Stellus Capital Investment Corp 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Some of the statements in this Annual Report on Form 10-K constitute forward-looking statements, which relate to future events or our future performance or financial condition. 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 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. ​ Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words. We have based the forward-looking statements included in this Annual Report on Form 10-K on information available to us on the date of this Annual Report on Form 10-K. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or SEC rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Overview We were organized as a Maryland corporation on May 18, 2012 and formally commenced operations on November 7, 2012. Our investment objective is to maximize the total return to our stockholders in the form of current income and capital appreciation through debt and related equity investments in middle-market companies. We are an externally managed, non-diversified, closed-end investment company that has elected to be regulated as a BDC under the 1940 Act. Our investment activities are managed by our investment adviser, Stellus Capital Management. 75 TABLE OF CONTENTS As a BDC, we are required to comply with certain regulatory requirements. For instance, as a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets. Qualifying assets include investments in “eligible portfolio companies.” 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 $250.0 million, in each case organized and with their principal of business in the United States. We have elected 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, 2020, we were in compliance with the RIC requirements. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any income we distribute to our stockholders. On March 23, 2018, the Small Business Credit Availability Act (the “SBCAA”) was signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The SBCAA included changes to the 1940 Act to allow BDCs to decrease their asset coverage requirement to 150% from 200% under certain circumstances. On April 4, 2018, the Board, including a “required majority” ​(as such term is defined in Section 57(o) of the Investment Company Act of 1940, as amended (the “1940 Act”)) of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. At our 2018 annual meeting of stockholders our stockholders also approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the asset coverage ratio applicable to us was decreased from 200% to 150%, effective June 29, 2018, which effectively increased the amount of leverage we may incur. As of December 31, 2020, our asset coverage ratio was 223%. The amount of leverage that we employ at any time depends on our assessment of the market and other factors at the time of any proposed borrowing. COVID-19 Developments On March 11, 2020, the World Health Organization declared COVID-19 a pandemic and recommended containment and mitigation measures worldwide. During the year ended December 31, 2020, and subsequent to December 31, 2020, the COVID-19 pandemic has had a significant impact on the U.S. and global economy. Each portfolio company has been assessed on an individual basis to identify the impact of the COVID-19 pandemic on the valuation of our investments in such company. We believe that any such COVID-19 pandemic impacts have been reflected in the valuation of our investments. The global impact of the outbreak continues to evolve, and many countries have reacted by instituting quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues. Businesses are also implementing similar precautionary measures. Such measures, as well as the general uncertainty surrounding the dangers and impact of the COVID-19 pandemic, have created significant disruption in supply chains and economic activity. While several countries, as well as certain states in the United States, have begun to lift public health restrictions with the view to reopening their economies, recurring COVID-19 outbreaks have led to the re-introduction of such restrictions in certain states in the United States and globally and could continue to lead to the re-introduction of such restrictions elsewhere. The Federal Food and Drug Administration authorized vaccines produced for emergency use starting in December 2020, it remains unclear how quickly the vaccines will be distributed nationwide and globally or when “herd immunity” will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. The delay in distributing the vaccines could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience a recession, and we anticipate our business and operations could be materially adversely affected by a prolonged recession in the United States and other major markets. As COVID-19 continues to spread, the potential impacts, including a global, regional, or other economic recession, remain uncertain and difficult to assess. The extent of the impact of the COVID-19 76 TABLE OF CONTENTS pandemic on the financial performance of our current and future investments will depend on future developments, including the duration and spread of the virus, related advisories and restrictions, and the health of the financial markets and economy, all of which are highly uncertain and cannot be predicted. To the extent our portfolio companies are adversely impacted by the effects of the COVID-19 pandemic, it may have a material adverse impact on our future net investment income, the fair value of our portfolio investments and our financial condition. Economic outlook The Federal Food and Drug Administration authorized vaccines produced for emergency use starting in December 2020, it remains unclear how quickly the vaccines will be distributed nationwide and globally or when “herd immunity” will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. The delay in distributing the vaccines could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period. The COVID-19 pandemic could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The COVID-19 pandemic presents material uncertainty and risks with respect to the underlying value of our portfolio companies and with respect to our business, financial condition, results of operations, and cash flows, such as the potential negative impact to financing arrangements, increased costs of operations, changes in law and/or regulation, and uncertainty regarding government and regulatory policy. Operations All partners and employees of Stellus Capital have been operating remotely since March 16, 2020 without disruption to its operations and are prepared to continue working remotely as long as is necessary for the health and safety of all personnel. Our COVID-19 response Since the onset of the COVID-19 pandemic, we have been in regular contact with all our portfolio companies and/or their sponsors to assess among other things their ability to function in the new environment. Discussions have addressed the portfolio companies’ liquidity position, expected covenant compliance, and the health of their workforce and customers. Financial impact We will continue to closely monitor the financial condition of our portfolio companies as part of our efforts to mitigate the impact of the COVID-19 pandemic. Historical