STELLUS CAPITAL INVESTMENT CORPORATION 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
? the dependence of our future success on the general economy and its effect on
the industries in which we invest;
the impact of interest rate volatility, including the decommissioning of
? Interbank Offered Rate ("LIBOR") and rising interest rates, on our business and
our portfolio companies;
? the ability of our portfolio companies to achieve their objectives;
? the use of borrowed money to finance a portion of our investments;
? the adequacy of our financing sources and working capital;
? the timing of cash flows, if any, from the operations of our portfolio
companies;
? the ability of
and to monitor and administer our investments;
? the ability of
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 orSEC rule or regulation. You are advised to consult any additional 75
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disclosures that we may make directly to you or through reports that we in the future may file with theSEC , 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
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 Management . 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 relevantSEC 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 inthe 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 ofDecember 31, 2022 , we were in compliance with the RIC requirements. As a RIC, we generally will not be subject toU.S. federal income tax on any income we distribute to our stockholders. OnMarch 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. OnApril 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%, effectiveJune 29, 2018 , which effectively increased the amount of leverage we may incur. As ofDecember 31, 2022 , our asset coverage ratio was 192%. 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
The effect on theU.S. and global economy of the ongoing pandemic caused by the novel coronavirus, SARS-CoV-2 (also referred to as "COVID-19" or "Coronavirus", uncertainty relating to new variants of the Coronavirus that have emerged inthe United States and globally, vaccine distribution, hesitancy and efficacy, the length of economic recovery, and policies of theU.S. presidential administration have created stress on the market and could affect our portfolio companies. 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 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 76 Table of Contents
may have a material adverse impact on our future net investment income, the fair value of our portfolio investments and our financial condition.
Economic Developments
Economic activity has continued to accelerate across sectors and regions. Nonetheless, we have observed and continue to observe supply chain interruptions, labor resource shortages, commodity inflation, rising interest rates, economic sanctions in response to international conflicts and instances of geopolitical, economic and financial market instability inthe United States and abroad. One or more of these factors may contribute to increased market volatility and may have long- and short-term effects inthe United States and worldwide financial markets.
Portfolio Composition and Investment Activity
Portfolio Composition
We originate and invest primarily in privately-held middle-market companies (typically those with$5.0 million to$50.0 million of EBITDA (earnings before interest, taxes, depreciation and amortization)) through first lien (including unitranche), second lien, and unsecured debt financing, often times with a corresponding equity investment. As ofDecember 31, 2022 , we had$844.7 million (at fair value) invested in 85 companies. As ofDecember 31, 2022 , our portfolio included approximately 87% of first lien debt (including unitranche investments), 5% of second lien debt, 1% of unsecured debt and 7% of equity investments at fair value. The composition of our investments at cost and fair value as ofDecember 31, 2022 was as follows: Cost Fair Value Senior Secured - First Lien(1)$ 750,527,999 $ 735,555,508 Senior Secured - Second Lien 69,989,477 45,304,300 Unsecured Debt 5,657,964 4,823,898 Equity 49,647,737 59,049,932 Total Investments$ 875,823,177 $ 844,733,638
Includes unitranche investments, which account for 3.1% of our portfolio at
fair value. Unitranche structures may combine characteristics of first lien (1) 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 ofDecember 31, 2021 , we had$772.9 million (at fair value) invested in 73 companies. As ofDecember 31, 2021 , our portfolio included approximately 84% of first lien debt (including unitranche investments), 7% of second lien debt, 1% of unsecured debt and 8% of equity investments at fair value. The composition of our investments at cost and fair value as ofDecember 31, 2021 was as follows: Cost Fair Value Senior Secured - First Lien(1)$ 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
Includes unitranche investments, which account for 1.6% of our portfolio at
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.
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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 ofDecember 31, 2022 andDecember 31, 2021 , we had unfunded commitments of$27.8 million and$31.0 million , respectively, to provide debt financing for 52 and 32 portfolio companies, respectively. As ofDecember 31, 2022 , we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility (as defined below)) to fund such unfunded commitments should the need arise.
