STELLUS CAPITAL INVESTMENT CORPORATION 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 our 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 " 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
monitor and administer our investments;
• the ability of
professionals;
• our ability to maintain our qualification as a RIC and as a BDC; and
• the effect of future changes in laws or regulations (including the
interpretation of these laws and regulations by regulatory authorities) and
conditions in our operating areas, particularly with respect to business development companies 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 orSecurities 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 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 business development company ("BDC") under
the Investment Company Act of 1940 Act, as amended (the "1940 Act"). Our
investment activities are managed by our investment adviser, Stellus Capital .
58
As a BDC, we are required to comply with certain regulatory requirements. For
instance, as a BDC, we may not acquire any assets other than "qualifying assets"
specified in the 1940 Act unless, at the time the acquisition is made, at least
70% of our total assets are qualifying assets. Qualifying assets include
investments in "eligible portfolio companies." Under the relevant SEC rules, the
term "eligible portfolio company" includes all private operating companies,
operating companies whose securities are not listed on a national securities
exchange, and certain public operating companies that have listed their
securities on a national securities exchange and have a market capitalization of
less than $250 million , in each case organized and with their principal of
business in the United States .
We have elected to be treated for U.S. federal tax purposes as a RIC under
Subchapter M of the Code and intend to operate in a manner to qualify annually
for a tax treatment applicable to RICs. To maintain our qualification as a RIC,
we must, among other things, meet certain source-of-income and asset
diversification requirements. As of June 30, 2021 , 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.
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 Investment Company Act of 1940, as amended (the 1940 Act)) of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. At our 2018 annual meeting of stockholders our stockholders also approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the asset coverage ratio applicable to us was decreased from 200% to 150%, effectiveJune 29, 2018 . As ofJune 30, 2021 , our asset coverage ratio was 194%. 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 OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a pandemic and recommended containment and mitigation measures worldwide. The COVID-19 pandemic has had a significant impact on theU.S. and global economy. Each portfolio company has been assessed on an individual basis to identify the impact of the COVID-19 pandemic on the valuation of our investments in such company. We believe that any such COVID-19 pandemic impacts have been reflected in the valuation of our investments. The global impact of the outbreak continues to evolve, and many countries have reacted by instituting quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues. Businesses are also implementing similar precautionary measures. Such measures, as well as the general uncertainty surrounding the dangers and impact of the COVID-19 pandemic, have created significant disruption in supply chains and economic activity. While several countries, as well as certain states inthe United States , have begun to lift public health restrictions with the view to reopening their economies, recurring COVID-19 outbreaks have led to the re-introduction of such restrictions in certain states inthe United States and globally and could continue to lead to the re-introduction of such restrictions elsewhere.The Federal Food and Drug Administration authorized vaccines produced for emergency use starting inDecember 2020 , and such vaccines have been distributed nationally; however, it remains unclear how quickly the vaccines will continue to be be distributed nationwide and globally or when "herd immunity" will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. The delay in distributing the vaccines could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, theU.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 inthe United States and other major markets. As COVID-19 continues to spread, the potential impacts, including a global, regional, or other economic recession, remain uncertain and difficult to assess. The extent of the impact of the COVID-19 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. 59 Economic outlookThe Federal Food and Drug Administration authorized vaccines produced for emergency use starting inDecember 2020 , it remains unclear how quickly the vaccines will be distributed nationwide and globally or when "herd immunity" will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. The delay in distributing the vaccines could lead people to continue to self- isolate and not participate in the economy at pre-pandemic levels for a prolonged period. The COVID-19 pandemic could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The COVID-19 pandemic presents material uncertainty and risks with respect to the underlying value of our portfolio companies and with respect to our business, financial condition, results of operations, and cash flows, such as the potential negative impact to financing arrangements, increased costs of operations, changes in law and/or regulation, and uncertainty regarding government and regulatory policy. Operations The partners and employees ofStellus Capital , our advisor, have been primarily operating remotely sinceMarch 16, 2020 without disruption toStellus Capital's operations and such partners and employees are prepared to continue working remotely as long as is necessary for the health and safety of all personnel. Our COVID-19 response
Since the onset of the COVID-19 pandemic, we have been in regular contact with all of our portfolio companies and/or their sponsors to assess among other things their ability to function in the new environment. Discussions have addressed the portfolio companies' liquidity position, expected covenant compliance, and the health of their workforce and customers.
