 Total Operating Expenses ​ $ 46.5 ​ $ 43.9 ​ $ 34.7 ​ 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 and 2026 Notes, 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.
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.
Proceeds from the sales and repayments of investments and amortization of certain other investments for the year ended December 31, 2020 totaled $128.6 million and net realized losses totaled $(10.1) million.
Proceeds from repayments of investments and amortization of certain other investments for the year ended December 31, 2023 totaled $141.3 million and net realized losses totaled $30.3 million.
On April 4, 2018, the Board, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act.
On April 4, 2018, the Board, including a “required majority” of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. At our 2018 annual meeting of stockholders, our stockholders also approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act.
Proceeds from repayments of investments and amortization of certain other investments for the year ended December 31, 2022 totaled $127.5 million and net realized gains totaled $3.7 million. Proceeds from repayments of investments and amortization of certain other investments for the year ended December 31, 2021 totaled $287.6 million and net realized losses totaled $23.7 million.
Proceeds from repayments of investments and amortization of certain other investments for the year ended December 31, 2021 totaled $287.6 million resulting in net realized gains totaling $23.7 million, primarily from gains from the realization of our equity investments in certain portfolio companies.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

6 edited+1 added−0 removed2 unchanged
Biggest changeAs of December 31, 2022 and 2021, the weighted average interest rate floor on our floating rate loans was 1.07% and 1.13%, respectively. 94 Table of Contents Assuming that the Statement of Assets and Liabilities as of December 31, 2022 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 ​ $ 15.3 ​ $ (4.0) ​ $ 11.3 Up 150 basis points ​ 11.5 ​ ​ (3.0) ​ 8.5 Up 100 basis points ​ 7.7 ​ ​ (2.0) ​ 5.7 Up 50 basis points ​ ​ 3.8 ​ ​ (1.0) ​ 2.8 Down 50 basis points ​ ​ (3.8) ​ ​ 1.0 ​ ​ (2.8) Down 100 basis points ​ ​ (7.7) ​ ​ 2.0 ​ ​ (5.7) Down 150 basis points ​ ​ (11.5) ​ ​ 3.0 ​ ​ (8.5) Down 200 basis points ​ ​ (15.3) ​ ​ 4.0 ​ ​ (11.3) (1) Excludes the impact of incentive fees based on pre-incentive fee net investment income.
Biggest changeAs 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.
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, 2022 and 2021, 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, 2023 and 2022, we did not engage in interest rate hedging activities. ​ ​ 95 Table of Contents ​
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. In connection with the COVID-19 pandemic, the U.S. Federal Reserve (the “Federal Reserve”) and other central banks had reduced certain interest rates.
See Note 2 for more information on the incentive fee. (2) At December 31, 2022, the three month LIBOR rate was 477 basis points and the three month SOFR rate was 460 basis points. This table assumes floating rates would not fall below zero. (3) Includes the impact of the 25 bps LIBOR 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, 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.
However, in March 2022, the Federal Reserve raised interest rates for the first time since December 2018, and subsequently raised rates several times, most recently in February 2023, bringing the target for the federal funds rate to 4.5% - 4.75%, the highest since October 2007 .For the year ended December 31, 2022 and 2021, 97% and 96% of the loans in our portfolio bore interest at floating rates.
However, in March 2022, the Federal Reserve raised interest rates for the first time since December 2018, and subsequently raised interest rates several times, most recently in July 2023, bringing the target for the federal funds rate to 5.25% - 5.50%, the highest since January 2001.
These floating rate loans typically bear interest in reference to LIBOR and SOFR, which are indexed to 30-day or 90-day LIBOR and SOFR rates, subject to an interest rate floor.
As of 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.
Added
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.

Other SCM 10-K year-over-year comparisons