Stellus Capital Investment Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or Stellus Capital Investment Corporation’s (“we”, “us”, “our” and the “Company”) future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, related to the current 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, LLC (“Stellus Capital” or the “Advisor); ​ • 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 to locate suitable investments for us and to monitor and administer our investments; ​ • the ability of Stellus Capital to attract and retain highly talented professionals; ​ • our ability to maintain our qualification as a regulated 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 BDC 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 quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or U.S. Securities and Exchange Commission (“SEC”) rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Overview We were organized as a Maryland corporation on May 18, 2012, and formally commenced operations on November 7, 2012. Our investment objective is to maximize the total return to our stockholders in the form of current income and capital appreciation through debt and related equity investments in middle-market companies. 58 TABLE OF CONTENTS We are an externally managed, non-diversified, closed-end investment company that has elected to be regulated as a BDC under the Investment Company Act of 1940, as amended (the “1940 Act”). Our investment activities are managed by our investment adviser, Stellus Capital. As a BDC, we are required to comply with certain regulatory requirements. For instance, as a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets. Qualifying assets include investments in “eligible portfolio companies.” (as defined in the 1940 Act). Under the relevant SEC rules, the term “eligible portfolio company” includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and certain public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal of business in the United States. We have elected, qualified, and intend to continue to qualify annually to be treated for tax purposes as a RIC under Subchapter M of the internal Revenue Code of 1986, as amended (the “Code”). To maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. As of March 31, 2022, 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 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 28, 2019 which effectively increased the amount of leverage we may incur. As of March 31, 2022, our asset coverage ratio was 193%. 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. 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. 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 and continue to lead to the re-introduction of restrictions. 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. The extent of the impact of the COVID-19 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. 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)) 59 TABLE OF CONTENTS through first lien (including unitranche), second lien, and unsecured debt financing, often times with a corresponding equity investment. As of March 31, 2022, we had $838.0 million (at fair value) invested in 78 portfolio companies. As of March 31, 2022, our portfolio included approximately 84% of first lien debt, 7% of second lien debt, 1% of unsecured debt and 8% of equity investments at fair value. The composition of our investments at cost and fair value as of March 31, 2022 was as follows: ​ ​ ​ Cost ​ ​ Fair Value ​ Senior Secured – First Lien (1) ​ ​ ​ $ 714,456,379 ​ ​ ​ ​ $ 706,079,324 ​ ​ Senior Secured – Second Lien ​ ​ ​ ​ 84,743,570 ​ ​ ​ ​ ​ 61,221,062 ​ ​ Unsecured Debt ​ ​ ​ ​ 5,244,381 ​ ​ ​ ​ ​ 4,800,358 ​ ​ Equity ​ ​ ​ ​ 49,401,393 ​ ​ ​ ​ ​ 65,890,746 ​ ​ Total Investments ​ ​ ​ $ 853,845,723 ​ ​ ​ ​ $ 837,991,490 ​ ​ ​ (1) Includes unitranche investments, which account for 1.5% 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 and 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, 2021, we had $772.9 million (at fair value) invested in 73 portfolio companies. As of December 31, 2021, our portfolio included approximately 84% of first lien debt, 7% of second lien debt, 1% of unsecured debt and 8% of equity investments at fair value. The composition of our investments at cost and fair value as of December 31, 2021 was as follows: ​ ​ ​ Cost ​ ​ Fair Value ​ Senior Secured – First Lien (1) ​ ​ ​ $ 652,561,144 ​ ​ ​ ​ $ 646,352,935 ​ ​ Senior Secured – Second Lien ​ ​ ​ ​ 79,806,598 ​ ​ ​ ​ ​ 56,733,110 ​ ​ Unsecured Debt ​ ​ ​ ​ 5,030,143 ​ ​ ​ ​ ​ 4,883,854 ​ ​ Equity ​ ​ ​ ​ 47,608,072 ​ ​ ​ ​ ​ 64,903,427 ​ ​ Total Investments ​ ​ ​ $ 785,005,957 ​ ​ ​ ​ $ 772,873,326 ​ ​ ​ (1) Includes unitranche investments, which account for 1.6% 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 and 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. ​ Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms and conditions of the underlying loan agreements. As of March 31, 2022 and December 31, 2021, we had unfunded commitments of $34.2 million and $31.0 million, respectively, to provide debt financing to 38 and 32 portfolio companies, respectively. As of March 31, 2022, we had sufficient liquidity to fund such unfunded commitments should the need arise. 