Financial impact
We will continue to closely monitor the financial condition of our portfolio companies as part of our efforts to mitigate the impact of the COVID-19 pandemic. Historical information may be relatively less significant.
Portfolio Composition and Investment Activity
Portfolio Composition
We originate and invest primarily in privately-held middle-market companies (typically those with$5.0 million to$50.0 million of EBITDA (earnings before interest, taxes, depreciation and amortization)) through first lien (including unitranche), second lien, and unsecured debt financing, often times with a corresponding equity investment. As ofJune 30, 2021 , we had$781.9 million (at fair value) invested in 76 portfolio companies. As ofJune 30, 2021 , our portfolio included approximately 83% of first lien debt, 7% of second lien debt, 2% of unsecured debt and 8% of equity investments at fair value. The composition of our investments at cost and fair value as ofJune 30, 2021 was as follows: Cost Fair Value Senior Secured - First Lien(1)$ 645,480,178 $ 643,634,506 Senior Secured - Second Lien 79,753,388 58,223,942 Unsecured Debt 18,607,346 18,776,716 Equity 41,523,671 61,312,808 Total Investments$ 785,364,583 $ 781,947,972 (1) Includes unitranche investments, which account for 11.1% 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 "second-out" and "last-out" tranche. 60
As ofDecember 31, 2020 , we had$653.4 million (at fair value) invested in 66 portfolio companies. As ofDecember 31, 2020 , our portfolio included approximately 78% of first lien debt, 11% of second lien debt, 3% of unsecured debt and 8% of equity investments at fair value. The composition of our investments at cost and fair value as ofDecember 31, 2020 was as follows: Cost Fair Value Senior Secured - First Lien(1)$ 508,060,059 $ 508,673,064 Senior Secured - Second Lien 93,636,285 70,720,186 Unsecured Debt 22,212,888 21,191,245 Equity 34,719,734 52,840,000 Total Investments$ 658,628,966 $ 653,424,495 (1) Includes unitranche investments, which account for 13.0% of our portfolio atDecember 31, 2020 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 ofJune 30, 2021 andDecember 31, 2020 , we had unfunded commitments of$25.7 million and$28.9 million , respectively, to provide debt financing for 27 and 19 portfolio companies, respectively. As ofJune 30, 2021 , we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded commitments should the need arise. 61
The following is a summary of geographical concentration of our investment portfolio as of
% of Total
Investments at
Cost Fair Value Fair Value
Texas $ 151,322,626 $ 134,514,015 17.20 %
California 122,068,171 127,950,320 16.33 %
Illinois 62,435,020 63,020,976 8.06 %
Arizona 50,776,511 52,525,678 6.72 %
New Jersey 38,156,032 36,094,463 4.62 %
Ohio 33,512,002 35,079,739 4.49 %
Canada 34,842,810 34,997,850 4.48 %
Pennsylvania 24,666,871 24,624,063 3.15 %
Washington 22,796,827 22,933,726 2.93 %
Wisconsin 22,643,018 22,923,812 2.93 %
New York 18,932,074 20,400,342 2.61 %
United Kingdom 21,295,341 19,928,875 2.55 %