information may be relatively less significant. Portfolio Composition and Investment Activity Portfolio Composition We originate and invest primarily in privately-held middle-market companies (typically those with $5.0 million to $50.0 million of EBITDA (earnings before interest, taxes, depreciation and amortization)) through first lien (including unitranche), second lien, and unsecured debt financing, often times with a corresponding equity investment. As of December 31, 2020, we had $ 653.4 million (at fair value) invested in 66 companies. As of December 31, 2020, our portfolio included approximately 78% of first lien debt (including unitranche investments), 11% of second lien debt, 3% of unsecured debt and 8% of equity investments at fair value. The composition of our investments at cost and fair value as of December 31, 2020 was as follows: 77 TABLE OF CONTENTS ​ ​ ​ Cost ​ ​ Fair Value ​ Senior Secured – First Lien (1) ​ ​ ​ $ 508,060,059 ​ ​ ​ ​ $ 508,673,064 ​ ​ Senior Secured – Second Lien ​ ​ ​ ​ 93,636,285 ​ ​ ​ ​ ​ 70,720,186 ​ ​ Unsecured Debt ​ ​ ​ ​ 22,212,888 ​ ​ ​ ​ ​ 21,191,245 ​ ​ Equity ​ ​ ​ ​ 34,719,734 ​ ​ ​ ​ ​ 52,840,000 ​ ​ Total Investments ​ ​ ​ $ 658,628,966 ​ ​ ​ ​ $ 653,424,495 ​ ​ ​ (1) Includes unitranche investments, which account for 13.0% of our portfolio at fair value. 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, 2019, we had $628.9 million (at fair value) invested in 63 companies. As of December 31, 2019, our portfolio included approximately 72% of first lien debt (including unitranche investments), 18% of second lien debt, 4% of unsecured debt and 6% of equity investments at fair value. The composition of our investments at cost and fair value as of December 31, 2019 was as follows: ​ ​ ​ Cost ​ ​ Fair Value ​ Senior Secured – First Lien (1) ​ ​ ​ $ 461,107,595 ​ ​ ​ ​ $ 455,169,878 ​ ​ Senior Secured – Second Lien ​ ​ ​ ​ 130,600,172 ​ ​ ​ ​ ​ 111,961,013 ​ ​ Unsecured Debt ​ ​ ​ ​ 22,279,519 ​ ​ ​ ​ ​ 22,137,186 ​ ​ Equity ​ ​ ​ ​ 28,720,538 ​ ​ ​ ​ ​ 39,680,000 ​ ​ Total Investments ​ ​ ​ $ 642,707,824 ​ ​ ​ ​ $ 628,948,077 ​ ​ ​ (1) Includes unitranche investments, which account for 14.4% of our portfolio at December 31, 2019 fair value. 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. ​ Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms and conditions of the underlying loan agreements. As of December 31, 2020 and December 31, 2019, we had unfunded commitments of $28.9 million and $37.5 million, respectively, to provide debt financing for 19 and 17 portfolio companies, respectively. As of December 31, 2020, 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. The following is a summary of geographical concentration of our investment portfolio as of December 31, 2020: ​ ​ ​ Cost ​ ​ Fair Value ​ ​ % of Total Investments at fair value ​ Texas ​ ​ ​ $ 151,640,862 ​ ​ ​ ​ $ 135,146,776 ​ ​ ​ ​ ​ 20.68 % ​ ​ California ​ ​ ​ ​ 86,050,467 ​ ​ ​ ​ ​ 92,069,851 ​ ​ ​ ​ ​ 14.09 % ​ ​ Illinois ​ ​ ​ ​ 57,330,756 ​ ​ ​ ​ ​ 57,535,404 ​ ​ ​ ​ ​ 8.81 % ​ ​ Arizona ​ ​ ​ ​ 50,822,139 ​ ​ ​ ​ ​ 52,015,600 ​ ​ ​ ​ ​ 7.96 % ​ ​ New Jersey ​ ​ ​ ​ 38,228,359 ​ ​ ​ ​ ​ 37,765,139 ​ ​ ​ ​ ​ 5.78 % ​ ​ Ohio ​ ​ ​ ​ 34,109,657 ​ ​ ​ ​ ​ 35,827,682 ​ ​ ​ ​ ​ 5.48 % ​ ​ Wisconsin ​ ​ ​ ​ 22,721,856 ​ ​ ​ ​ ​ 22,827,500 ​ ​ ​ ​ ​ 3.49 % ​ ​ Canada ​ ​ ​ ​ 21,318,659 ​ ​ ​ ​ ​ 21,540,925 ​ ​ ​ ​ ​ 3.30 % ​ ​ 78 TABLE OF CONTENTS ​ ​ ​ Cost ​ ​ Fair Value ​ ​ % of Total Investments at fair value ​ New York ​ ​ ​ ​ 19,527,594 ​ ​ ​ ​ ​ 20,547,579 ​ ​ ​ ​ ​ 3.14 % ​ ​ Tennessee ​ ​ ​ ​ 19,832,576 ​ ​ ​ ​ ​ 19,959,613 ​ ​ ​ ​ ​ 3.05 % ​ ​ United Kingdom ​ ​ ​ ​ 20,159,650 ​ ​ ​ ​ ​ 18,727,500 ​ ​ ​ ​ ​ 2.87 % ​ ​ South Carolina ​ ​ ​ ​ 15,834,471 ​ ​ ​ ​ ​ 18,132,490 ​ ​ ​ ​ ​ 2.77 % ​ ​ Indiana ​ ​ ​ ​ 17,741,889 ​ ​ ​ ​ ​ 18,026,339 ​ ​ ​ ​ ​ 2.76 % ​ ​ Maryland ​ ​ ​ ​ 16,970,057 ​ ​ ​ ​ ​ 17,064,250 ​ ​ ​ ​ ​ 2.61 % ​ ​ Florida ​ ​ ​ ​ 12,404,739 ​ ​ ​ ​ ​ 12,299,545 ​ ​ ​ ​ ​ 1.88 % ​ ​ Alabama ​ ​ ​ ​ 12,252,768 ​ ​ ​ ​ ​ 12,252,768 ​ ​ ​ ​ ​ 1.88 % ​ ​ Washington ​ ​ ​ ​ 11,803,768 ​ ​ ​ ​ ​ 11,801,363 ​ ​ ​ ​ ​ 1.81 % ​ ​ Missouri ​ ​ ​ ​ 9,956,554 ​ ​ ​ ​ ​ 10,720,000 ​ ​ ​ ​ ​ 1.64 % ​ ​ Pennsylvania ​ ​ ​ ​ 9,884,148 ​ ​ ​ ​ ​ 9,900,000 ​ ​ ​ ​ ​ 1.52 % ​ ​ Virginia ​ ​ ​ ​ 7,505,287 ​ ​ ​ ​ ​ 7,759,020 ​ ​ ​ ​ ​ 1.19 % ​ ​ Washington, D.C. ​ ​ ​ ​ 6,937,907 ​ ​ ​ ​ ​ 7,030,512 ​ ​ ​ ​ ​ 1.08 % ​ ​ Georgia ​ ​ ​ ​ 685,000 ​ ​ ​ ​ ​ 6,420,000 ​ ​ ​ ​ ​ 0.98 % ​ ​ North Carolina ​ ​ ​ ​ 4,979,153 ​ ​ ​ ​ ​ 2,925,000 ​ ​ ​ ​ ​ 0.45 % ​ ​ Puerto Rico ​ ​ ​ ​ 8,613,244 ​ ​ ​ ​ ​ 2,589,639 ​ ​ ​ ​ ​ 0.40 % ​ ​ Massachusetts ​ ​ ​ ​ 1,317,406 ​ ​ ​ ​ ​ 1,780,000 ​ ​ ​ ​ ​ 0.27 % ​ ​ Utah ​ ​ ​ ​ — ​ ​ ​ ​ ​ 760,000 ​ ​ ​ ​ ​ 0.11 % ​ ​ ​ ​ ​ ​ $ 658,628,966 ​ ​ ​ ​ $ 653,424,495 ​ ​ ​ ​ ​ 100.00 % ​ ​ ​ The following is a summary of geographical concentration of our investment portfolio as of December 31, 2019: ​ ​ ​ Cost ​ ​ Fair Value ​ ​ % of Total Investments at Fair Value ​ Texas ​ ​ ​ $ 134,451,527 ​ ​ ​ ​ $ 120,672,985 ​ ​ ​ ​ ​ 19.19 % ​ ​ California ​ ​ ​ ​ 79,090,474 ​ ​ ​ ​ ​ 78,136,331 ​ ​ ​ ​ ​ 12.42 % ​ ​ Arizona ​ ​ ​ ​ 52,390,949 ​ ​ ​ ​ ​ 53,274,526 ​ ​ ​ ​ ​ 8.47 % ​ ​ New Jersey ​ ​ ​ ​ 52,548,769 ​ ​ ​ ​ ​ 51,637,750 ​ ​ ​ ​ ​ 8.21 % ​ ​ Ohio ​ ​ ​ ​ 48,502,609 ​ ​ ​ ​ ​ 50,092,839 ​ ​ ​ ​ ​ 7.96 % ​ ​ Illinois ​ ​ ​ ​ 41,869,947 ​ ​ ​ ​ ​ 44,406,252 ​ ​ ​ ​ ​ 7.06 % ​ ​ Canada ​ ​ ​ ​ 21,201,137 ​ ​ ​ ​ ​ 21,217,811 ​ ​ ​ ​ ​ 3.37 % ​ ​ New York ​ ​ ​ ​ 19,922,689 ​ ​ ​ ​ ​ 20,584,020 ​ ​ ​ ​ ​ 3.27 % ​ ​ United Kingdom ​ ​ ​ ​ 20,116,695 ​ ​ ​ ​ ​ 20,116,695 ​ ​ ​ ​ ​ 3.20 % ​ ​ Wisconsin ​ ​ ​ ​ 19,207,770 ​ ​ ​ ​ ​ 19,466,054 ​ ​ ​ ​ ​ 3.10 % ​ ​ South Carolina ​ ​ ​ ​ 19,935,337 ​ ​ ​ ​ ​ 19,366,716 ​ ​ ​ ​ ​ 3.08 % ​ ​ Tennessee ​ ​ ​ ​ 19,854,956 ​ ​ ​ ​ ​ 19,260,076 ​ ​ ​ ​ ​ 3.06 % ​ ​ Pennsylvania ​ ​ ​ ​ 17,408,508 ​ ​ ​ ​ ​ 17,566,213 ​ ​ ​ ​ ​ 2.79 % ​ ​ Maryland ​ ​ ​ ​ 17,103,044 ​ ​ ​ ​ ​ 17,325,000 ​ ​ ​ ​ ​ 2.75 % ​ ​ Indiana ​ ​ ​ ​ 14,064,012 ​ ​ ​ ​ ​ 13,997,251 ​ ​ ​ ​ ​ 2.23 % ​ ​ Florida ​ ​ ​ ​ 13,663,116 ​ ​ ​ ​ ​ 13,820,256 ​ ​ ​ ​ ​ 2.20 % ​ ​ Colorado ​ ​ ​ ​ 10,867,843 ​ ​ ​ ​ ​ 12,444,250 ​ ​ ​ ​ ​ 1.98 % ​ ​ Arkansas ​ ​ ​ ​ 14,920,694 ​ ​ ​ ​ ​ 11,989,446 ​ ​ ​ ​ ​ 1.91 % ​ ​ 79 TABLE OF CONTENTS ​ ​ ​ Cost ​ ​ Fair Value ​ ​ % of Total Investments at Fair Value ​ Missouri ​ ​ ​ ​ 10,078,235 ​ ​ ​ ​ ​ 10,428,223 ​ ​ ​ ​ ​ 1.66 % ​ ​ Georgia ​ ​ ​ ​ 575,000 ​ ​ ​ ​ ​ 5,250,000 ​ ​ ​ ​ ​ 0.83 % ​ ​ North Carolina ​ ​ ​ ​ 4,961,969 ​ ​ ​ ​ ​ 4,375,000 ​ ​ ​ ​ ​ 0.70 % ​ ​ Puerto Rico ​ ​ ​ ​ 8,613,244 ​ ​ ​ ​ ​ 3,490,383 ​ ​ ​ ​ ​ 0.55 % ​ ​ Utah ​ ​ ​ ​ 41,894 ​ ​ ​ ​ ​ 30,000 ​ ​ ​ ​ ​ 0.00 % ​ ​ Massachusetts ​ ​ ​ ​ 1,317,406 ​ ​ ​ ​ ​ — ​ ​ ​ ​ ​ — % ​ ​ ​ ​ ​ ​ $ 642,707,824 ​ ​ ​ ​ $ 628,948,077 ​ ​ ​ ​ ​ 100.00 % ​ ​ ​ The following is a summary of industry concentration of our investment portfolio as of December 31, 2020: ​ ​ ​ Cost ​ ​ Fair Value ​ ​ % of Total Investments at fair value ​ Services: Business ​ ​ ​ $ 102,005,864 ​ ​ ​ ​ $ 109,873,364 ​ ​ ​ ​ ​ 16.82 % ​ ​ Healthcare & Pharmaceuticals ​ ​ ​ ​ 87,198,279 ​ ​ ​ ​ ​ 82,945,887 ​ ​ ​ ​ ​ 12.69 % ​ ​ Aerospace & Defense ​ ​ ​ ​ 53,615,886 ​ ​ ​ ​ ​ 52,184,338 ​ ​ ​ ​ ​ 7.99 % ​ ​ Beverage, Food, & Tobacco ​ ​ ​ ​ 39,339,090 ​ ​ ​ ​ ​ 41,012,620 ​ ​ ​ ​ ​ 6.28 % ​ ​ Media: Broadcasting & Subscription ​ ​ ​ ​ 31,889,423 ​ ​ ​ ​ ​ 34,418,869 ​ ​ ​ ​ ​ 5.27 % ​ ​ High Tech Industries ​ ​ ​ ​ 33,571,427 ​ ​ ​ ​ ​ 33,793,693 ​ ​ ​ ​ ​ 5.17 % ​ ​ Consumer Goods: Durable ​ ​ ​ ​ 27,802,124 ​ ​ ​ ​ ​ 27,780,032 ​ ​ ​ ​ ​ 4.25 % ​ ​ Environmental Industries ​ ​ ​ ​ 25,454,549 ​ ​ ​ ​ ​ 24,977,427 ​ ​ ​ ​ ​ 3.82 % ​ ​ Education ​ ​ ​ ​ 26,428,607 ​ ​ ​ ​ ​ 24,494,108 ​ ​ ​ ​ ​ 3.75 % ​ ​ Services: Consumer ​ ​ ​ ​ 38,026,487 ​ ​ ​ ​ ​ 22,600,924 ​ ​ ​ ​ ​ 3.46 % ​ ​ Media: Advertising, Printing & Publishing ​ ​ ​ ​ 21,903,057 ​ ​ ​ ​ ​ 21,348,217 ​ ​ ​ ​ ​ 3.27 % ​ ​ Capital Equipment ​ ​ ​ ​ 20,005,255 ​ ​ ​ ​ ​ 20,680,904 ​ ​ ​ ​ ​ 3.17 % ​ ​ Finance ​ ​ ​ ​ 18,016,762 ​ ​ ​ ​ ​ 19,435,000 ​ ​ ​ ​ ​ 2.97 % ​ ​ Transportation & Logistics ​ ​ ​ ​ 18,690,276 ​ ​ ​ ​ ​ 18,944,945 ​ ​ ​ ​ ​ 2.90 % ​ ​ Retail ​ ​ ​ ​ 15,834,471 ​ ​ ​ ​ ​ 18,132,490 ​ ​ ​ ​ ​ 2.77 % ​ ​ Containers, Packaging, & Glass ​ ​ ​ ​ 17,853,813 ​ ​ ​ ​ ​ 17,890,000 ​ ​ ​ ​ ​ 2.74 % ​ ​ Metals & Mining ​ ​ ​ ​ 16,970,057 ​ ​ ​ ​ ​ 17,064,250 ​ ​ ​ ​ ​ 2.61 % ​ ​ Consumer goods: non-durable ​ ​ ​ ​ 13,272,383 ​ ​ ​ ​ ​ 12,930,000 ​ ​ ​ ​ ​ 1.98 % ​ ​ Automotive ​ ​ ​ ​ 11,028,125 ​ ​ ​ ​ ​ 11,028,125 ​ ​ ​ ​ ​ 1.69 % ​ ​ Construction & Building ​ ​ ​ ​ 10,446,055 ​ ​ ​ ​ ​ 10,750,000 ​ ​ ​ ​ ​ 1.65 % ​ ​ Energy: Oil & Gas ​ ​ ​ ​ 11,015,013 ​ ​ ​ ​ ​ 9,991,177 ​ ​ ​ ​ ​ 1.53 % ​ ​ Utilities: Oil & Gas ​ ​ ​ ​ 9,884,148 ​ ​ ​ ​ ​ 9,900,000 ​ ​ ​ ​ ​ 1.52 % ​ ​ Chemicals, Plastics, & Rubber ​ ​ ​ ​ 6,605,024 ​ ​ ​ ​ ​ 6,808,125 ​ ​ ​ ​ ​ 1.04 % ​ ​ Software ​ ​ ​ ​ 1,772,791 ​ ​ ​ ​ ​ 4,430,000 ​ ​ ​ ​ ​ 0.66 % ​ ​ Hotel, Gaming, & Leisure ​ ​ ​ ​ — ​ ​ ​ ​ ​ 10,000 ​ ​ ​ ​ ​ 0.00 % ​ ​ ​ ​ ​ ​ $ 658,628,966 ​ ​ ​ ​ $ 653,424,495 ​ ​ ​ ​ ​ 100.00 % ​ ​ 80 TABLE OF CONTENTS The following is a summary of industry concentration of our investment portfolio as of December 31, 2019: ​ ​ ​ Cost ​ ​ Fair Value ​ ​ % of Total Investments at Fair Value ​ Healthcare & Pharmaceuticals ​ ​ ​ $ 98,307,360 ​ ​ ​ ​ $ 94,000,860 ​ ​ ​ ​ ​ 14.95 % ​ ​ Services: Business ​ ​ ​ ​ 56,354,433 ​ ​ ​ ​ ​ 62,410,845 ​ ​ ​ ​ ​ 9.92 % ​ ​ Aerospace & Defense ​ ​ ​ ​ 44,970,957 ​ ​ ​ ​ ​ 46,547,324 ​ ​ ​ ​ ​ 7.40 % ​ ​ Consumer Goods: Durable ​ ​ ​ ​ 47,933,468 ​ ​ ​ ​ ​ 44,158,660 ​ ​ ​ ​ ​ 7.02 % ​ ​ Beverage, Food, & Tobacco ​ ​ ​ ​ 42,131,354 ​ ​ ​ ​ ​ 42,592,966 ​ ​ ​ ​ ​ 6.77 % ​ ​ Media: Broadcasting & Subscription ​ ​ ​ ​ 32,353,301 ​ ​ ​ ​ ​ 33,218,991 ​ ​ ​ ​ ​ 5.28 % ​ ​ Finance ​ ​ ​ ​ 27,776,880 ​ ​ ​ ​ ​ 29,562,500 ​ ​ ​ ​ ​ 4.70 % ​ ​ Education ​ ​ ​ ​ 26,594,771 ​ ​ ​ ​ ​ 25,661,125 ​ ​ ​ ​ ​ 4.08 % ​ ​ Media: Advertising, Printing & Publishing ​ ​ ​ ​ 22,425,972 ​ ​ ​ ​ ​ 21,965,124 ​ ​ ​ ​ ​ 3.49 % ​ ​ High Tech Industries ​ ​ ​ ​ 21,201,137 ​ ​ ​ ​ ​ 21,217,811 ​ ​ ​ ​ ​ 3.37 % ​ ​ Capital Equipment ​ ​ ​ ​ 20,093,379 ​ ​ ​ ​ ​ 20,237,066 ​ ​ ​ ​ ​ 3.22 % ​ ​ Retail ​ ​ ​ ​ 19,935,337 ​ ​ ​ ​ ​ 19,366,716 ​ ​ ​ ​ ​ 3.08 % ​ ​ Metals & Mining ​ ​ ​ ​ 17,103,044 ​ ​ ​ ​ ​ 17,325,000 ​ ​ ​ ​ ​ 2.75 % ​ ​ Transportation & Logistics ​ ​ ​ ​ 17,173,599 ​ ​ ​ ​ ​ 17,226,294 ​ ​ ​ ​ ​ 2.74 % ​ ​ Automotive ​ ​ ​ ​ 17,151,902 ​ ​ ​ ​ ​ 17,221,213 ​ ​ ​ ​ ​ 2.74 % ​ ​ Software ​ ​ ​ ​ 15,807,191 ​ ​ ​ ​ ​ 15,516,250 ​ ​ ​ ​ ​ 2.47 % ​ ​ Containers, Packaging, & Glass ​ ​ ​ ​ 14,306,286 ​ ​ ​ ​ ​ 14,564,570 ​ ​ ​ ​ ​ 2.32 % ​ ​ Environmental Industries ​ ​ ​ ​ 15,256,675 ​ ​ ​ ​ ​ 14,410,327 ​ ​ ​ ​ ​ 2.29 % ​ ​ Energy: Oil & Gas ​ ​ ​ ​ 12,624,269 ​ ​ ​ ​ ​ 13,582,102 ​ ​ ​ ​ ​ 2.16 % ​ ​ Services: Consumer ​ ​ ​ ​ 26,075,606 ​ ​ ​ ​ ​ 13,345,105 ​ ​ ​ ​ ​ 2.12 % ​ ​ Chemicals, Plastics, & Rubber ​ ​ ​ ​ 11,880,825 ​ ​ ​ ​ ​ 11,857,228 ​ ​ ​ ​ ​ 1.89 % ​ ​ Consumer goods: non-durable ​ ​ ​ ​ 14,973,711 ​ ​ ​ ​ ​ 11,770,000 ​ ​ ​ ​ ​ 1.87 % ​ ​ Construction & Building ​ ​ ​ ​ 10,408,323 ​ ​ ​ ​ ​ 10,750,000 ​ ​ ​ ​ ​ 1.71 % ​ ​ Utilities: Oil & Gas ​ ​ ​ ​ 9,868,044 ​ ​ ​ ​ ​ 9,900,000 ​ ​ ​ ​ ​ 1.57 % ​ ​ Hotel, Gaming, & Leisure ​ ​ ​ ​ — ​ ​ ​ ​ ​ 540,000 ​ ​ ​ ​ ​ 0.09 % ​ ​ ​ ​ ​ ​ $ 642,707,824 ​ ​ ​ ​ $ 628,948,077 ​ ​ ​ ​ ​ 100.00 % ​ ​ At December 31, 2020, our average portfolio company investment at amortized cost and fair value was approximately $10.0 million and $9.9 million, respectively, and our largest portfolio company investment at amortized cost and fair value was approximately $21.4 million and $21.6 million, respectively. At December 31, 2019, our average portfolio company investment at amortized cost and fair value was approximately $10.2 million and $10.0 million, respectively, and our largest portfolio company investment at amortized cost and fair value was approximately $21.6 million and $21.3 million, respectively. At December 31, 2020, 93% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as London Interbank Offered Rate (“LIBOR”), and 7% bore interest at fixed rates. At December 31, 2019, 93% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 7% bore interest at fixed rates. The weighted average yield on all of our debt investments as of December 31, 2020 and December 31, 2019 was approximately 8.3% and 9.2%, respectively. The weighted average yield on all of our investments, including non-income producing equity positions, as of December 31, 2020 and December 31, 2019 was approximately 7.9% and 8.8%, 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 81 TABLE OF CONTENTS average yield of our debt investments is not the same as a return on investment for our stockholders, but, rather relates to a portion of our investment portfolio and is calculated before the payment of all of our subsidiaries’ fees and expenses. As of December 31, 2020 and December 31, 2019, we had cash and cash equivalents of $18.5 million and $16.1 million, respectively. Investment Activity During the year ended December 31, 2020, we made $152.0 million of investments in ten new portfolio companies and twenty existing portfolio companies. During the year ended December 31, 2020, we received $128.8 million in proceeds principally from prepayments of our investments, including $38.3 million from amortization of certain other investments. During the year ended December 31, 2019, we made $246.5 million of investments in seventeen new portfolio companies and twelve existing portfolio companies. During the year ended December 31, 2019, we received $128.2 million in proceeds principally from prepayments of our investments, including $19.2 million from amortization of certain other investments. Our level of investment activity can vary substantially from period to period depending on many factors, including the amount of debt and equity capital to middle market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make. For example, during the twelve months ended December 31, 2020, the uncertainty and economic ramifications of the rapid spread of COVID-19 led to a general slowing of investment activity in the U.S. lower middle market. As a result, we did not make any investments in new portfolio companies from March 13, 2020 until July 17, 2020. Since then, the investment activity has increased and we have invested $76.7 million (net of fees) in seven new portfolio companies. See Note 15 to the Consolidated Financial Statements for information on investments made subsequent to quarter end. Asset Quality In addition to various risk management