60 TABLE OF CONTENTS The following is a summary of geographical concentration of our investment portfolio as of March 31, 2022: ​ ​ ​ Cost ​ ​ Fair Value ​ ​ % of Total Investments ​ Texas ​ ​ ​ $ 195,230,380 ​ ​ ​ ​ $ 176,467,790 ​ ​ ​ ​ ​ 21.06 % ​ ​ California ​ ​ ​ ​ 159,484,017 ​ ​ ​ ​ ​ 158,784,883 ​ ​ ​ ​ ​ 18.95 % ​ ​ Illinois ​ ​ ​ ​ 69,150,094 ​ ​ ​ ​ ​ 69,032,012 ​ ​ ​ ​ ​ 8.24 % ​ ​ Arizona ​ ​ ​ ​ 43,277,571 ​ ​ ​ ​ ​ 43,112,876 ​ ​ ​ ​ ​ 5.14 % ​ ​ Pennsylvania ​ ​ ​ ​ 42,816,814 ​ ​ ​ ​ ​ 42,509,202 ​ ​ ​ ​ ​ 5.07 % ​ ​ Washington ​ ​ ​ ​ 40,946,863 ​ ​ ​ ​ ​ 40,836,573 ​ ​ ​ ​ ​ 4.87 % ​ ​ Ohio ​ ​ ​ ​ 36,002,522 ​ ​ ​ ​ ​ 37,883,785 ​ ​ ​ ​ ​ 4.52 % ​ ​ Florida ​ ​ ​ ​ 31,256,977 ​ ​ ​ ​ ​ 31,670,045 ​ ​ ​ ​ ​ 3.78 % ​ ​ New York ​ ​ ​ ​ 25,104,764 ​ ​ ​ ​ ​ 28,786,831 ​ ​ ​ ​ ​ 3.44 % ​ ​ Wisconsin ​ ​ ​ ​ 25,834,055 ​ ​ ​ ​ ​ 25,824,357 ​ ​ ​ ​ ​ 3.08 % ​ ​ New Jersey ​ ​ ​ ​ 25,482,325 ​ ​ ​ ​ ​ 23,789,966 ​ ​ ​ ​ ​ 2.84 % ​ ​ United Kingdom ​ ​ ​ ​ 21,334,126 ​ ​ ​ ​ ​ 19,134,926 ​ ​ ​ ​ ​ 2.28 % ​ ​ Georgia ​ ​ ​ ​ 10,942,133 ​ ​ ​ ​ ​ 18,900,488 ​ ​ ​ ​ ​ 2.26 % ​ ​ Maryland ​ ​ ​ ​ 16,805,987 ​ ​ ​ ​ ​ 16,931,249 ​ ​ ​ ​ ​ 2.02 % ​ ​ Minnesota ​ ​ ​ ​ 16,960,021 ​ ​ ​ ​ ​ 16,174,281 ​ ​ ​ ​ ​ 1.93 % ​ ​ Colorado ​ ​ ​ ​ 15,109,907 ​ ​ ​ ​ ​ 14,769,749 ​ ​ ​ ​ ​ 1.76 % ​ ​ District of Columbia ​ ​ ​ ​ 11,597,185 ​ ​ ​ ​ ​ 13,446,652 ​ ​ ​ ​ ​ 1.60 % ​ ​ Canada ​ ​ ​ ​ 13,396,395 ​ ​ ​ ​ ​ 13,317,095 ​ ​ ​ ​ ​ 1.59 % ​ ​ South Carolina ​ ​ ​ ​ 13,249,700 ​ ​ ​ ​ ​ 13,200,056 ​ ​ ​ ​ ​ 1.58 % ​ ​ North Carolina ​ ​ ​ ​ 10,487,953 ​ ​ ​ ​ ​ 10,777,500 ​ ​ ​ ​ ​ 1.29 % ​ ​ Missouri ​ ​ ​ ​ 9,850,892 ​ ​ ​ ​ ​ 10,530,202 ​ ​ ​ ​ ​ 1.26 % ​ ​ Massachusetts ​ ​ ​ ​ 10,264,453 ​ ​ ​ ​ ​ 10,414,995 ​ ​ ​ ​ ​ 1.24 % ​ ​ Puerto Rico ​ ​ ​ ​ 8,760,589 ​ ​ ​ ​ ​ 711,228.00 ​ ​ ​ ​ ​ 0.08 % ​ ​ Virginia ​ ​ ​ ​ 500,000 ​ ​ ​ ​ ​ 984,749.00 ​ ​ ​ ​ ​ 0.12 % ​ ​ ​ ​ ​ ​ $ 853,845,723 ​ ​ ​ ​ $ 837,991,490 ​ ​ ​ ​ ​ 100.00 % ​ ​ 61 TABLE OF CONTENTS The following is a summary of geographical concentration of our investment portfolio as of December 31, 2021: ​ ​ ​ Cost ​ ​ Fair Value ​ ​ % of Total Investments 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 % ​ ​ 62 TABLE OF CONTENTS The following is a summary of industry concentration of our investment portfolio as of March 31, 2022: ​ ​ ​ Cost ​ ​ Fair Value ​ ​ % of Total Investments ​ Services: Business ​ ​ ​ $ 204,673,120 ​ ​ ​ ​ $ 214,616,580 ​ ​ ​ ​ ​ 25.61 % ​ ​ Healthcare & Pharmaceuticals ​ ​ ​ ​ 103,716,638 ​ ​ ​ ​ ​ 97,787,282 ​ ​ ​ ​ ​ 11.67 % ​ ​ Aerospace & Defense ​ ​ ​ ​ 66,430,440 ​ ​ ​ ​ ​ 62,601,416 ​ ​ ​ ​ ​ 7.47 % ​ ​ Media: Advertising, Printing & Publishing ​ ​ ​ ​ 53,054,402 ​ ​ ​ ​ ​ 51,404,156 ​ ​ ​ ​ ​ 6.13 % ​ ​ Media: Broadcasting & Subscription ​ ​ ​ ​ 39,229,812 ​ ​ ​ ​ ​ 44,561,407 ​ ​ ​ ​ ​ 5.32 % ​ ​ Consumer Goods: Durable ​ ​ ​ ​ 35,781,058 ​ ​ ​ ​ ​ 36,262,909 ​ ​ ​ ​ ​ 4.33 % ​ ​ Beverage, Food, & Tobacco ​ ​ ​ ​ 34,035,900 ​ ​ ​ ​ ​ 32,939,806 ​ ​ ​ ​ ​ 3.93 % ​ ​ Software ​ ​ ​ ​ 28,361,662 ​ ​ ​ ​ ​ 28,973,774 ​ ​ ​ ​ ​ 3.46 % ​ ​ Consumer Goods: Non-Durable ​ ​ ​ ​ 30,649,563 ​ ​ ​ ​ ​ 28,611,585 ​ ​ ​ ​ ​ 3.41 % ​ ​ Services: Consumer ​ ​ ​ ​ 45,315,174 ​ ​ ​ ​ ​ 27,650,198 ​ ​ ​ ​ ​ 3.30 % ​ ​ Capital Equipment ​ ​ ​ ​ 27,405,794 ​ ​ ​ ​ ​ 27,218,258 ​ ​ ​ ​ ​ 3.25 % ​ ​ Construction & Building ​ ​ ​ ​ 27,150,816 ​ ​ ​ ​ ​ 27,092,070 ​ ​ ​ ​ ​ 3.23 % ​ ​ Environmental Industries ​ ​ ​ ​ 25,643,996 ​ ​ ​ ​ ​ 25,123,176 ​ ​ ​ ​ ​ 2.99 % ​ ​ Chemicals, Plastics, & Rubber ​ ​ ​ ​ 19,501,538 ​ ​ ​ ​ ​ 19,084,569 ​ ​ ​ ​ ​ 2.28 % ​ ​ Containers, Packaging, & Glass ​ ​ ​ ​ 17,527,340 ​ ​ ​ ​ ​ 17,704,466 ​ ​ ​ ​ ​ 2.11 % ​ ​ Transportation & Logistics ​ ​ ​ ​ 17,238,168 ​ ​ ​ ​ ​ 17,568,896 ​ ​ ​ ​ ​ 2.10 % ​ ​ Metals & Mining ​ ​ ​ ​ 16,805,987 ​ ​ ​ ​ ​ 16,931,249 ​ ​ ​ ​ ​ 2.02 % ​ ​ FIRE: Real Estate ​ ​ ​ ​ 15,681,346 ​ ​ ​ ​ ​ 14,992,946 ​ ​ ​ ​ ​ 1.79 % ​ ​ Energy: Oil & Gas ​ ​ ​ ​ 11,120,671 ​ ​ ​ ​ ​ 11,141,991 ​ ​ ​ ​ ​ 1.33 % ​ ​ Education ​ ​ ​ ​ 11,034,204 ​ ​ ​ ​ ​ 11,058,036 ​ ​ ​ ​ ​ 1.32 % ​ ​ Automotive ​ ​ ​ ​ 11,074,280 ​ ​ ​ ​ ​ 10,968,750 ​ ​ ​ ​ ​ 1.31 % ​ ​ Utilities: Oil & Gas ​ ​ ​ ​ 9,906,615 ​ ​ ​ ​ ​ 9,800,000 ​ ​ ​ ​ ​ 1.17 % ​ ​ Finance ​ ​ ​ ​ 2,507,199 ​ ​ ​ ​ ​ 3,330,796 ​ ​ ​ ​ ​ 0.40 % ​ ​ Hotel, Gaming, & Leisure ​ ​ ​ ​ — ​ ​ ​ ​ ​ 567,174 ​ ​ ​ ​ ​ 0.07 % ​ ​ Total ​ ​ ​ $ 853,845,723 ​ ​ ​ ​ $ 837,991,490 ​ ​ ​ ​ ​ 100.00 % ​ ​ 63 TABLE OF CONTENTS The following is a summary of industry concentration of our investment portfolio as of December 31, 2021: ​ ​ ​ Cost ​ ​ Fair Value ​ ​ % of Total Investments 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 March 31, 2022, our average portfolio company investment at amortized cost and fair value was approximately $10.9 million and $10.7 million, respectively, and our largest portfolio company investment at amortized cost and fair value was $21.3 million and $20.5 million, respectively. 