The following is a summary of geographical concentration of our investment
portfolio as of
% of Total
Cost Fair Value Investments
Texas $ 191,422,143 $ 171,165,597 20.26 %
California 167,833,384 165,340,017 19.57 %
Florida 60,593,839 59,421,775 7.03 %
Illinois 64,421,998 53,218,615 6.30 %
Arizona 43,129,283 44,277,625 5.24 %
Pennsylvania 42,899,504 41,889,344 4.96 %
Ohio 34,223,452 37,333,236 4.42 %
Washington 28,978,375 28,480,471 3.37 %
New Jersey 25,395,054 25,140,343 2.98 %
Wisconsin 27,533,402 24,271,761 2.87 %
District of Columbia 17,236,556 21,124,347 2.50 %
Georgia 10,919,642 19,692,757 2.33 %
South Carolina 19,089,373 18,654,782 2.21 %
Maryland 16,824,077 16,576,554 1.96 %
Minnesota 16,972,086 15,952,072 1.89 %
United Kingdom 20,530,087 14,445,481 1.71 %
Colorado 15,204,934 14,295,470 1.69 %
Indiana 14,346,082 14,245,432 1.69 %
Canada 13,333,737 13,266,669 1.57 %
North Carolina 10,461,551 10,649,232 1.26 %
Massachusetts 10,215,356 10,527,659 1.25 %
Idaho 9,873,093 9,863,103 1.17 %
Missouri 9,142,111 9,656,287 1.14 %
New York 5,096,152 5,096,008 0.61 %
Michigan 147,906 149,001 0.02 %
$ 875,823,177 $ 844,733,638 100.00 %
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The following is a summary of geographical concentration of our investment
portfolio as of
% of Total
Investments
Cost Fair Value at fair value
California $ 153,793,390 $ 157,446,299 20.37 %
Texas 161,550,893 142,657,160 18.46 %
Illinois 69,780,236 71,066,882 9.20 %
Pennsylvania 42,866,707 42,604,002 5.51 %
Washington 41,067,458 40,790,941 5.28 %
Ohio 36,551,789 38,218,517 4.94 %
Arizona 31,165,320 31,117,284 4.03 %
New York 25,161,998 27,334,823 3.54 %
Wisconsin 25,880,018 25,893,643 3.35 %
New Jersey 25,518,474 23,548,670 3.05 %
United Kingdom 21,320,828 19,537,231 2.53 %
Georgia 11,066,059 19,045,442 2.46 %
Maryland 16,838,603 16,974,999 2.20 %
Minnesota 15,922,220 15,688,073 2.03 %
Colorado 15,151,135 14,980,283 1.94 %
South Carolina 13,270,660 13,270,530 1.71 %
Canada 13,418,371 13,265,324 1.71 %
Florida 12,966,130 13,220,344 1.71 %
District of Columbia 11,798,134 13,137,892 1.70 %
Missouri 9,871,933 10,600,866 1.37 %
North Carolina 10,503,957 10,360,521 1.34 %
Massachusetts 10,281,055 10,348,341 1.34 %
Puerto Rico 8,760,589 1,149,047 0.15 %
Virginia 500,000 616,212 0.08 %
$ 785,005,957 $ 772,873,326 100.00 %
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The following is a summary of industry concentration of our investment portfolio
as of December 31, 2022 :
% of Total
Cost Fair Value Investments
Services: Business $ 207,234,534 $ 218,866,572 25.91 %Healthcare & Pharmaceuticals 86,469,854 88,103,319 10.43 % Media: Advertising, Printing & Publishing 52,830,447 52,525,839 6.22 % Consumer Goods: Non-Durable 54,683,102 51,280,593
6.07 %
Consumer Goods: Durable 45,601,928 44,529,176 5.27 %
Aerospace & Defense 48,137,394 39,526,086 4.68 %
Software 37,582,855 37,975,255 4.50 %
Capital Equipment 33,538,647 33,801,951 4.00 %
Beverage, Food, & Tobacco 34,000,918 32,755,054 3.88 %
Construction & Building 26,948,135 26,406,849 3.13 %
Environmental Industries 27,771,798 26,247,936 3.11 %
Services: Consumer 43,302,101 24,616,706 2.92 %Media: Broadcasting & Subscription 18,615,052 21,445,307 2.54 % Chemicals, Plastics, & Rubber 18,487,206 17,903,999
2.12 %
Transportation & Logistics 16,768,763 17,161,972 2.03 %
Metals & Mining 16,708,750 16,464,001 1.95 %Containers, Packaging, & Glass 17,436,600 13,977,250
1.65 %
Retail 13,303,536 13,217,256 1.56 %
High Tech Industries 14,126,954 12,648,347 1.50 %
Automotive 11,252,581 11,342,751 1.34 %
Education 11,057,921 10,498,760 1.24 %
Utilities: Oil & Gas 9,921,469 9,800,000 1.16 %
Energy: Oil & Gas 7,314,230 7,355,074 0.87 %
FIRE: Real Estate 15,642,093 5,866,397 0.69 %Media: Diversified & Production 5,517,409 5,534,710
0.66 %
Finance 1,568,900 4,082,579 0.48 %
Hotel, Gaming, & Leisure - 799,899 0.09 %
Total $ 875,823,177 $ 844,733,638 100.00 %
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The following is a summary of industry concentration of our investment portfolio
as of December 31, 2021 :
% of Total
Investments