and monitoring tools, Stellus Capital Management uses an investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in our portfolio. This investment rating system uses a five-level numeric scale. The following is a description of the conditions associated with each investment category: • Investment Category 1 is used for investments that are performing above expectations, and whose risks remain favorable compared to the expected risk at the time of the original investment. ​ • Investment Category 2 is used for investments that are performing within expectations and whose risks remain neutral compared to the expected risk at the time of the original investment. All new loans are initially rated 2. ​ • Investment Category 3 is used for investments that are performing below expectations and that require closer monitoring, but where no loss of return or principal is expected. Portfolio companies with a rating of 3 may be out of compliance with financial covenants. ​ • Investment Category 4 is used for investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are often in work out. Investments with a rating of 4 are those for which some loss of return but no loss of principal is expected. ​ • Investment Category 5 is used for investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are almost always in work out. Investments with a rating of 5 are those for which some loss of return and principal is expected. ​ 82 TABLE OF CONTENTS ​ ​ ​ (dollars in millions) ​ ​ ​ ​ As of December 31, 2020 ​ ​ As of December 31, 2019 ​ Investment Category ​ ​ Fair Value ​ ​ % of Total Portfolio ​ ​ Number of Portfolio Companies ​ ​ Fair Value ​ ​ % of Total Portfolio ​ ​ Number of Portfolio Companies (1) ​ 1 ​ ​ ​ $ 87.3 ​ ​ ​ ​ ​ 14 % ​ ​ ​ ​ ​ 12 ​ ​ ​ ​ $ 70.4 ​ ​ ​ ​ ​ 11 % ​ ​ ​ ​ ​ 11 ​ ​ 2 ​ ​ ​ ​ 496.5 ​ ​ ​ ​ ​ 76 % ​ ​ ​ ​ ​ 45 ​ ​ ​ ​ ​ 492.2 ​ ​ ​ ​ ​ 78 % ​ ​ ​ ​ ​ 41 ​ ​ 3 ​ ​ ​ ​ 61.3 ​ ​ ​ ​ ​ 9 % ​ ​ ​ ​ ​ 6 ​ ​ ​ ​ ​ 49.3 ​ ​ ​ ​ ​ 8 % ​ ​ ​ ​ ​ 7 ​ ​ 4 ​ ​ ​ ​ — ​ ​ ​ ​ ​ — % ​ ​ ​ ​ ​ — ​ ​ ​ ​ ​ 12.0 ​ ​ ​ ​ ​ 2 % ​ ​ ​ ​ ​ 1 ​ ​ 5 ​ ​ ​ ​ 8.3 ​ ​ ​ ​ ​ 1 % ​ ​ ​ ​ ​ 3 ​ ​ ​ ​ ​ 5.0 ​ ​ ​ ​ ​ 1 % ​ ​ ​ ​ ​ 4 ​ ​ Total ​ ​ ​ $ 653.4 ​ ​ ​ ​ ​ 100 % ​ ​ ​ ​ ​ 66 ​ ​ ​ ​ $ 628.9 ​ ​ ​ ​ ​ 100 % ​ ​ ​ ​ ​ 64 ​ ​ ​ (1) One portfolio company appears in two categories as of December 31, 2019. ​ Loans and Debt Securities on Non-Accrual Status We will not accrue interest on loans and debt securities if we have reason to doubt our ability to collect such interest. As of December 31, 2020, we had loans to three portfolio companies that were on non-accrual status, which represented approximately 4.3% of our loan portfolio at cost and 1.0% at fair value. As of December 31, 2019, we had loans to two portfolio companies that were on non-accrual status, which represented approximately 3.6% of our loan portfolio at cost and 0.9% at fair value. As of December 31, 2020 and December 31, 2019, $7.1 million and $3.8 million of income from investments on non-accrual has not been accrued, respectively. Results of Operations An important measure of our financial performance is net increase (decrease) in net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income (loss) is the difference between our income from interest, dividends, fees and other investment income and our operating expenses including interest on borrowed funds. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio. Comparison of the Years ended December 31, 2020, 2019, and 2018 Revenues We generate revenue in the form of interest income on debt investments and capital gains and distributions, if any, on investment securities that we may acquire in portfolio companies. Our debt investments typically have a term of five to seven years and bear interest at primarily floating rates. Interest on our debt securities is generally payable quarterly. Payments of principal on our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments may pay interest in-kind, or PIK interest. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect that the total dollar amount of interest and any dividend income that we earn will increase as the size of our investment portfolio increases. In addition, we may generate revenue in the form of prepayment fees, commitment, loan origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees. 83 TABLE OF CONTENTS The following shows the breakdown of investment income for the years ended December 31, 2020, 2019, and 2018 (in millions). ​ ​ ​ Year ended December 31, 2020 ​ ​ Year ended December 31, 2019 ​ ​ Year ended December 31, 2018 ​ Interest Income (1) ​ ​ ​ $ 54.7 ​ ​ ​ ​ $ 56.5 ​ ​ ​ ​ $ 49.6 ​ ​ PIK Income ​ ​ ​ ​ 0.7 ​ ​ ​ ​ ​ 0.4 ​ ​ ​ ​ ​ 1.9 ​ ​ Miscellaneous fees (1) ​ ​ ​ ​ 1.3 ​ ​ ​ ​ ​ 2.0 ​ ​ ​ ​ ​ 1.8 ​ ​ Total ​ ​ ​ $ 56.7 ​ ​ ​ ​ $ 58.9 ​ ​ ​ ​ $ 53.3 ​ ​ ​ (1) For the years ended December 31, 2020, 2019, and 2018, we recognized $2.1, million, $2.8 million and $3.4 million of non-recurring income, respectively. 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 decrease in interest income from the year ended December 31, 2019 to the year ended December 31, 2020 was due primarily to a decline in the market indices that are used for the floating rate loans, subject to interest rate floors. The increase in interest income from the year ended December 31, 2018 to the year ended December 31, 2019 was due primarily to growth in the overall investment portfolio. Expenses Our primary operating expenses include the payment of fees to Stellus Capital Management under the investment advisory agreement, our allocable portion of overhead expenses under the administration agreement and other operating costs described below. We bear all other out-of-pocket costs and expenses of our operations and transactions, which may include: • 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; ​ • base management and incentive fees; ​ • administration fees and expenses, if any, payable under the administration agreement (including our allocable portion of Stellus Capital’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 distributing any reports, proxy statements or other notices to stockholders, including printing costs; ​ 84 TABLE OF CONTENTS • 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 in connection with administering our business. ​ The following shows the breakdown of operating expenses for the years ended December 31, 2020, 2019 and 2018 (in millions). Operating Expenses ​ ​ Year ended December 31, 2020 ​ ​ Year ended December 31, 2019 ​ ​ Year ended December 31, 2018 ​ Management Fees ​ ​ ​ $ 11.1 ​ ​ ​ ​ $ 9.7 ​ ​ ​ ​ $ 8.2 ​ ​ Valuation Fees ​ ​ ​ ​ 0.3 ​ ​ ​ ​ ​ 0.3 ​ ​ ​ ​ ​ 0.3 ​ ​ Administrative services expenses ​ ​ ​ ​ 1.8 ​ ​ ​ ​ ​ 1.7 ​ ​ ​ ​ ​ 1.4 ​ ​ Income incentive fees ​ ​ ​ ​ 2.5 ​ ​ ​ ​ ​ 5.8 ​ ​ ​ ​ ​ 5.5 ​ ​ Capital gain incentive (reversal) fees ​ ​ ​ ​ (0.4 ) ​ ​ ​ ​ ​ 0.8 ​ ​ ​ ​ ​ 0.1 ​ ​ Professional fees ​ ​ ​ ​ 1.0 ​ ​ ​ ​ ​ 1.0 ​ ​ ​ ​ ​ 1.2 ​ ​ Directors’ fees ​ ​ ​ ​ 0.4 ​ ​ ​ ​ ​ 0.4 ​ ​ ​ ​ ​ 0.3 ​ ​ Insurance expense ​ ​ ​ ​ 0.3 ​ ​ ​ ​ ​ 0.3 ​ ​ ​ ​ ​ 0.3 ​ ​ Interest expense and other fees ​ ​ ​ ​ 16.0 ​ ​ ​ ​ ​ 15.0 ​ ​ ​ ​ ​ 12.3 ​ ​ Income tax expense ​ ​ ​ ​ 0.8 ​ ​ ​ ​ ​ 0.9 ​ ​ ​ ​ ​ 0.3 ​ ​ Other general and administrative ​ ​ ​ ​ 0.9 ​ ​ ​ ​ ​ 0.6 ​ ​ ​ ​ ​ 0.7 ​ ​ Total Operating Expenses ​ ​ ​ $ 34.7 ​ ​ ​ ​ $ 36.5 ​ ​ ​ ​ $ 30.6 ​ ​ The decrease in operating expenses for the respective periods was primarily due to lower income incentive fees, as a result of pre-incentive fee net investment income being lower than the hurdle rate, mainly due to lower LIBOR rates over the period; and the reversal of a previously accrued capital gains incentive fee, which resulted from realized losses incurred over the period. The decrease was offset by an increase in management fees, directly related to the growth of our portfolio and an increase in interest expense due to the higher balances on the Credit Facility and SBA-guaranteed debentures (as defined below) outstanding during the period. Net Investment Income For the year ended December 31, 2020, net investment income was $22.0 million, or $1.13 per common share based on 19,471,500 weighted-average common shares outstanding. For the year ended December 31, 2019, net investment income was $22.4 million, or $1.23 per common share based on 18,275,696 weighted-average common shares outstanding. For the year ended December 31, 2018, net investment income was $22.6 million, or $1.42 per common share based on 15,953,571 weighted-average common shares outstanding. Net investment income for the year ended December 31, 2020 decreased compared to the year ended December 31, 2019 as a result of lower interest income due to a decline in the market indices that are used for our floating rate loans, subject to interest rate floors; offset by lower operating expenses as explained in the “Expenses” section above. Net investment income for the year ended December 31, 2019 decreased compared to the year ended December 31, 2018 as a result of an increase in accrued capital gains incentive fees and excise taxes generated by realized gains on certain equity positions and higher interest expense from larger amounts outstanding under the Credit Facility and SBA-guaranteed debentures; offset by higher investment income due to a larger portfolio. 85 TABLE OF CONTENTS Net Realized Gains and Losses We measure realized gains or losses by the difference between the net proceeds from the repayment, sale or other disposition and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized. Proceeds from repayments of investments and amortization of certain other investments for the 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, 2019 totaled $128.2 million and net realized gains totaled $19.6 million. Proceeds from the sales and repayments of investments and amortization of certain other investments for the year ended December 31, 2018 totaled $147.5 million and net realized gains totaled $5.5 million. 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 gains for the years ended December 31, 2019 and 2018 resulted primarily from the realization of our equity investments in certain portfolio companies. Net Change in Unrealized Appreciation (Depreciation) of Investments Net change in unrealized appreciation primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded appreciation or depreciation when gains or losses are realized. Net change in unrealized appreciation (depreciation) on investments and cash equivalents for the year ended December 31, 2020, 2019 and 2018 totaled $8.6 million, ($15.5) million, and ($1.6) million, respectively. The change in unrealized appreciation in 2020 was primarily due to portfolio company specific performance on several of our equity investments. The change in unrealized depreciation in 2019 was primarily due to write downs on specific investments. The change in unrealized depreciation in 2018 was due to a significant widening of spreads right at year end, offset by the write up of a specific equity investment. Provision for Taxes on Unrealized Appreciation on Investments We have direct wholly owned subsidiaries that have elected to be taxable entities (the “Taxable Subsidiaries”). The Taxable Subsidiaries permit us to hold equity investments in portfolio companies which are “pass through” entities for U.S. federal income tax purposes and continue to comply with the “source income” requirements contained in RIC tax provisions of the Code. The Taxable Subsidiaries are not consolidated with us for U.S. federal income tax purposes and may generate U.S. federal income tax expense, benefit, and the related tax assets and liabilities, as a result of their ownership of certain portfolio investments. The U.S. federal income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in our consolidated financial statements. For the year ended December 31, 2020, 2019 and 2018, we recognized a deferred tax provision related to unrealized appreciation on certain equity investments for income tax at our Taxable Subsidiaries of $224.9 thousand, $66.8 thousand and $68.0 thousand, respectively. As of December 31, 2020 and 2019, deferred tax liabilities of $359.6 thousand and $134.7 thousand, respectively, were included on the Consolidated Statement of Assets and Liabilities. For the year ended December 31, 2018, we recognized tax expense related to the realized gains on certain equity investments at our taxable subsidiaries of $267.0 thousand. There was no such tax expense for the years ended December 31, 2020 and 2019. As of December 31, 2020 and 2019, no tax liability related to the taxes on realized gains were included on the Consolidated Statement of Assets and Liabilities. Net Increase in Net Assets Resulting from Operations Net increase in net assets resulting from operations totaled $20.2 million, or $1.04 per common share based on weighted-average shares of 19,471,500 for the year ended December 31, 2020, as compared to $26.4 million, or $1.45 per common share based on weighted-average shares of 18,275,696 common shares 86 TABLE OF CONTENTS outstanding for the year ended December 31, 2019, as compared to $26.2 million, or $1.64 per common share based on weighted-average shares of 15,953,571 common shares outstanding for the year ended December 31, 2018. The decrease in net increase in net assets for the year ended December 31, 2020 was primarily due to net realized losses, offset by net unrealized gains. The net increase in net assets resulting from operations for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was higher due primarily to a larger amount of realized gains, offset by unrealized depreciation. Financial condition, liquidity and capital resources Cash Flows from Operating and Financing Activities 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. The decrease in net cash used in operating activities over the period is because we did not make any new investments during the first half of 2020, primarily due to the COVID-19 pandemic. Our financing activities for the year ended December 31, 2020 provided cash of $5.8 million primarily from proceeds from SBA-guaranteed debentures, net borrowings on our Credit Facility, and proceeds from the issuance of common stock. Our operating activities used net cash of $93.3 million for the year ended December 31, 2019, primarily in connection with the purchase of portfolio investments, offset by sales and repayments of portfolio investments. Our financing activities for the year ended December 31, 2019 provided cash of $92.0 million primarily from proceeds from the issuance of common stock, proceeds from