Washington, D.C. 18,988,139 19,274,808 2.46 %
South Carolina 15,860,738 18,822,490 2.41 %
Indiana 17,716,890 17,905,067 2.29 %
Georgia 11,313,756 17,718,756 2.27 %
Maryland 16,904,135 17,062,500 2.18 %
Minnesota 15,817,831 15,795,987 2.02 %
Colorado 15,213,977 15,213,780 1.95 %
Florida 13,676,822 13,958,409 1.79 %
Alabama 12,208,387 12,250,938 1.57 %
Missouri 9,914,154 10,670,000 1.36 %
North Carolina 10,536,326 10,555,500 1.35 %
Virginia 7,339,579 7,628,133 0.98 %
Tennessee 4,495,893 4,515,959 0.58 %
Puerto Rico 8,613,244 2,161,786 0.28 %
New Hampshire 2,000,000 2,000,000 0.26 %
Massachusetts 1,317,406 1,010,000 0.13 %
Utah - 410,000 0.05 %
$ 785,364,583 $ 781,947,972 100.00 %
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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
Texas $ 151,640,862 $ 135,146,776 20.67 %
California 86,050,467 92,069,851 14.09 %
Illinois 57,330,756 57,535,404 8.81 %
Arizona 50,822,139 52,015,600 7.96 %
New Jersey 38,228,359 37,765,139 5.78 %
Ohio 34,109,657 35,827,682 5.48 %
Wisconsin 22,721,856 22,827,500 3.49 %
Canada 21,318,659 21,540,925 3.30 %
New York 19,527,594 20,547,579 3.14 %
Tennessee 19,832,576 19,959,613 3.05 %
United Kingdom 20,159,650 18,727,500 2.87 %
South Carolina 15,834,471 18,132,490 2.78 %
Indiana 17,741,889 18,026,339 2.76 %
Maryland 16,970,057 17,064,250 2.61 %
Florida 12,404,739 12,299,545 1.88 %
Alabama 12,252,768 12,252,768 1.88 %
Washington 11,803,768 11,801,363 1.81 %
Missouri 9,956,554 10,720,000 1.64 %
Pennsylvania 9,884,148 9,900,000 1.52 %
Virginia 7,505,287 7,759,020 1.19 %
Washington, D.C. 6,937,907 7,030,512 1.08 %
Georgia 685,000 6,420,000 0.98 %
North Carolina 4,979,153 2,925,000 0.45 %
Puerto Rico 8,613,244 2,589,639 0.40 %
Massachusetts 1,317,406 1,780,000 0.27 %
Utah - 760,000 0.11 %
$ 658,628,966 $ 653,424,495 100.00 %
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The following is a summary of industry concentration of our investment portfolio as of
% of Total
Investments
Cost Fair Value at Fair Value
Services: Business $ 173,203,423 $ 181,431,116 23.20 %
Healthcare & Pharmaceuticals 116,579,225 113,216,595 14.49 %
Aerospace & Defense 81,792,450 79,972,148 10.23 %
Beverage, Food, & Tobacco 38,768,477 39,261,594 5.02 %
Capital Equipment 33,626,974 34,892,494 4.46 %Media: Broadcasting & Subscription 31,329,792
34,591,632 4.42 %
High Tech Industries 33,590,096 33,791,862 4.32 %
Consumer Goods: Durable 29,032,088 29,389,177 3.76 %
Services: Consumer 37,999,312 22,255,186 2.85 %
Education 21,427,380 21,611,213 2.76 %Media: Advertising, Printing & Publishing 21,224,545 18,999,209 2.43 % Retail 15,860,738 18,822,490 2.41 % Containers, Packaging, & Glass 17,791,339
18,011,313 2.30 %
Transportation & Logistics 17,892,480 17,985,003 2.30 %
Metals & Mining 16,904,135 17,062,500 2.18 %
Software 14,309,117 16,115,500 2.06 %Chemicals, Plastics, & Rubber 14,721,687
14,811,598 1.89 %
Consumer goods: non-durable 13,421,886 13,103,197 1.68 %
Automotive 11,045,942 11,025,000 1.41 %
Construction & Building 10,628,756 10,628,756 1.36 %