Cost Fair Value at fair value
Services: Business $ 167,253,835 $ 177,242,299 22.93 %
Healthcare & Pharmaceuticals 104,933,428 99,584,343 12.89 %
Aerospace & Defense 66,503,939 63,467,579 8.21 %
Media: Advertising, Printing & Publishing 53,136,718 51,125,659 6.62 %
Media: Broadcasting & Subscription 39,319,912 42,892,137 5.55 %
Consumer Goods: Durable 36,216,806 36,537,445 4.73 %
Beverage, Food, & Tobacco 34,089,805 33,791,047 4.37 %
Consumer Goods: Non-Durable 30,597,444 29,447,632 3.81 %
Construction & Building 27,333,360 27,282,504 3.53 %
Environmental Industries 26,826,229 26,355,789 3.41 %
Software 21,498,947 23,841,617 3.08 %
Services: Consumer 40,034,415 22,682,119 2.93 %
Transportation & Logistics 18,583,797 18,934,004 2.45 %
Containers, Packaging, & Glass 17,557,212 17,710,907 2.29 %
Metals & Mining 16,838,603 16,974,999 2.20 %
FIRE: Real Estate 15,694,701 15,824,998 2.05 %
Chemicals, Plastics, & Rubber 14,638,210 14,288,322 1.85 %
Education 11,053,167 11,053,167 1.43 %
Automotive 11,064,612 10,800,000 1.40 %
Energy: Oil & Gas 11,098,912 10,461,417 1.35 %
Utilities: Oil & Gas 9,901,900 9,800,000 1.27 %
Capital Equipment 8,322,806 8,182,736 1.06 %
Finance 2,507,199 4,108,356 0.53 %
Hotel, Gaming, & Leisure - 484,250 0.06 %
$ 785,005,957 $ 772,873,326 100.00 %
AtDecember 31, 2022 , our average portfolio company investment at amortized cost and fair value was approximately$10.3 million and$9.9 million , respectively, and our largest portfolio company investment at amortized cost and fair value was approximately$20.4 million and$21.1 million , respectively. AtDecember 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. AtDecember 31, 2022 , 97% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR or SOFR, and 3% bore interest at fixed rates. AtDecember 31, 2021 , 96% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 4% bore interest at fixed rates. The weighted average yield on all of our debt investments as ofDecember 31, 2022 andDecember 31, 2021 was approximately 11.1% and 8.0%, respectively. The weighted average yield on all of our investments, including non-income producing equity positions, as ofDecember 31, 2022 andDecember 31, 2021 was approximately 10.4% and 7.5%, respectively. The weighted average yield was computed using the effective interest rates for all of our debt investments, including accretion of original issue discount. The weighted average yield 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 ofDecember 31, 2022 andDecember 31, 2021 , we had cash and cash equivalents of$48.0 million and$44.2 million , respectively, the majority of which was
held
in our SBIC subsidiaries.
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Investment Activity
During the year ended December 31, 2022 , we made $211.0 million of investments
in 22 new portfolio companies and 28 existing portfolio companies. During
the year ended December 31, 2022 , we received an aggregate of $127.5 million in
proceeds from repayments of our investments.
During the year ended
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 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.
As of December 31, 2022 As of December 31, 2021
(dollars in millions) (dollars in millions)
Number of Number of
% of Total Portfolio % of Total PortfolioInvestment Category Fair Value Portfolio Companies
Fair Value Portfolio Companies 1$ 146.6 17 % 17$ 63.6 8 % 12 2 553.2 66 % 52 585.0 76 % 48 3 120.7 14 % 13 118.4 15 % 10 4 18.3 2 % 2 3.7 1 % 1 5 5.9 1 % 1 2.2 - % 2 Total$ 844.7 100 % 85$ 772.9 100 % 73 82 Table of Contents
We will not accrue interest on loans and debt securities if we have reason to doubt our ability to collect such interest. As ofDecember 31, 2022 , we had loans to three portfolio companies that were on non-accrual status, which represented approximately 5.2% of our loan portfolio at cost and 2.3% at fair value. As ofDecember 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 ofDecember 31, 2022 andDecember 31, 2021 ,$4.8 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 Years ended
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.