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 March 31, 2022, 97% of our debt investments bore interest based on floating rates (subject to interest rate floors) and 3% bore interest at fixed rates. At December 31, 2021, 96% of our debt investments bore interest based on floating rates (subject to interest rate floors) and 4% bore interest at fixed rates. The weighted average yield on all of our debt investments as of both March 31, 2022 and December 31, 2021 was approximately 8.0%. The weighted average yield on all of our investments, including non-income producing equity positions, as of both March 31, 2022 and December 31, 2021 was approximately 7.5%. The weighted average yield was computed using the effective interest rates for all of our debt investments, including accretion of original issue discount. The weighted average yield of our debt investments is not the same as a return on investment for our stockholder, but rather relates to a portion of our investment portfolio and is calculated before the payment of all of our subsidiaries’ fees and expenses. 64 TABLE OF CONTENTS As of March 31, 2022 and December 31, 2021, we had cash and cash equivalents of $24.6 million and $44.2 million, respectively. Investment Activity During the three months ended March 31, 2022, we made an aggregate of $74.5 million of investments in six new portfolio company and seven existing portfolio companies. During the three months ended March 31, 2022, we received an aggregate of $10.0 million in proceeds from repayments of our investments. Our level of investment activity can vary substantially from period to period depending on many factors, including the amount of debt and equity capital to middle-market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make. Asset Quality In addition to various risk management and monitoring tools, Stellus Capital uses an investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in our portfolio. This investment rating system uses a five-level numeric scale. The following is a description of the conditions associated with each investment category: • 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. ​ ​ ​ ​ As of March 31, 2022 ​ ​ As of December 31, 2021 ​ ​ ​ ​ (dollars in millions) ​ ​ (dollars in millions) ​ Investment Category ​ ​ Fair Value ​ ​ % of Total Portfolio ​ ​ Number of Portfolio Companies ​ ​ Fair Value ​ ​ % of Total Portfolio ​ ​ Number of Portfolio Companies ​ 1 ​ ​ ​ $ 104.8 ​ ​ ​ ​ ​ 13 % ​ ​ ​ ​ ​ 15 ​ ​ ​ ​ $ 63.6 ​ ​ ​ ​ ​ 8 % ​ ​ ​ ​ ​ 12 ​ ​ 2 ​ ​ ​ ​ 609.3 ​ ​ ​ ​ ​ 73 % ​ ​ ​ ​ ​ 50 ​ ​ ​ ​ ​ 585.0 ​ ​ ​ ​ ​ 76 % ​ ​ ​ ​ ​ 48 ​ ​ 3 ​ ​ ​ ​ 118.6 ​ ​ ​ ​ ​ 14 % ​ ​ ​ ​ ​ 10 ​ ​ ​ ​ ​ 118.4 ​ ​ ​ ​ ​ 15 % ​ ​ ​ ​ ​ 10 ​ ​ 4 ​ ​ ​ ​ 3.7 ​ ​ ​ ​ ​ — % ​ ​ ​ ​ ​ 1 ​ ​ ​ ​ ​ 3.7 ​ ​ ​ ​ ​ 1 % ​ ​ ​ ​ ​ 1 ​ ​ 5 ​ ​ ​ ​ 1.6 ​ ​ ​ ​ ​ — % ​ ​ ​ ​ ​ 2 ​ ​ ​ ​ ​ 2.2 ​ ​ ​ ​ ​ — % ​ ​ ​ ​ ​ 2 ​ ​ Total ​ ​ ​ $ 838.0 ​ ​ ​ ​ ​ 100 % ​ ​ ​ ​ ​ 78 ​ ​ ​ ​ $ 772.9 ​ ​ ​ ​ ​ 100 % ​ ​ ​ ​ ​ 73 ​ ​ 65 TABLE OF CONTENTS Loans and Debt Securities on Non-Accrual Status We will not accrue interest on loans and debt securities if we have reason to doubt our ability to collect such interest. As of March 31, 2022, we had loans to three portfolio companies that were on non-accrual status which represented approximately 3.9% of our loan portfolio at cost and 0.7% at 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 March 31, 2022 and December 31, 2021, $11.4 million and $10.4 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 three months ended March 31, 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. Our debt investments typically have a term of five to seven years and bear interest at primarily at floating rates. Interest on our debt securities is generally payable quarterly. Payments of principal on our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments may pay interest in-kind, or PIK interest. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect that the total dollar amount of interest and any dividend income that we earn will increase as the size of our investment portfolio increases. In addition, we may generate revenue in the form of prepayment fees, commitment, loan origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees. The following shows the breakdown of investment income for the three months ended March 31, 2022 and 2021 (in millions). ​ ​ ​ Three months ended March 31, 2022 ​ ​ Three months ended March 31, 2021 ​ Interest income (1) ​ ​ ​ $ 14.8 ​ ​ ​ ​ $ 13.4 ​ ​ PIK interest ​ ​ ​ ​ 0.3 ​ ​ ​ ​ ​ 0.1 ​ ​ Miscellaneous fees (1) ​ ​ ​ ​ 0.4 ​ ​ ​ ​ ​ 0.5 ​ ​ Total ​ ​ ​ $ 15.5 ​ ​ ​ ​ $ 14.0 ​ ​ ​ (1) For the three months ended March 31, 2022, we recognized no non-recurring income related to early repayments and amendments to specific loan positions. For the three months ended March 31, 2021, we recognized $0.3 million of non-recurring income related to early repayments, and amendments to specific loan positions. ​ The increase in interest income from the respective periods was due primarily to growth in the overall investment portfolio. 