SBA-guaranteed debentures and net borrowings on our Credit Facility. Our operating activities used net cash of $102.4 million for the year ended December 31, 2018, primarily in connection with the purchase of portfolio investments, offset by sales and repayments of portfolio investments. Our financing activities for the year ended December 31, 2018 used cash of $94.8 million, primarily from proceeds from SBA-guaranteed debentures and net borrowings on our Credit Facility. Liquidity and Capital Resources Our liquidity and capital resources are derived from the Credit Facility, the 2022 Notes (as defined below), SBA-guaranteed debentures and cash flows from operations, including investment sales and repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies and other operating expenses we incur, as well as the payment of dividends to the holders of our common stock. We used, and expect to continue to use, these capital resources as well as proceeds from turnover within our portfolio and from public and private offerings of securities to finance our investment activities. Although we expect to fund the growth of our investment portfolio through the net proceeds from future public and private equity offerings and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act, our plans to raise capital may not be successful. In this regard, if our common stock trades at a price below our then-current net asset value per share, we may be limited in our ability to raise equity capital given that we cannot sell our common stock at a price below net asset value per share unless our stockholders approve such a sale and our Board of directors makes certain determinations in connection therewith. A proposal, approved by our stockholders at our 2020 annual stockholders meeting, authorizes us to sell up to 25% of our outstanding common shares at a price equal to or below the then current net asset value per share in one or more offerings. This authorization will expire on June 25, 2021, the one-year anniversary of our 2020 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. In addition, we intend to distribute between 90% and 100% of our taxable income to our stockholders in order to satisfy the requirements applicable to RICs under Subchapter M of the Code. Consequently, we may not have the funds or the ability to fund new investments, to make additional investments in our portfolio companies, to fund our unfunded commitments to portfolio 87 TABLE OF CONTENTS companies or to repay borrowings. In addition, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value. Also, as a BDC, we generally are required to meet 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). 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 Stellus Capital SBIC, LP (“SBIC subsidiary”) and Stellus Capital SBIC II, LP (“SBIC II subsidiary”) (together, “the SBIC subsidiaries”) guaranteed by the Small Business Administration (“SBA”) from the definition of senior securities in the asset coverage test under the 1940 Act. We were in compliance with the asset coverage ratios at all times. As of December 31, 2020 and December 31, 2019, our asset coverage ratio was 223% and 229%, respectively. The amount of leverage that we employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing, such as the maturity, covenant package and rate structure of the proposed borrowings, our ability to raise funds through the issuance of shares of our common stock and the risks of such borrowings within the context of our investment outlook. Ultimately, we only intend to use leverage if the expected returns from borrowing to make investments will exceed the cost of such borrowing. As of December 31, 2020 and December 31, 2019, we had cash and cash equivalents of $18.5 million and $16.1 million, respectively. Credit Facility On October 11, 2017, we entered a senior secured revolving credit agreement, dated as of October 10, 2017, as amended, that was amended and restated on September 18, 2020 with ZB, N.A., dba Amegy Bank and various other lenders (the “Credit Facility”). The key changes in the amended and restated Credit Facility are as follows: ​ ​ ​ Prior agreement ​ ​ As amended and restated ​ Maturity Date ​ ​ October 10, 2021 ​ ​ September 18, 2025 ​ Commitment termination date ​ ​ March 10, 2021 ​ ​ September 18, 2024 ​ LIBOR floor ​ ​ None ​ ​ 0.25% ​ Prime rate floor ​ ​ None ​ ​ 3.00% ​ Asset coverage ratio ​ ​ Minimum of 1.75 to 1.00 (maximum leverage of 1.33x) ​ ​ Minimum of 1.67 to 1.00 (maximum leverage of 1.5x) ​ Refinancing of 2022 Notes (1) ​ ​ Not required ​ ​ Required by March 15, 2022 ​ ​ (1) See subsequent events section below for discussion on activity related to the 2022 Notes subsequent to December 31, 2020. ​ The Credit Facility, as amended and restated, provides for borrowings up to a maximum of $230.0 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. Borrowings under the Credit Facility bear interest, subject to our election, on a per annum basis equal to (i) LIBOR 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) with a 0.25% LIBOR floor, or (ii) 1.50% (or 1.75% during certain periods in which our asset coverage ratio is equal to or below 1.90 to 1.00) plus an alternate base rate based on the highest of the Prime Rate, Federal Funds Rate plus 0.5% or one month LIBOR plus 1.0%. We pay unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility. Interest is payable quarterly in arrears. The commitment to fund the revolver expires on September 18, 2024, 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. 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. 88 TABLE OF CONTENTS Our obligations to the lenders are secured by a first priority security interest in our portfolio of securities and cash not held at the SBIC subsidiaries but excluding short term investments. The Credit Facility contains certain covenants, including but not limited to: (i) maintaining a minimum liquidity test of at least $10,000,000, including cash, liquid investments and undrawn availability, (ii) maintaining an asset coverage ratio of at least 1.67 to 1.0, (iii) maintaining a minimum shareholder’s equity, and (iv) maintaining a minimum interest coverage ratio of at least 2.00 to 1.00. As of December 31, 2020 and December 31, 2019, the outstanding balance under the Credit Facility was $174.0 million and $161.6 million, respectively. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value. The fair value of the Credit Facility is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Credit Facility is estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. We have incurred costs of $3.6 million in connection with the current Credit Facility, which were capitalized and are being amortized over the life of the facility. Additionally, $0.3 million of costs from a prior credit facility will continue to be amortized over the life of the Credit Facility. As of December 31, 2020 and 2019, $2.3 million and $1.0 million of such prepaid loan structure fees and administration fees had yet to be amortized, respectively. 