The following shows the breakdown of investment income for the years ended
For the years ended
December 31, 2022 December 31, 2021 December 31, 2020
Interest income(1) $ 70.8 $ 60.7 $ 54.7
PIK interest 1.4 0.9 0.7
Miscellaneous fees(1) 2.9 2.1 1.3
Total $ 75.1 $ 63.7 $ 56.7
For the years ended
million,
previously reserved income from a prior period, and amendments to specific
loan positions.
The increase in interest income from the year endedDecember 31, 2021 to the year endedDecember 31, 2022 was due primarily to growth in the overall investment portfolio and rising interest rates. The increase in interest income from the year endedDecember 31, 2020 to the year endedDecember 31, 2021 was due primarily to a growth within the overall investment portfolio. 83 Table of Contents Expenses Our primary operating expenses include the payment of fees toStellus 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;
? valuing our assets and calculating our net asset value (including the cost and
expenses of any independent valuation firm);
fees and expenses payable to third parties, including agents, consultants or
other advisors, in monitoring financial and legal affairs for us and in
? monitoring our investments and performing due diligence on our prospective
portfolio companies or otherwise relating to, or associated with, evaluating
and making investments;
? interest payable on debt, if any, incurred to finance our investments and
expenses related to unsuccessful portfolio acquisition efforts;
? base management and incentive fees;
administration fees and expenses, if any, payable under the Administration
Agreement (including our allocable portion of
? 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;
?
? all costs of registration and listing our securities on any securities
exchange;
?
? independent directors' fees and expenses;
? costs of preparing and filing reports or other documents required by the
other regulators;
? costs of any reports, proxy statements or other notices to stockholders,
including printing costs;
? costs and fees associated with any fidelity bond, directors and officers/errors
and omissions liability insurance, and any other insurance premiums;
direct costs and expenses of administration, including printing, mailing, long
? distance telephone, copying, secretarial and other staff, independent auditors
and outside legal costs;
? proxy voting expenses; and
? all other expenses incurred by us or
with administering our business.
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The following shows the breakdown of operating expenses for the years ended
For the years ended
December 31, 2022 December 31, 2021 December 31, 2020
Operating Expenses
Management fees $ 14.8 $ 13.2 $ 11.1
Valuation fees 0.3 0.3 0.3Administrative services expenses 1.8 1.8 1.8 Income incentive fees 3.8 3.0 2.5 Capital gains incentive (reversal) fee (2.8)
2.9 (0.4)
Professional fees 1.1 1.1 1.0
Directors' fees 0.3 0.3 0.4
Insurance expense 0.5 0.5 0.3Interest expense and other fees 24.5 18.7 16.0 Income tax expense 1.2 1.1 0.8 Other general and administrative expenses 1.0
1.0 0.9
Total Operating Expenses $ 46.5 $ 43.9 $ 34.7
The increase in operating expenses for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 was due to (1) higher interest expense as a result of higher outstanding balances on our SBA-guaranteed debentures and 2026 Notes, as well as rising interest rates, (2) higher management fees due to a larger investment portfolio and (3) higher incentive fees due to portfolio performance. The increase in operating expenses for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 was due to (1) higher interest expense as a result of higher outstanding balances on our SBA-guaranteed debentures and 2026 Notes, (2) higher management fees due to a larger investment portfolio and (3) higher incentive fees due
to portfolio performance. Net Investment Income For the year endedDecember 31, 2022 , net investment income was$28.6 million , or$1.46 per common share based on 19,552,931 weighted-average common shares outstanding. For the year endedDecember 31, 2021 , net investment income was$19.8 million , or$1.01 per common share based on 19,489,750 weighted-average common shares outstanding. For the year endedDecember 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. Net investment income for the year endedDecember 31, 2022 increased compared to the year endedDecember 31, 2021 as a result of growth in the overall investment portfolio and rising interest rates, offset by higher operating expenses as explained in the "Expenses" section above. Net investment income for the year endedDecember 31, 2021 decreased compared to the year endedDecember 31, 2020 as a result of higher operating 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 year endedDecember 31, 2022 totaled$127.5 million and net realized gains totaled$3.7 million . Proceeds from repayments of investments and amortization of certain other investments for the year endedDecember 31, 2021 totaled$287.6 million and net realized losses totaled$23.7 million . Proceeds from the sales and repayments of investments and amortization of certain other investments for the year endedDecember 31, 2020 totaled$128.6 million and net realized losses totaled$(10.1) million . Net realized gains during the year endedDecember 31, 2022 resulted primarily by gains from the 85
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realization of our equity investments in certain portfolio companies, offset by dispositions of loans in our portfolio. Net realized gains during the year endedDecember 31, 2021 resulted primarily by gains from the realization of our equity investments in certain portfolio companies. Net realized losses during the year endedDecember 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 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 year endedDecember 31, 2022 , 2021, and 2020 totaled($17.5) million ,($6.9) million , and$8.6 million , respectively. The change in unrealized depreciation in 2022 was primarily due to write downs on specific investments. The change in unrealized depreciation in 2021 was primarily due to realizations on equity investments previously written up. The change in unrealized appreciation in 2020 was primarily due to portfolio company specific performance on several of our equity investments.