Environmental Industries 10,759,753 10,190,000 1.30 %
Utilities: Oil & Gas 9,892,808 9,850,000 1.26 %
Energy: Oil & Gas 11,054,984 9,540,390 1.22 %
Finance 2,507,196 5,350,000 0.68 %
Hotel, Gaming, & Leisure - 40,000 0.01 %
$ 785,364,583 $ 781,947,972 100.00 %
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The following is a summary of industry concentration of our investment portfolio as of
% of Total
Investments
Cost Fair Value at fair value
Services: Business $ 102,005,864 $ 109,873,364 16.81 %
Healthcare & Pharmaceuticals 87,198,279 82,945,887 12.69 %
Aerospace & Defense 53,615,886 52,184,338 7.99 %
Beverage, Food, & Tobacco 39,339,090 41,012,620 6.28 %Media: Broadcasting & Subscription 31,889,423
34,418,869 5.27 %
High Tech Industries 33,571,427 33,793,693 5.17 %
Consumer Goods: Durable 27,802,124 27,780,032 4.25 %
Environmental Industries 25,454,549 24,977,427 3.82 %
Education 26,428,607 24,494,108 3.75 %
Services: Consumer 38,026,487 22,600,924 3.46 %Media: Advertising, Printing & Publishing 21,903,057
21,348,217 3.27 %
Capital Equipment 20,005,255 20,680,904 3.17 %
Finance 18,016,762 19,435,000 2.97 %
Transportation & Logistics 18,690,276 18,944,945 2.90 %
Retail 15,834,471 18,132,490 2.78 %Containers, Packaging, & Glass 17,853,813
17,890,000 2.74 %
Metals & Mining 16,970,057 17,064,250 2.61 %
Consumer goods: non-durable 13,272,383 12,930,000 1.98 %
Automotive 11,028,125 11,028,125 1.69 %
Construction & Building 10,446,055 10,750,000 1.65 %
Energy: Oil & Gas 11,015,013 9,991,177 1.53 %
Utilities: Oil & Gas 9,884,148 9,900,000 1.52 %Chemicals, Plastics, & Rubber 6,605,024
6,808,125 1.04 %
Software 1,772,791 4,430,000 0.66 %
Hotel, Gaming, & Leisure - 10,000 - %
$ 658,628,966 $ 653,424,495 100.00 %
At June 30, 2021 , our average portfolio company investment at both amortized
cost and fair value was approximately $10.3 million , and our largest portfolio
company investment at amortized cost and fair value was $21.4 million and $21.6
million , respectively. At December 31, 2020 , our average portfolio company
investment at amortized cost and fair value was approximately $10.0 million and
$9.9 million , respectively, and our largest portfolio company investment at
amortized cost and fair value was approximately $21.4 million and $21.6 million ,
respectively.
At June 30, 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. At December 31, 2020 , 93% of our debt investments bore interest
based on floating rates (subject to interest rate floors), such as LIBOR, and 7%
bore interest at fixed rates.
The weighted average yield on all of our debt investments as of June 30, 2021
and December 31, 2020 was 8.2% and 8.3%, respectively. The weighted average
yield on all of our investments, including non-income producing equity
positions, investments as of June 30, 2021 and December 31, 2020 was
approximately 7.8% and 7.9%, 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
stockholder, but, rather relates to a portion of our investment portfolio and is
calculated before the payment of all of our and our subsidiaries' fees and
expenses.