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. The following table summarizes the interest expense and amortized loan fees on the Credit Facility for the years ended December 31, 2020, 2019, and 2018 (dollars in millions): ​ ​ ​ For the years ended ​ ​ ​ ​ December 31, 2020 ​ ​ December 31, 2019 ​ ​ December 31, 2018 ​ Interest expense ​ ​ ​ $ 5.8 ​ ​ ​ ​ $ 5.1 ​ ​ ​ ​ $ 3.7 ​ ​ Loan fee amortization ​ ​ ​ ​ 0.6 ​ ​ ​ ​ ​ 0.5 ​ ​ ​ ​ ​ 0.4 ​ ​ Commitment fees on unused portion ​ ​ ​ ​ 0.2 ​ ​ ​ ​ ​ 0.4 ​ ​ ​ ​ ​ 0.4 ​ ​ Administration fees ​ ​ ​ ​ 0.1 ​ ​ ​ ​ ​ — ​ ​ ​ ​ ​ 0.1 ​ ​ Total interest and financing expenses ​ ​ ​ $ 6.7 ​ ​ ​ ​ $ 6.0 ​ ​ ​ ​ $ 4.6 ​ ​ Weighted average interest rate ​ ​ ​ ​ 3.2 % ​ ​ ​ ​ ​ 4.8 % ​ ​ ​ ​ ​ 4.7 % ​ ​ Effective interest rate (including fee amortization) ​ ​ ​ ​ 3.7 % ​ ​ ​ ​ ​ 5.7 % ​ ​ ​ ​ ​ 5.7 % ​ ​ Average debt outstanding ​ ​ ​ $ 181.9 ​ ​ ​ ​ $ 106.2 ​ ​ ​ ​ $ 79.8 ​ ​ Cash paid for interest and unused fees ​ ​ ​ $ 6.3 ​ ​ ​ ​ $ 5.2 ​ ​ ​ ​ $ 4.2 ​ ​ 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”). 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, 2020 and 2019, the SBIC subsidiary had $75.0 million in “regulatory capital”, as such term is defined by the SBA. As of December 31, 2020 and 2019, the SBIC II subsidiary had $40.0 million and $20.0 million in regulatory capital, respectively. 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. The exemptive relief provides us with increased flexibility under the asset coverage test by permitting us to borrow up to $325.0 million more than we would otherwise be able to absent the receipt of this exemptive relief. On a stand-alone basis, the SBIC subsidiaries held $277.3 million and $240.1 million in assets at December 31, 2020 and 2019, respectively, which accounted for approximately 41.1% and 37.0% of our total consolidated assets at December 31, 2020 and 2019, respectively. 89 TABLE OF CONTENTS SBA-guaranteed debentures have fixed interest rates that equal prevailing 10-year Treasury Note rates plus a market spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the SBA-guaranteed debentures is not required to be paid before maturity but may be pre-paid at any time with no prepayment penalty. As of December 31, 2020 and 2019, the SBIC subsidiaries had $176.5 million and $161.00 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. SBA-guaranteed debentures drawn after October 1, 2019 incur upfront fees of 3.435%, which consists of a 1.00% commitment fee and a 2.435% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. Once pooled, which occurs in March and September 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, 2020 and 2019, the carrying amount of the SBA-guaranteed debentures approximated their fair value. The fair value of the SBA-guaranteed debentures is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the 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, 2020 and 2019, the SBA-guaranteed debentures would be deemed to be Level 3, as defined in Note 6. As of December 31, 2020, we have incurred $6.2 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 December 31, 2020 and 2019, $3.3 million and $3.5 million of prepaid financing costs had yet to be amortized, respectively. These prepaid loan fees are presented on the consolidated statement of assets and liabilities as a deduction from the debt liability. The following table summarizes the interest expense and amortized fees on the SBA-guaranteed debentures for the years ended December 31, 2020, 2019 and 2018 (dollars in millions): ​ ​ ​ For the years ended ​ ​ ​ ​ December 31, 2020 ​ ​ December 31, 2019 ​ ​ December 31, 2018 ​ Interest expense ​ ​ ​ $ 5.4 ​ ​ ​ ​ $ 5.2 ​ ​ ​ ​ $ 4.0 ​ ​ Debenture fee amortization ​ ​ ​ ​ 0.7 ​ ​ ​ ​ ​ 0.6 ​ ​ ​ ​ ​ 0.6 ​ ​ Total interest and financing expenses ​ ​ ​ $ 6.1 ​ ​ ​ ​ $ 5.8 ​ ​ ​ ​ $ 4.6 ​ ​ Weighted average interest rate ​ ​ ​ ​ 3.3 % ​ ​ ​ ​ ​ 3.4 % ​ ​ ​ ​ ​ 3.2 % ​ ​ Effective interest rate (including fee amortization) ​ ​ ​ ​ 3.8 % ​ ​ ​ ​ ​ 3.8 % ​ ​ ​ ​ ​ 3.7 % ​ ​ Average debt outstanding ​ ​ ​ $ 161.6 ​ ​ ​ ​ $ 151.9 ​ ​ ​ ​ $ 125.4 ​ ​ Cash paid for interest ​ ​ ​ $ 5.3 ​ ​ ​ ​ $ 5.0 ​ ​ ​ ​ $ 3.1 ​ ​ Notes Offering On August 21, 2017, we issued $42.5 million in aggregate principal amount of 5.75% fixed-rate notes due 2022 (the “2022 Notes”). 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 2022 Notes will mature on September 15, 2022, and may be redeemed in whole or in part at any time or from time to time at our option on or after September 15, 2019 at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest is payable quarterly. We used all of the net proceeds from this offering to fully redeem notes issued in a prior public offering and a portion of the amount outstanding under our prior credit facility. As of both December 31, 2020 and 2019, the aggregate carrying amount of all Notes was $48.9 million and the fair value of the Notes was approximately $49.2 million and $49.7 million, respectively. The 2022 Notes are listed on New York Stock Exchange under the trading symbol “SCA”. The fair value of the Notes is based on the closing price of the security, which is a Level 2 input under ASC 820 due to sufficient trading volume. 90 TABLE OF CONTENTS In connection with the issuance and maintenance of the 2022 Notes, we have incurred $1.7 million of fees which are being amortized over the term of the 2022 Notes, of which $0.6 million and $0.9 million remained to be amortized as of December 31, 2020 and 2019, respectively. These financing costs are presented on the consolidated statement of assets and liabilities as a deduction from the debt liability. The following table summarizes the interest expense and deferred financing costs on the 2022 Notes for the years ended December 31, 2020, 2019, 2018 (in millions): ​ ​ ​ For the years ended ​ ​ ​ ​ December 31, 2020 ​ ​ December 31, 2019 ​ ​ December 31, 2018 ​ Interest expense ​ ​ ​ $ 2.8 ​ ​ ​ ​ $ 2.8 ​ ​ ​ ​ $ 2.8 ​ ​ Deferred financing costs ​ ​ ​ ​ 0.3 ​ ​ ​ ​ ​ 0.3 ​ ​ ​ ​ ​ 0.3 ​ ​ Total interest and financing expenses ​ ​ ​ $ 3.1 ​ ​ ​ ​ $ 3.1 ​ ​ ​ ​ $ 3.1 ​ ​ Weighted average interest rate ​ ​ ​ ​ 5.7 % ​ ​ ​ ​ ​ 5.8 % ​ ​ ​ ​ ​ 5.8 % ​ ​ Effective interest rate (including fee amortization) ​ ​ ​ ​ 6.4 % ​ ​ ​ ​ ​ 6.4 % ​ ​ ​ ​ ​ 6.4 % ​ ​ Average debt outstanding ​ ​ ​ $ 48.9 ​ ​ ​ ​ $ 48.9 ​ ​ ​ ​ $ 48.9 ​ ​ Cash paid for interest ​ ​ ​ $ 2.8 ​ ​ ​ ​ $ 2.8 ​ ​ ​ ​ $ 2.8 ​ ​ Contractual Obligations As of December 31, 2020, our future fixed commitments for cash payments on contractual obligations for each of the next five years and thereafter are as follows: ​ ​ ​ Total ​ ​ 2021 ​ ​ 2022 ​ ​ 2023 ​ ​ 2024 ​ ​ 2025 ​ ​ 2026 and thereafter ​ ​ ​ ​ (dollars in thousands) ​ Credit Facility payable ​ ​ ​ $ 174,000 ​ ​ ​ ​ ​ — ​ ​ ​ ​ ​ — ​ ​ ​ ​ ​ — ​ ​ ​ ​ $ 58,000 ​ ​ ​ ​ $ 116,000 ​ ​ ​ ​ ​ — ​ ​ Notes payable (1) ​ ​ ​ $ 48,875 ​ ​ ​ ​ ​ — ​ ​ ​ ​ $ 48,875 ​ ​ ​ ​ ​ — ​ ​ ​ ​ ​ — ​ ​ ​ ​ ​ — ​ ​ ​ ​ ​ — ​ ​ SBA-guaranteed debentures ​ ​ ​ $ 176,500 ​ ​ ​ ​ ​ — ​ ​ ​ ​ ​ — ​ ​ ​ ​ ​ — ​ ​ ​ ​ ​ — ​ ​ ​ ​ ​ — ​ ​ ​ ​ $ 176,500 ​ ​ Total ​ ​ ​ $ 399,375 ​ ​ ​ ​ $ — ​ ​ ​ ​ $ 48,875 ​ ​ ​ ​ $ — ​ ​ ​ ​ $ 58,000 ​ ​ ​ ​ $ 116,000 ​ ​ ​ ​ $ 176,500 ​ ​ ​ (1) See Note 15 for the discussion regarding the 2022 Notes subsequent to December 31, 2020 ​ 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, 2020, our only off-balance sheet arrangements consisted of $28.9 million of unfunded commitments to provide debt financing to 19 of our portfolio companies. As of December 31, 2019, our only off-balance sheet arrangements consisted of $37.5 million unfunded commitments to provide debt financing to 17 of our portfolio companies. As of December 31, 2020, we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility to fund such unfunded commitments should the need arise. Regulated Investment Company Status and Dividends We have elected to be treated as a RIC under Subchapter M of the Code. So long as we maintain our qualification as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders as dividends on a timely basis. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Distributions declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable 91 TABLE OF CONTENTS income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital. To qualify for RIC tax treatment, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). If we maintain our qualification as a RIC, we must also satisfy certain distribution requirements each calendar year to avoid a U.S. federal excise tax on our undistributed earnings of a RIC. As of December 31, 2020, we had $21,051,549 of undistributed taxable income that will be carried forward toward distributions paid during the year ending December 31, 2021. We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, the covenants contained in the Credit Facility may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement. In addition, we may retain for investment some or all our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in shares of our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividends for that fiscal year, a portion of those dividend distributions may be deemed a return of capital to our stockholders. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a BDC under the 1940 Act and due to provisions in the Credit Facility. We cannot assure stockholders that they will receive any distributions or distributions at a particular level. In accordance with certain applicable U.S. Treasury regulations and private letter rulings issued by the Internal Revenue Service (the “IRS”), a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in shares of our common stock). In no event will any stockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash, except as described below. Recently, in recognition of the need for enhanced liquidity during the current period of economic disruption, the IRS temporarily reduced the minimum required aggregate amount of cash that shareholders may receive in such a distribution from 20% down to 10% percent of the aggregate declared distribution. This temporary modification was effective solely with respect to distributions declared on or after April 1, 2020, and on or before December 31, 2020. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in shares of our common stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our common stock in accordance with these U.S. Treasury regulations or private letter rulings. However, we continue to monitor the Company’s liquidity position and the overall economy and will continue to assess whether it would be in our and our shareholders best interest to take advantage of the IRS rulings. Recent Accounting Pronouncements See Note 1 to the financial statements for a description of recent accounting pronouncements, if any, including the expected dates of adoption and the anticipated impact on the financial statements. 92 TABLE OF CONTENTS Critical Accounting Policies See Note 1 to the Consolidated Financial Statements contained herein for a description of critical accounting policies. Subsequent Events Investment Portfolio On January 14, 2021, we received full repayment on the first lien term loan and revolver of BFC Solmetex, LLC. for total proceeds of $13.6 million. We also received full repayment on the first lien term loan of Bonded Filter Co. LLC, a subsidiary of BFC Solmetex, LLC, for total proceeds of $1.2 million. On January 29, 2021, we invested $11.3 million in the first lien term loan of NuSource Financial, LLC, a provider of technology integration and installation of Automated Teller Machines / Integrated Teller Machines (“ATM” / “ITM”), maintenance services, and security solutions. Additionally, we invested $4.8 million in the subordinated debt and warrants of the company. On February 1, 2021, we invested $0.4 million in the equity of Tailwind Core Investor, LLC, an existing portfolio company. On February 11, 2021, we invested $7.2 million in the first lien term loan of Time Manufacturing Acquisition, LLC, an existing portfolio company. Additionally, we invested $0.1 million in the equity of the company. On February 19, 2021, we invested $13.5 million in the first lien term loan and committed $0.1 million in the unfunded revolver of CEATI International, Inc., a provider of intellectual content, technical trade programs, research groups, and conferences for utility companies. Additionally, we invested $0.3 million in the equity of the company. On March 1, 2021, we invested $10.8 million in the first lien term loan and committed $0.1 million in the unfunded revolver of TAC LifePort Purchaser, LLC, a provider of aerospace products for the U.S. military / government, air medical, and high-end VIP aircraft end markets. Additionally, we invested $0.5 million in the equity of the company. On March 2, 2021, we invested $10.0 million in the first lien term loan and $0.1 million in the unfunded revolver of TradePending, LLC, a provider of vehicle trade-in and merchandising intelligence solutions for auto dealerships, primarily flagship dealerships. Additionally, we invested $0.8 million in the equity of the company. 2026 Notes On January 14, 2021, we issued $100.0 million in aggregate principal amount of 4.875% fixed-rate notes due 2026 (the “2026 Notes”). 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. Interest is payable semi-annually beginning September 30, 2021. We used all of the net proceeds from this offering to fully redeem the 2022 Notes and repay a portion of the outstanding amount under the Credit Facility. Redemption of the 2022 Notes On February 12, 2021, we redeemed all $48.875 million in aggregate principal amount of the 2022 Notes. The 2022 Notes were redeemed at 100% of their principal amount, plus the accrued and unpaid interest thereon through the redemption date. Credit Facility The outstanding balance under the Credit Facility as of March 3, 2021 was $164.5 million. 93 TABLE OF CONTENTS ​ SBA-guaranteed Debentures The outstanding balance under SBA-guaranteed debentures as of March 3, 2021 was $210.0 million. SBIC II Subsidiary On January 21, 2021, we contributed $15.0 million to the SBIC II subsidiary, bring total contributed capital to $35.0 million. On January 25, 2021, we increased committed capital to $60.0 million. Dividend Declared On January 15, 2021, our Board changed the frequency of distributions from quarterly to monthly and declared a regular monthly dividend for each of January, February and March 2021 as follows: Declared ​ ​ Ex-Dividend Date ​ ​ Record Date ​ ​ Payment Date ​ ​ Amount per Share ​ 1/15/2021 ​ ​ ​ ​ 1/28/2021 ​ ​ ​ ​ ​ 1/29/2021 ​ ​ ​ ​ ​ 2/16/2021 ​ ​ ​ ​ $ 0.0833 ​ ​ 1/15/2021 ​ ​ ​ ​ 2/25/2021 ​ ​ ​ ​ ​ 2/26/2021 ​ ​ ​ ​ ​ 3/15/2021 ​ ​ ​ ​ $ 0.0833 ​ ​ 1/15/2021 ​ ​ ​ ​ 3/30/2021 ​ ​ ​ ​ ​ 3/31/2021 ​ ​ ​ ​ ​ 4/15/2021 ​ ​ ​ ​ $ 0.0833 ​ ​