Provision for Taxes on Unrealized Appreciation on Investments
We have direct wholly owned subsidiaries that have elected to be treated as corporations forU.S. federal income tax purposes (the "Taxable Subsidiaries"), and as a result, the income of the Taxable Subsidiaries is subject toU.S. federal income tax at corporate rates. The Taxable Subsidiaries permit us to hold equity investments in portfolio companies which are "pass through" entities forU.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 forU.S. federal income tax purposes and may generateU.S. federal income tax expense, benefit, and the related tax assets and liabilities, as a result of their ownership of certain portfolio investments. TheU.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 endedDecember 31, 2022 , 2021 and 2020, we recognized a deferred tax (provision) benefit related to unrealized appreciation on certain equity investments for income tax at our Taxable Subsidiaries of approximately($213.2) thousand ,$510.9 thousand , and($224.9) thousand , respectively. For the year endedDecember 31, 2021 , we recognized tax expense related gains realized on certain equity investments held at our taxable subsidiaries of$3.0 million . There was no such tax expense for the years endedDecember 31, 2022 and 2020. As ofDecember 31, 2021 , a tax liability related to the taxes on realized gains of$2.4 million was included on the Consolidated Statement of Assets and Liabilities. As ofDecember 31, 2022 and 2020, no tax liability related to the taxes on realized gains were included on the Consolidated Statement of Assets and Liabilities. As ofDecember 31, 2022 a deferred tax liability of$61.9 thousand , along with a deferred tax asset of$151.3 thousand as ofDecember 31, 2021 was included in Consolidated Statement of Assets and Liabilities.
Net Increase in Net Assets Resulting from Operations
Net increase in net assets resulting from operations totaled$14.5 million , or$0.74 per common share based on weighted-average shares of 19,552,931 outstanding for the year endedDecember 31, 2022 , as compared to$33.6 million , or$1.72 per common share based on weighted-average shares of 19,489,750 outstanding for the year endedDecember 31, 2021 , as compared to$20.2 million , or$1.04 per common share based on weighted-average shares of 19,471,500 outstanding for the year endedDecember 31, 2020 .
The net decrease in net assets resulting from operations for the year ended
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net assets resulting from operations for the year ended
Financial condition, liquidity and capital resources
Cash Flows from Operating and Financing Activities
Our operating activities used net cash of
Our operating activities used net cash of
Our operating activities used net cash of$3.5 million for the year endedDecember 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, due to the COVID-19 pandemic. Our financing activities for the year endedDecember 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.
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. 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 2022 annual stockholders meeting, authorizes us to sell up to 25% of our outstanding common shares at a price equal to or below the then current net asset value per share in one or more offerings. This authorization will expire on the earlier ofJune 23, 2023 , the one-year anniversary of our 2022 annual stockholders meeting, or our 2023 annual stockholders meeting. We would need similar future approval from our stockholders to issue shares below the then current net asset value per share any time after the expiration of the current approval. 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% effectiveJune 29, 2018 (at least 200% prior toJune 29, 2018 ). This requirement limits the amount that we may borrow. We have received exemptive relief from theSEC to permit us to exclude the debt of the SBIC subsidiaries guaranteed by the SBA from the definition of senior securities in 87
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the asset coverage test under the 1940 Act. We were in compliance with the asset coverage ratios at all times. As ofDecember 31, 2022 andDecember 31, 2021 , our asset coverage ratio was 192% 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 ofDecember 31, 2022 andDecember 31, 2021 , we had cash and cash equivalents of$48.0 million and$44.2 million , respectively.