66 TABLE OF CONTENTS Expenses Our primary operating expenses include the payment of fees to Stellus Capital under the investment advisory agreement, our allocable portion of overhead expenses under the administration agreement and other operating costs described below. We bear all other out-of-pocket costs and expenses of our operations and transactions, which may include: • 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; ​ • offerings of our commons 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’s overhead in performing its obligations under the administration agreement, including rent and the allocable portion of the cost of our chief financial officer and chief compliance officer and their respective staffs); ​ • transfer 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 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 in connection with administering our business. ​ 67 TABLE OF CONTENTS The following shows the breakdown of operating expenses for the three months ended March 31, 2022 and 2021 (in millions). ​ ​ ​ Three months ended March 31, 2022 ​ ​ Three months ended March 31, 2021 ​ Operating Expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Management fees ​ ​ ​ $ 3.5 ​ ​ ​ ​ $ 3.0 ​ ​ Valuation fees ​ ​ ​ ​ 0.1 ​ ​ ​ ​ ​ 0.1 ​ ​ Administrative services expenses ​ ​ ​ ​ 0.5 ​ ​ ​ ​ ​ 0.5 ​ ​ Capital gain incentive fee (reversal) expense ​ ​ ​ ​ (0.0 ) ​ ​ ​ ​ ​ 0.1 ​ ​ Professional fees ​ ​ ​ ​ 0.3 ​ ​ ​ ​ ​ 0.3 ​ ​ Directors’ fees ​ ​ ​ ​ 0.1 ​ ​ ​ ​ ​ 0.1 ​ ​ Insurance expense ​ ​ ​ ​ 0.1 ​ ​ ​ ​ ​ 0.1 ​ ​ Interest expense and other fees ​ ​ ​ ​ 4.9 ​ ​ ​ ​ ​ 4.3 ​ ​ Income tax expense ​ ​ ​ ​ 0.3 ​ ​ ​ ​ ​ 0.2 ​ ​ Other general and administrative ​ ​ ​ ​ 0.2 ​ ​ ​ ​ ​ 0.2 ​ ​ Total Operating Expenses ​ ​ ​ $ 10.0 ​ ​ ​ ​ $ 8.9 ​ ​ The increase in operating expenses for both the three months ended March 31, 2021 and 2021 was due to (1) higher interest expense as a result of higher outstanding balances on our SBA-guaranteed debentures and Notes and (2) higher management fees due to a larger investment portfolio. Net Investment Income For the three months ended March 31, 2022, net investment income was $5.5 million, or $0.28 per common share (based on 19,517,761 weighted average shares outstanding for the quarter ended March 31, 2022). For the three months ended March 31, 2021, net investment income was $5.1 million, or $0.26 per common share (based on 19,486,003 weighted average shares outstanding for the quarter ended March 31, 2021). The increase in net investment income over the respective periods was due to higher investment income as a result of a larger investment portfolio, offset by the increase in expenses as explained in the “Expenses” section above. Net Realized Gains and Losses We measure realized gains or losses by the difference between the net proceeds from the repayment, sale or other disposition and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized. Proceeds from repayments of investments and amortization of certain other investments for the three months ended March 31, 2022 totaled $10.0 million and net realized gain totaled $3.5 million. Proceeds from repayments of investments and amortization of certain other investments for the three months ended March 31, 2021 totaled $33.5 million and net realized gain totaled $0.5 million. Net Change in Unrealized Appreciation (Depreciation) of Investments Net change in unrealized appreciation (depreciation) primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded appreciation or depreciation when gains or losses are realized. Net change in unrealized (depreciation) appreciation on investments and cash equivalents for the three months ended March 31, 2022 and 2021 totaled ($3.7) million and $0.1 million, respectively. 68 TABLE OF CONTENTS The change in unrealized depreciation over the respective periods was due to the accounting reversal upon realization of one portfolio company and the widening of credit spreads and swap rates caused by the macro-economic environment which have been reflected in the valuation of our investments. Provision for Taxes on Unrealized Appreciation on Investments We have direct wholly owned subsidiaries that have elected to be taxable entities (the “Taxable Subsidiaries”). The Taxable Subsidiaries permit us to hold equity investments in portfolio companies which are “pass through” entities for U.S. federal income tax purposes and continue to comply with the “source income” requirements contained in RIC tax provisions of the Code. The Taxable Subsidiaries are not consolidated with us for U.S. federal income tax purposes and may generate U.S. federal income tax expense, benefit, and the related tax assets and liabilities, as a result of their ownership of certain portfolio investments. The U.S. federal income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in our consolidated financial statements. For the three months ended March 31, 2022 and 2021, we recognized a provision for income tax on unrealized investments of ($21.2) thousand and ($167.8) thousand for the Taxable Subsidiaries, respectively. As of March 31, 2022 and December 31, 2021, there was $130.1 thousand and $151.3 thousand of deferred tax asset on the Consolidated Statements of Assets and Liabilities. Net Increase in Net Assets Resulting