As of
Investment Activity
During the six months ended
65
Our level of investment activity can vary substantially from period to period
depending on many factors, including the amount of debt and equity capital
required by 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 investment 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 withinexpectations 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 belowexpectations 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 increasedsubstantially 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 June 30, 2021 As of December 31, 2020
(dollars in millions) (dollars in millions)
Number of Number of
% of Total Portfolio % of Total Portfolio
Investment Category Fair Value Portfolio Companies Fair Value Portfolio Companies
1 $ 145.6 19 % 16 $ 87.3 14 % 12
2 551.5 70 % 51 496.5 76 % 45
3 76.6 10 % 6 61.3 9 % 6
4 3.7 0 % 1 - - % -
5 4.5 1 % 2 8.3 1 % 3
Total $ 781.9 100 % 76 $ 653.4 100 % 66
We will not accrue interest on loans and debt securities if we have reason to doubt our ability to collect such interest. As ofJune 30, 2021 , we had four loans on non-accrual status, which represented approximately 4.2% of our loan portfolio at cost and 1.1% at fair value. As ofDecember 31, 2020 , we had three loans on non-accrual status that represented approximately 4.3% of our loan portfolio at cost and 1.0% at fair value. As ofJune 30, 2021 andDecember 31, 2020 ,$8.4 million and$7.1 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. 66
Comparison of the Three Months and Six Months EndedJune 30, 2021 and 2020
Revenues
We generate revenue in the form of interest income on debt investments and capital gains and distributions, if any, on investment securities that we may acquire in portfolio companies. 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 three and six
months ended
Three months ended Six months ended
June 30, June 30,
(dollars in millions) (dollars in millions)
2021 2020 2021 2020
Interest income(1) $ 13.9 $ 12.9 $ 26.5 $ 26.3
PIK interest 0.2 - 0.4 0.6Miscellaneous fees(1) 1.0 0.9 2.2
2.2 Total$ 15.1 $ 13.8 $ 29.1 $ 29.1
(1) For the three and six months ended
and
repayments, and amendments to specific loan positions. For the three and six
months ended
respectively, of non-recurring income related to early repayments, amendments
to specific loan positions, and the recognition of previously reserved income
from a prior period.
The increase in total income for three months ended
For the six months ended
Expenses Our primary operating expenses include the payment of fees toStellus 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; • 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;
67
• 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
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 paying agent and custodial fees and expenses;
•U.S. federal and state registration fees;
• all costs of registration and listing our securities on any securities exchange;
•U.S. federal, state and local taxes; • independent directors' fees and expenses;
• costs of preparing and filing reports or other documents required by the
SEC or other regulators;
• costs of distributing any reports, proxy statements or other notices to
stockholders, including printing costs;
• costs and fees associated with any fidelity bond, directors andofficers/errors and omissions liability insurance, and any other insurance
premiums;
• direct costs and expenses of administration, including printing, mailing,
long distance telephone, copying, secretarial and other staff, independent
auditors and outside legal costs;
• proxy voting expenses; and
• all other expenses incurred by us or Stellus Capital in connection with
administering our business.
The following shows the breakdown of operating expenses for the three and six
months ended
Three months ended Six months ended
June 30, June 30,
(dollars in millions) (dollars in millions)
2021 2020 2021 2020
Operating Expenses
Management fees $ 3.3 $ 2.7 $ 6.2 $ 5.5
Valuation Fees - - 0.2 0.1Administrative services expenses 0.5 0.4
0.9 0.9 Income incentive fees 0.1 0.2 0.1 1.5 Capital gain incentive fees - - 0.1 (0.9 ) Professional fees 0.2 0.2 0.5 0.5 Directors' fees 0.1 0.1 0.2 0.2 Insurance expense 0.1 0.1 0.2 0.2
Interest expense and other fees 4.7 4.1 9.0 8.4 Income tax expense 0.3 0.3 0.5 0.5 Other general and administrative 0.3 0.3
0.6 0.5 Total Operating Expenses$ 9.6 $ 8.4 $ 18.5 $ 17.4 The increase in operating expenses for the three months endedJune 30 , 2021and six months endedJune 30, 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. This increase was offset for the three months endedJune 30, 2021 by lower income incentive fees from growing net assets, making it more challenge to get through the hurdle. See Note 2 for further discussion on incentive fees. Net Investment Income
For the three months ended
68
For the three months ended
For the six months endedJune 30, 2021 , net investment income was$10.6 million , or$0.54 per common share (based on 19,486,003 weighted-average common shares outstanding atJune 30, 2021 ). For the six months endedJune 30, 2020 , net investment income was$11.7 million , or$0.60 per common share (based on 19,456,849 weighted-average common shares outstanding atJune 30, 2020 ).