Credit Facility
OnOctober 11, 2017 , the Company entered into a senior secured revolving credit agreement, as amended, dated as ofOctober 10, 2017 , that was amended and restated onDecember 21, 2021 ,February 28, 2022 andMay 13, 2022 , with Zions Bancorporation, N.A., dbaAmegy Bank and various other lenders (the "Credit Facility"). The Credit Facility, as amended and restated, provides for borrowings up to a maximum of$265.0 million on a committed basis with an accordion feature that allows us to increase the aggregate commitments up to$280.0 million , subject to new or existing lenders agreeing to participate in the increase and other customary conditions. Pursuant to the Third Amendment and Commitment Increase to Amended and Restated Senior Secured Revolving Credit Agreement the Credit Facility will bear interest, subject to the Company's election, on a per annum basis equal to (i) term SOFR plus 2.50% (or 2.75% during certain periods in which the Company's asset coverage ratio is equal to or below 1.90 to 1.00) plus a SOFR credit spread adjustment (0.10% for one-month term SOFR and 0.15% for three-month term SOFR), with a 0.25% SOFR floor, or (ii) 1.50% (or 1.75% during certain periods in which the Company's asset coverage ratio is equal to or below 1.90 to 1.00) plus an alternate base rate based on the highest of the prime rate (subject to a 3% floor), Federal Funds Rate plus 0.50% and one month term SOFR plus 1.00%. 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 onSeptember 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, onSeptember 18, 2025 . Our obligations to the lenders are secured by a first priority security interest in our portfolio of securities and cash not held at the SBIC subsidiaries, but excluding short term investments. The Credit Facility contains certain covenants, including but not limited to: (i) maintaining a minimum liquidity test of at least$10,000,000 , including cash, liquid investments and undrawn availability, (ii) maintaining an asset coverage ratio of at least 1.67 to 1.00, (iii) maintaining a minimum stockholder's equity, and (iv) maintaining a minimum interest coverage ratio of at least 2.00 to 1.00. As ofDecember 31, 2022 , we were in compliance with these covenants. As ofDecember 31, 2022 andDecember 31, 2021 , the outstanding balance under the Credit Facility was$199.2 million and$177.3 million , respectively. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value. The fair value of the Credit Facility is determined in accordance with Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurements and Disclosures ("ASC 820"), which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Credit Facility is estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. We have incurred costs of$4.0 million in connection with the current Credit Facility, which were capitalized and are being amortized over the life of the facility. Additionally,$0.3 million of costs from a prior credit facility will continue to be amortized over the life of the Credit Facility. As ofDecember 31, 2022 and 2021,$1.5 million and$1.9 million of such prepaid loan structure fees and administration fees had yet to be amortized, respectively. These prepaid loan fees are presented on our consolidated statement of assets and liabilities as a deduction from the debt liability attributable to the Credit Facility. 88
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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
For the years ended
December 31, 2022 December 31, 2021 December 31, 2020
Interest expense $ 9.2 $ 5.2 $ 6.1
Loan fee amortization 0.6 0.6 0.6Total interest and financing expenses $ 9.8 $ 5.8 $ 6.7 Weighted average interest rate 4.4 % 2.8 % 3.2 % Effective interest rate (including fee amortization) 4.8 % 3.3 % 3.7 % Average debt outstanding $ 204.3 $ 176.9 $ 181.9 Cash paid for interest and unused fees $ 9.0 $
5.3 $ 6.3
SBA-guaranteed debentures
Due to the SBIC subsidiaries' status as licensed SBICs, we can issue debentures
guaranteed by the SBA at favorable interest rates ("SBA-guaranteed debentures").
Under the regulations applicable to SBIC funds, a single licensee can have
outstanding SBA-guaranteed debentures, subject to a regulatory leverage limit,
up to two times the amount of regulatory capital. As of both December 31, 2022
and 2021, the SBIC I subsidiary had $75.0 million in "regulatory capital", as
such term is defined by the SBA.