from Operations For the three months ended March 31, 2022, net increase in net assets resulting from operations totaled $5.2 million, or $0.27 per common share (based on 19,517,761 weighted average shares outstanding for the quarter ended March 31, 2022). For the three months ended March 31, 2021, net increase in net assets resulting from operations totaled $4.9 million, or $0.25 per common share (based on 19,486,003 weighted average shares outstanding for the quarter ended March 31, 2021). The net increase in net assets between the respective periods was due to a larger amount of realized gains on investments and an increase in net investment income, offset by net unrealized depreciation. Financial condition, liquidity and capital resources Cash Flows from Operating and Financing Activities Our operating activities used net cash of $62.9 million for the three months ended March 31, 2022, primarily in connection with the purchase of portfolio investments, offset by sales and repayments of portfolio investments. Our financing activities for the three months ended March 31, 2022 provided cash of $43.4 million primarily from proceeds from SBA-guaranteed debentures and net borrowings on our Credit Facility. Our operating activities used net cash of $57.1 million for the three months ended March 31, 2021, primarily in connection with the purchase of portfolio investments, offset by sales and repayments of portfolio investments. Our financing activities for the three months ended March 31, 2021 provided cash of $69.0 due to the issuance of our 4.875% fixed-rate notes due 2026 (the “2026 Notes”) offset by the repayment of our 5.75% fixed-rate notes due 2022 (the “2022 Notes”) and net repayments on our Credit Facility. 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. 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. 69 TABLE OF CONTENTS Although we expect to fund the growth of our investment portfolio through the net proceeds from future public and private equity offerings and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act, our plans to raise capital may not be successful. In this regard, if our common stock trades at a price below our then-current net asset value per share, we may be limited in our ability to raise equity capital given that we cannot sell our common stock at a price below net asset value per share unless our stockholders approve such a sale and our Board makes certain determinations in connection therewith. A proposal, approved by our stockholders at our 2021 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 24, 2022, the one-year anniversary of our 2021 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 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 March 31, 2022 and December 31, 2021, our asset coverage ratio was 193% and 203%, respectively. The amount of leverage that we employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing, such as the maturity, covenant package and rate structure of the proposed borrowings, our ability to raise funds through the issuance of shares of our common stock and the risks of such borrowings within the context of our investment outlook. Ultimately, we only intend to use leverage if the expected returns from borrowing to make investments will exceed the cost of such borrowing. As of March 31, 2022 and December 31, 2021, we had cash and cash equivalents of $24.6 million and $44.2 million, respectively. 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 and February 28, 2022, with ZB, N.A., dba Amegy Bank and various other lenders (the “Credit Facility”). The Credit Facility, as amended and restated, provides for borrowings up to a maximum of $250.0 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 the Company’s election, on a per annum basis equal to (i) LIBOR 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) with a 0.25% LIBOR 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 3.0% floor), Federal Funds Rate plus 0.5% or one month LIBOR plus 1.0%. The Company pays unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility. Interest is payable monthly or quarterly in arrears. The commitment to fund the revolver expires on September 18, 2024, after which the Company may no longer borrow under the Credit Facility and must begin repaying principal equal to 1/12 of the aggregate amount outstanding under the Credit Facility each month. Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on September 18, 2025. 70 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 $10.0 million, including cash, liquid investments and undrawn availability, (ii) maintaining an asset coverage ratio of at least 1.67 to 1.0, and (iii) maintaining a minimum stockholder’s equity, and (iv) maintaining a minimum interest coverage ratio of at least 2.00 to 1.00. As of March 31, 2022, we were in compliance with these covenants. As of March 31, 2022 and December 31, 2021, $205.5 million and $177.3 million, respectively, was outstanding under the Credit Facility. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value. The fair values of the Credit Facility is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Credit Facility is estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. We incurred costs of $3.8 million in connection with the current Credit Facility, which are being amortized over the life of the facility. Additionally, $0.3 million of costs from a prior credit facility will continue to be amortized over the remaining life of the Credit Facility. As of March 31, 2022 and December 31, 2021, $1.8 million and $1.9 million of such prepaid loan structure fees and administration fees had yet to be amortized, respectively. These prepaid loan fees are presented on the Consolidated Statements of Assets and Liabilities as a deduction from the debt liability. Interest is paid quarterly in arrears. The following table summarizes the interest expense and amortized loan fees on the Credit Facility for the three months ended March 31, 2022 and 2021 (in millions): ​ ​ ​ For the three months ended ​ ​ ​ ​ March 31, 2022 ​ ​ March 31, 2021 ​ Interest expense ​ ​ ​ $ 1.4 ​ ​ ​ ​ $ 1.0 ​ ​ Loan fee amortization ​ ​ ​ ​ 0.1 ​ ​ ​ ​ ​ 0.1 ​ ​ Commitment fees on unused portion ​ ​ ​ ​ 0.1 ​ ​ ​ ​ ​ 0.1 ​ ​ Total interest and financing expenses ​ ​ ​ $ 1.6 ​ ​ ​ ​ $ 1.2 ​ ​ Weighted average interest rate ​ ​ ​ ​ 2.8 % ​ ​ ​ ​ ​ 2.8 % ​ ​ Effective interest rate (including fee amortization) ​ ​ ​ ​ 3.3 % ​ ​ ​ ​ ​ 3.5 % ​ ​ Average debt outstanding ​ ​ ​ $ 193.4 ​ ​ ​ ​ $ 140.7 ​ ​ Cash paid for interest and unused fees ​ ​ ​ $ 1.4 ​ ​ ​ ​ $ 1.0 ​ ​ SBA-Guaranteed Debentures Due to the SBIC subsidiaries’ status as licensed SBICs, we have the ability to issue debentures guaranteed by the SBA at favorable interest rates (“SBA-guaranteed debentures”). Under the regulations applicable to SBIC funds, a single licensee can have outstanding SBA-guaranteed debentures, subject to a regulatory leverage limit, up to two times the amount of regulatory capital. As of both March 31, 2022 and December 31, 2021, the SBIC subsidiary had $75.0 million in “regulatory capital”, as such term is defined by the SBA and $150.0 million of SBA-guaranteed debentures outstanding. As of March 31, 2022 and December 31, 2021, the SBIC II subsidiary had $87.5 million in regulatory capital, respectively, and $120.0 million and $100.0 million of SBA-guaranteed debentures outstanding, respectively. On August 12, 2014, we obtained exemptive relief from the SEC to permit us to exclude the debt of the SBIC subsidiaries guaranteed by the SBA from our 150% asset coverage test under the 1940 Act. The exemptive relief provides us with increased flexibility under the 150% asset coverage test by permitting us to borrow up to $325.0 million more than we would otherwise be able to absent the receipt of this exemptive relief. 71 TABLE OF CONTENTS On a stand-alone basis, the SBIC subsidiaries held $421.1 million and $403.3 million in assets at March 31, 2022 and December 31, 2021, respectively, which accounted for approximately 48.6% and 49.1% of our total consolidated assets, respectively. SBA-guaranteed debentures have fixed interest rates that equal prevailing 10-year U.S. Treasury Note rates plus a market spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the debentures is not required to be paid before maturity but may be pre-paid at any time with no prepayment penalty. SBA-guaranteed debentures drawn before October 1, 2019 incur upfront fees of 3.425%, which consists of a 1.00% commitment fee and a 2.425% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. SBA-guaranteed debentures drawn after October 1, 2019 incur upfront fees of 3.435%, which consists of a 1.00% commitment fee and a 2.435% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. Once pooled, which occurs in March and September of each applicable year, the SBA-guaranteed debentures bear interest at a fixed rate that is set to the current 10-year treasury rate plus a spread at each pooling date. As of March 31, 2022 and December 31, 2021, the carrying amount of the SBA-guaranteed debentures approximated their fair value. The fair values of the SBA-guaranteed debentures are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the SBA-guaranteed debentures is estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. At March 31, 2022 and December 31, 2021, the SBA-guaranteed debentures would be deemed to be Level 3, as defined in Note 6. As of March 31, 2022, we have incurred $9.8 million in financing costs related to the SBA-guaranteed debentures since the SBIC subsidiaries received their licenses, which were recorded as prepaid loan fees. As of March 31, 2022 and December 31, 2021, $5.6 and $5.4 million of prepaid financing costs had yet to be amortized, respectively. These prepaid loan fees are presented on the Consolidated Statements of Assets and Liabilities as a deduction from the debt liability. The following table summarizes the interest expense and amortized fees on the SBA-guaranteed debentures for the three months ended March 31, 2022 and 2021 (dollars in millions): ​ ​ ​ For the three months ended ​ ​ ​ ​ March 31, 2022 ​ ​ March 31, 2021 ​ Interest expense ​ ​ ​ $ 1.7 ​ ​ ​ ​ $ 1.4 ​ ​ Debenture fee amortization ​ ​ ​ ​ 0.3 ​ ​ ​ ​ ​ 0.2 ​ ​ Total interest