Net investment income for the three and six months ended
Net Realized Gains and Losses
We measure realized gains or losses by the difference between the net proceeds from the repayment, sale or disposition and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized.
Repayments and sales of investments and amortization of other certain investments for the three months endedJune 30, 2021 totaled$24.8 million , and net realized losses totaled($1.8) million , primarily attributable to the loss after the restructuring of one specific investment. Repayments and sales of investments and amortization of other certain investments for the three months endedJune 30, 2020 totaled$10.5 million , and net realized losses totaled($3.9) million , primarily attributable to loss on conversion of debt from a specific investment. Repayments and sales of investments and amortization of other certain investments for the six months endedJune 30, 2021 totaled$56.0 million , and net realized losses totaled($1.3) million , primarily attributable to the loss after the restructuring of one specific investment. Repayments and sales of investments and amortization of other certain investments for the six months endedJune 30, 2020 totaled$42.3 million , and net realized losses totaled($2.6) million primarily attributable to realizations of our equity investments in a few portfolio companies and a loss on conversion of debt from a specific investment.
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 appreciation on investments and cash equivalents for the three months endedJune 30, 2021 and 2020 totaled$1.7 million and$38.3 million , respectively. Net change in unrealized appreciation (depreciation) on investments and cash equivalents for the six months endedJune 30, 2021 and 2020 totaled$1.8 million and($13.2) million , respectively.
The change in unrealized appreciation for the three and six months ended
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 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. The income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in our consolidated financial statements. For the three months endedJune 30, 2021 and 2020, we recognized a benefit (provision) for income tax on unrealized investments of$187.7 thousand and($58.9) thousand , respectively, for the Taxable Subsidiaries. For the six months endedJune 30, 2021 and 2020, we recognized a benefit (provision) for income tax on unrealized investments of$19.9 thousand and($30.0) thousand , respectively. As ofJune 30, 2021 andDecember 31, 2020 , there was a deferred tax liability of$339.7 thousand and$359.6 thousand on the Consolidated Statement of Assets
and
Liabilities, respectively.
69
Net Increase in Net Assets Resulting from Operations
For the three months ended
For the three months ended
For the six months ended
For the six months endedJune 30, 2020 , net decrease in net assets resulting from operations totaled($4.1) million , or ($0.21 ) per common share (based on 19,456,849 weighted-average common shares outstanding atJune 30, 2020 ).
The increase in net assets resulting from operations for the three months ended
The increase to net assets resulting from operations for the six months ended
Financial condition, liquidity and capital resources
Cash Flows from Operating and Financing Activities
Our operating activities used net cash of($114.5) million for the six months endedJune 30, 2021 , primarily in connection with the purchase and origination of new portfolio investments, some of which was offset by repayment of portfolio investments. Our financing activities for the six months endedJune 30, 2021 provided cash of$114.7 million 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"), issuance of additional SBA-guaranteed debentures, and net repayments on our Credit Facility. Our operating activities used net cash of$12.4 million for the six months endedJune 30, 2020 , primarily in connection with the purchase and origination of new portfolio investments, some of which was offset by the sales and repayments on our investments. Our financing activities for the six months endedJune 30, 2020 provided cash of$19.5 million due net borrowings under 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. 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 onJune 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. 70