As of both
OnAugust 12, 2014 , we obtained exemptive relief from theSEC 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
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 ofDecember 31, 2022 and 2021, the SBIC subsidiaries had$313.6 million and$250.0 of the SBA-guaranteed debentures outstanding, respectively. SBA-guaranteed debentures drawn beforeOctober 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 afterOctober 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 ofDecember 31, 2022 and 2021, 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. AtDecember 31, 2022 and 2021, the SBA-guaranteed debentures would be deemed to be Level 3, as defined in Note 6.
As of
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December 31, 2022 and 2021,$5.7 million and$5.4 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 endedDecember 31, 2022 , 2021, and 2020 (dollars in millions): For the years ended December 31, 2022 December 31, 2021 December 31, 2020 Interest expense $ 8.2 $ 6.4 $ 5.4
Debenture fee amortization 1.2 1.1 0.7 Total interest and financing expenses $ 9.4 $ 7.5 $ 6.1 Weighted average interest rate 2.8 % 2.8 % 3.3 % Effective interest rate (including fee amortization) 3.3 % 3.3 % 3.8 % Average debt outstanding $ 288.2 $ 227.8 $ 161.6 Cash paid for interest $ 7.4 $ 5.9 $ 5.3 Notes Offering
OnAugust 21, 2017 , the Company issued$42.5 million in aggregate principal amount of 5.75% fixed-rate notes dueSeptember 15, 2022 (the "2022 Notes"). OnSeptember 8, 2017 , the Company issued an additional$6.4 million in aggregate principal amount of the 2022 Notes pursuant to a full exercise of the underwriters' overallotment option. OnJanuary 13, 2021 , the Company caused notices to be issued to the holders of its 2022 Notes regarding the Company's exercise of its option to redeem all of the issued and outstanding 2022 Notes, pursuant to the Second Supplemental Indenture dated as ofAugust 21, 2017 , between the Company andU.S. Bank National Association , as trustee. The Company redeemed all$48.9 million in aggregate principal amount of the 2022 Notes onFebruary 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, the Company recognized a loss 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 Statement of Operations for the year endedDecember 31, 2022 . The following table summarizes the interest expense and deferred financing costs on the 2022 Notes for the years endedDecember 31, 2021 and 2020 (in millions): For the years ended December 31, 2021 December 31, 2020 Interest expense $ 0.3 $ 2.8 Deferred financing costs 0.1 0.3 Total interest and financing expenses $ 0.4 $ 3.1 Loss on extinguishment of debt(1) 0.5 - Weighted average interest rate(2) 5.7 % 5.7 % Effective interest rate (including fee amortization)(2) 6.4 % 6.4 % Average debt outstanding(3) $ 48.9 $ 48.9 Cash paid for interest $ 0.5 $ 2.8
(1) The loss on debt extinguishment is not included in interest expense or net
investment income
(2) Excludes the loss on debt extinguishment
For the year ended
2022 Notes
OnJanuary 14, 2021 , the Company issued$100.0 million in aggregate principal amount of 4.875% fixed-rate notes due 2026 (the "2026 Notes"). The 2026 Notes will mature onMarch 30, 2026 and may be redeemed in whole or in part at any time or from time to time at our option on or afterDecember 31, 2025 at a redemption price equal to 100% of the 90
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outstanding principal, plus accrued and unpaid interest. Interest on the 2026
Notes is payable semi-annually beginning
The Company used the net proceeds from the 2026 Notes offering to fully redeem the 2022 Notes and repay a portion of the amount outstanding under the Credit Facility. As ofDecember 31, 2022 , the aggregate carrying amount of the 2026 Notes was approximately$100.0 million . Prior to their redemption onFebruary 12, 2021 , the 2022 Notes were listed onNew York Stock Exchange under the trading symbol "SCA". As ofDecember 31, 2021 , the fair value of the 2022 Notes was$49.2 million . The 2026 Notes are institutional, non-traded notes. The 2026 Notes are carried at cost, which approximates fair value. In connection with the issuance and maintenance of the 2026 Notes, the Company incurred$2.3 million of fees, which are being amortized over the term of the 2026 Notes. As ofDecember 31, 2022 andDecember 31, 2021 $1.5 million and$1.9 million remains to be amortized, 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 2026 years ended
For the years ended
December 31, 2022 December 31, 2021
Interest expense $ 4.9 $ 4.7
Deferred financing costs 0.4 0.4Total interest and financing expenses $ 5.3 $
5.1
Weighted average interest rate 4.9 % 4.9 % Effective interest rate (including fee amortization) 5.3 % 5.3 % Average debt outstanding $ 100.0 $ 100.0(1) Cash paid for interest $ 4.9 $ 3.5
(1) Calculated for the period from
Contractual Obligations
2028 and
Total 2023 2024 2025 2026 2027 thereafter
(in millions)
Credit Facility payable $ 199.2 $ - $ 33.2 $ 166.0 $ - $ - $ -
Notes payable 100.0 - - - 100.0 - -
SBA-guaranteed debentures 313.6 - - 26.0 39.0 - 248.6
Total $ 612.8 $ - $ 33.2 $ 192.0 $ 139.0 $ - $ 248.6 Off-Balance Sheet Arrangements