and financing expenses ​ ​ ​ $ 2.0 ​ ​ ​ ​ $ 1.6 ​ ​ Weighted average interest rate ​ ​ ​ ​ 2.8 % ​ ​ ​ ​ ​ 3.0 % ​ ​ Effective interest rate (including fee amortization) ​ ​ ​ ​ 3.2 % ​ ​ ​ ​ ​ 3.5 % ​ ​ Average debt outstanding ​ ​ ​ $ 254.2 ​ ​ ​ ​ $ 190.2 ​ ​ Cash paid for interest ​ ​ ​ $ 3.4 ​ ​ ​ ​ $ 2.7 ​ ​ 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”). On September 8, 2017, we issued an additional $6.38 million in aggregate principal amount of the 2022 Notes pursuant to a full exercise of the underwriters’ overallotment option. On January 13, 2021, we 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. We redeemed all $48.875 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. As a result of the redemption, we recognized a loss 72 TABLE OF CONTENTS on debt extinguishment of $0.5 million due to the write off of the remaining deferred financing costs on the 2022 Notes. This loss is included in the Consolidated Statements of Operations for the three months ended March 31, 2021. The following table summarizes the interest expense and deferred financing costs on the 2022 Notes for the three months ended 2021: ​ ​ ​ For the three months ended March 31, 2021 ​ Interest expense ​ ​ ​ $ 0.3 ​ ​ Deferred financing costs ​ ​ ​ ​ 0.1 ​ ​ Total interest and financing expenses ​ ​ ​ $ 0.4 ​ ​ Loss on extinguishment of debt (1) ​ ​ ​ ​ 0.5 ​ ​ Weighted average interest rate (2) ​ ​ ​ ​ 5.7 ​ ​ Effective interest rate (including fee amortization) (2) ​ ​ ​ ​ 6.4 ​ ​ Average debt outstanding (3) ​ ​ ​ $ 48.9 ​ ​ Cash paid for interest ​ ​ ​ $ 0.5 ​ ​ ​ (1) The loss on debt extinguishment is not included in interest expense or net investment income ​ (2) Excludes the loss on debt extinguishment ​ (3) For the three months ended March 31, 2021, the average is calculated for the period January 1, 2021 through February 12, 2021; the repayment date of the 2022 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 the net proceeds from this offering to fully redeem the 2022 Notes and repay a portion of the amount outstanding under the Credit Facility. As of both March 31, 2022 and December 31, 2021, the aggregate carrying amount of the 2026 Notes were approximately $100.0 million. 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, 2020, the fair value of the 2022 Notes was $49.2 million. The carrying value of the 2026 Notes approximates fair value. In connection with the issuance of the 2026 Notes, we have incurred $2.3 million of fees which are being amortized over the term of the 2026 Notes, of which $1.8 million and $1.9 million remains to be amortized as of March 31, 2022 and December 31, 2021, respectively. These financing costs are presented on the Consolidated Statements of Assets and Liabilities as a deduction from the debt liability. The following table summarizes the interest expense and deferred financing costs on the 2026 Notes for the three and three months ended March 31, 2022 and 2021 (dollars in millions): ​ ​ ​ For the three months ended ​ ​ ​ ​ March 31, 2022 ​ ​ March 31, 2021 ​ Interest expense ​ ​ ​ $ 1.2 ​ ​ ​ ​ $ 1.0 ​ ​ Deferred financing costs ​ ​ ​ ​ 0.1 ​ ​ ​ ​ ​ 0.1 ​ ​ Total interest and financing expenses ​ ​ ​ $ 1.3 ​ ​ ​ ​ $ 1.1 ​ ​ Weighted average interest rate ​ ​ ​ ​ 4.9 % ​ ​ ​ ​ ​ 4.9 % ​ ​ Effective interest rate (including fee amortization) ​ ​ ​ ​ 5.4 % ​ ​ ​ ​ ​ 5.4 % ​ ​ Average debt outstanding ​ ​ ​ $ 100.0 ​ ​ ​ ​ $ 100.0 ​ ​ Cash paid for interest ​ ​ ​ $ 2.4 ​ ​ ​ ​ $ — ​ ​ 73 TABLE OF CONTENTS Off-Balance Sheet Arrangements We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of March 31, 2022 and December 31, 2021, our off-balance sheet arrangements consisted of $34.2 million and $30.7 million, respectively, of unfunded commitments to provide debt and equity financings to 38 and 32 of our portfolio companies, respectively. As of March 31, 2022, we had sufficient liquidity to fund such unfunded commitments (through cash on hand and available borrowings under the Credit Facility) should the need arise. Regulated Investment Company Status and Dividends We have elected, have qualified, and intend to qualify annually to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code. So long as we maintain our qualification as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders as dividends on a timely basis. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Distributions declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital. To qualify for RIC tax treatment, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). If we maintain our qualification as a RIC, we must also satisfy certain distribution requirements each calendar year in order to avoid a federal excise tax on our undistributed earnings of a RIC. As of December 31, 2021, we had $25,182,518 of undistributed taxable income that will be carried forward toward distributions paid during the year ending December 31, 2022. We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, the covenants contained in the Credit Facility may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement. In addition, we may retain for investment some or all of our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividends for that fiscal year, a portion of those dividend distributions may be deemed a return of capital to our stockholders. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a business development company under the 1940 Act and due to provisions in Credit Facility. We cannot assure stockholders that they will receive any distributions or distributions at a particular level. In accordance with certain applicable U.S. Treasury regulations and private letter rulings issued by the Internal Revenue Service (the “IRS”), a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a pro rata amount of cash (with the 74 TABLE OF CONTENTS balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our stock in accordance with these U.S. Treasury regulations or private letter rulings. However, we continue to monitor the Company’s liquidity position and the overall economy and will continue to assess whether it would be in our and our shareholders best interest to take advantage of the IRS rulings. Recent Accounting Pronouncements See Note 1 to the consolidated financial statements contained herein for a description of recent accounting pronouncements, if any, including the expected dates of adoption and the anticipated impact on the financial statements. 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 April 1, 2022, the Company invested $0.1 million in the first lien term loan and committed $0.1 million in the unfunded revolver of Cancos Tile & Stone LLC, a regional distributor, seller, and custom fabricator of high-end ceramic and stone tile products and accessories. Additionally, the Company invested $0.1 million in the equity of the company. On April 1, 2022, the Company invested $0.1 million in the first lien term loan and committed $0.1 million in the unfunded revolver of Tilley Chemical Company, Inc., a distributor of specialty chemicals, oils, and lubricants into the food & beverage, lubricants, flavor and fragrances, personal care, and other chemicals end-markets. On April 4, 2022, the Company invested $11.3 million in the first lien term loan and committed $0.1 million in the unfunded revolver of Microbe Formulas, LLC, A provider of dietary supplements and other natural solutions for detox and gut health. On April 7, 2022, the Company received full repayment of its equity in Energy Labs Holding Corp., with total proceeds of $1.3 million, resulting in a realized gain of $0.7 million. On April 15, 2022, the Company invested an incremental $6.6 million in the first lien term loan of Anne Lewis Strategies, LLC, an existing portfolio company. On April 15, 2022, the Company invested an incremental $0.1 million in the equity of Pure TopCo, LLC, an existing portfolio company. On April 25, 2022 we received full repayment on the first lien term loan of SQAD, LLC for total proceeds of $14.1 million. We also received full repayment on the equity of SQAD Holdco, Inc., a subsidiary of SQAD, LLC, for total proceeds of $2.4 million, resulting in a realized gain of $2.1 million. On April 29, 2022, we invested $10.0 million in the first lien term loan and committed $0.1 million in the revolver and $0.1 million in the delayed draw term loan of Florachem Holdings, LLC, a distiller and supplier of natural citrus, pine, and specialty inputs. Additionally, we invested $0.4 million in the equity of the company. Credit Facility The outstanding balance under the Credit Facility as of May 11, 2022 was $204.1 million. 75 TABLE OF CONTENTS ​ ATM Program Since March 31, 2022, the Company issued 13,416 shares under the ATM Program, for gross proceeds of $0.2 million and underwriting and other expenses of less than $0.1 million. The average per share offering price of shares issued in the ATM Program subsequent to March 31, 2022 was $14.01. The Advisor agreed to reimburse the Company for underwriting fees and expenses to the extent the issuance of shares would be dilutive in nature. As such, the Advisor reimbursed the Company less than $0.1 which resulted in net proceeds of $0.2 million, or $14.61 per share. SBA-guaranteed Debentures The total balance of SBA-guaranteed debentures outstanding as of May 11, 2022 was $290.0 million. Dividend Declared On April 19, 2022, the Board declared a regular monthly dividend for each of April 2022, May 2022 and June 2022 as follows: Declared ​ ​ Ex-Dividend Date ​ ​ Record Date ​ ​ Payment Date ​ ​ Amount per Share ​ 4/19/2022 ​ ​ ​ ​ 4/28/2022 ​ ​ ​ ​ ​ 4/29/2022 ​ ​ ​ ​ ​ 5/13/2022 ​ ​ ​ ​ $ 0.0933 ​ ​ 4/19/2022 ​ ​ ​ ​ 5/26/2022 ​ ​ ​ ​ ​ 5/27/2022 ​ ​ ​ ​ ​ 6/15/2022 ​ ​ ​ ​ $ 0.0933 ​ ​ 4/19/2022 ​ ​ ​ ​ 6/29/2022 ​ ​ ​ ​ ​ 6/30/2022 ​ ​ ​ ​ ​ 7/15/2022 ​ ​ ​ ​ $ 0.0933 ​ ​ On April 19, 2022, the Board declared a supplemental monthly dividend for each of April 2022, May 2022 and June 2022 as follows: Declared ​ ​ Ex-Dividend Date ​ ​ Record Date ​ ​ Payment Date ​ ​ Amount per Share ​ 4/19/2022 ​ ​ ​ ​ 4/28/2022 ​ ​ ​ ​ ​ 4/29/2022 ​ ​ ​ ​ ​ 5/13/2022 ​ ​ ​ ​ $ 0.02 ​ ​ 4/19/2022 ​ ​ ​ ​ 5/26/2022 ​ ​ ​ ​ ​ 5/27/2022 ​ ​ ​ ​ ​ 6/15/2022 ​ ​ ​ ​ $ 0.02 ​ ​ 4/19/2022 ​ ​ ​ ​ 6/29/2022 ​ ​ ​ ​ ​ 6/30/2022 ​ ​ ​ ​ ​ 7/15/2022 ​ ​ ​ ​ $ 0.02 ​ ​