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As ofDecember 31, 2022 , our only off-balance sheet arrangements consisted of$27.5 of unfunded commitments to provide debt financing to 52 existing portfolio companies and$0.3 in unfunded equity commitments to one existing portfolio company. As ofDecember 31, 2021 , our only off-balance sheet arrangements consisted of$30.7 million of unfunded commitments to provide debt financing to 32 existing portfolio companies and$0.3 in unfunded equity commitments to one existing portfolio company. As ofDecember 31, 2022 , we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded commitments should the need arise. 91
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Regulated Investment Company Status and Dividends
We have elected, qualified, and intend to continue to qualify annually to be treated forU.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 subject toU.S. federal income tax on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders as dividends on a timely basis. 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 to avoid aU.S. federal excise tax on our undistributed earnings of a RIC. As ofDecember 31, 2022 , we had$28.6 million of undistributed taxable income that will be carried forward toward distributions paid during the year endingDecember 31, 2023 . We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). 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 applicableU.S. Treasury regulations and private letter rulings issued by the Internal Revenue Service (the "IRS"), a publicly offered 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. If these and certain other requirements are met, forU.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 theseU.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 stockholders' best interest to take advantage of theIRS rulings. 92
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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.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles ("GAAP"). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ materially. For a description of our critical accounting policies, see Note 1 "Summary of Significant Accounting Policies" to our consolidated financial statements included in this report. We consider the most significant accounting policies to be those related to our Valuation of Portfolio Investments and Revenue Recognition.
Investment Portfolio Valuation
The most significant determination inherent in the preparation of our consolidated financial statements is the valuation of our investment portfolio and the related amounts of unrealized appreciation and depreciation. We consider this determination to be a critical accounting estimate, given the significant judgments and subjective measurements required. As of bothDecember 31, 2022 and 2021, our investment portfolio valued at fair value represented approximately 94% of our total assets. We are required to report our investments at fair value. We follow the provisions of ASC 820. ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires us to assume that the portfolio investment is to be sold in the principal market to independent market participants, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal market that are independent, knowledgeable and willing and able to transact. See Note 1 to the Consolidated Financial Statements contained herein for a detailed discussion of our investment portfolio valuation process and procedures. Due to the inherent uncertainty in the valuation process, our determination of fair value for our investment portfolio may differ materially from the values that would have been determined had a ready market for the securities existed. In addition, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned. We determine the fair value of each individual investment and record changes in fair value as unrealized appreciation or depreciation.
We believe our investment portfolio as of
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Subsequent Events
Investment Portfolio
The Company invested in the following portfolio companies subsequent to December
31, 2022 :
Activity Type Date Company Name Company Description Investment Amount Instrument Type
Add-On Investment January GP ABX Holdings Manufacturer of high $ 35,308 Equity
5, 2023 Partnership, L.P.* barrier forming web
films
New Investment January Evriholder Designer and supplier of $ 13,000,000 Senior Secured - First Lien
23, 2023 Acquisition, Inc. impulse products and
merchandising solutions
to retailers.
$ 873,333 Equity
$ 100,000 Revolver commitment
New Investment January Red's All Natural, Premium frozen food $ 10,916,882 Senior Secured - First Lien 31, 2023 LLC manufacturer $ 710,600 Equity
* Existing portfolio company
Credit Facility
The outstanding balance under the Credit Facility as of
SBA-guaranteed Debentures
The outstanding balance under SBA-guaranteed debentures as of
Dividend Declared
On
Ex-Dividend Record Payment Amount per
Declared Date Date Date Share
1/11/2023 1/30/2023 1/31/2023 2/15/2023 $ 0.1333
1/11/2023 2/27/2023 2/28/2023 3/15/2023 $ 0.1333
1/11/2023 3/30/2023 3/31/2023 4/14/2023 $ 0.1333 © Edgar Online, source