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 28, 2018 ). This requirement limits the amount that we may borrow. We have received exemptive relief from theSEC to permit us to exclude the debt ofStellus Capital SBIC, LP ("SBIC subsidiary") andStellus Capital SBIC II, LP ("SBIC II subsidiary") (together, "the SBIC subsidiaries") guaranteed by theSmall 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 ofJune 30, 2021 andDecember 31, 2020 , our asset coverage ratio was 194% and 223%, 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 ofJune 30, 2021 andDecember 31, 2020 , we had cash and cash equivalents of$18.6 million and$18.5 million , respectively. Cash held within the SBIC subsidiaries is generally restricted to the origination of new SBIC-eligible loans and the payment of SBA debentures, related interest expense and fund-expenses. Distributions from positive retained earnings available for distribution are made to the BDC as provided in the SBICs' limited partnership agreements. Credit Facility OnOctober 11, 2017 , we entered a senior secured revolving credit agreement, dated as ofOctober 10, 2017 , as amended, that was amended and restated onSeptember 18, 2020 withZB, 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$230.0 million on a committed basis with an accordion feature that allows us to increase the aggregate commitments up to$280.0 million , subject to new or existing lenders agreeing to participate in the increase and other customary conditions. Borrowings under the Credit Facility bear interest, subject to our election, on a per annum basis equal to (i) LIBOR plus 2.50% (or 2.75% during certain periods in which our asset coverage ratio is equal to or below 1.90 to 1.00) with a 0.25% LIBOR floor, or (ii) 1.50% (or 1.75% during certain periods in which our asset coverage ratio is equal to or below 1.90 to 1.00) plus an alternate base rate based on the highest of the Prime Rate (subject to a 3% floor), Federal Funds Rate plus 0.5% or one month LIBOR plus 1.0%. We pay unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility. Interest is payable monthly or quarterly in arrears. The commitment to fund the revolver expires onSeptember 18, 2024 , after which we may no longer borrow under the Credit Facility and must begin repaying principal equal to 1/12 of the aggregate amount outstanding under the Credit Facility 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 1.0, (iii) maintaining a minimum shareholder's equity, and (iv) maintaining a minimum interest coverage ratio of at least 2.00 to 1.00. As ofJune 30, 2021 , we were in compliance with these covenants. As ofJune 30, 2021 andDecember 31, 2020 , the outstanding balance under the Credit Facility was$192.6 million and$174.0 million , respectively. 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 Accounting Standards Codification ("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$3.6 million in connection with the 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 ofJune 30, 2021 andDecember 31, 2020 ,$2.0 million and$2.3 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. 71
Interest is payable monthly or quarterly in arrears. The following table
summarizes the interest expense and amortized loan fees on the Credit Facility
for the three and six months ended
For the three months ended For the six months ended
June 30, June 30, June 30, June 30,
2021 2020 2021 2020
Interest expense $ 1.3 $ 1.6 $ 2.3 $ 3.4
Loan fee amortization 0.1 0.2 0.2 0.3Commitment fees on unused portion 0.1 - 0.2 0.1
Total interest and financing expenses $ 1.5 $ 1.8
Weighted average interest rate 2.8 % 3.1 % 2.8 % 3.6 % Effective interest rate (including fee amortization) 3.2 % 3.5 % 3.3 % 4.0 % Average debt outstanding (1)$ 189.1 $ 204.6
Cash paid for interest and unused fees $ 1.5 $ 1.7$ 2.5 $ 3.6
(1) Calculated for the period from
offering, through June 30, 2021 .
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. Under the
regulations applicable to SBIC funds, a single licensee can have outstanding
debentures guaranteed by the SBA subject to a regulatory leverage limit, up to
two times the amount of regulatory capital. As of both June 30, 2021 and
December 31, 2020 , 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 June 30, 2021 and December 31, 2020 , the SBIC II subsidiary had $87.5
million and $40.0 million in regulatory capital and $84.0 million and $26.5
million of SBA-guaranteed debentures outstanding, respectively. See Note 10 to
the Consolidated Financial Statements for further detail on the SBA-guaranteed
debentures outstanding.
OnAugust 12, 2014 , we obtained exemptive relief from theSEC to permit us to exclude the debt of the SBIC subsidiaries guaranteed by the SBA from our 200% asset coverage test under the 1940 Act. The exemptive relief provides us with increased flexibility under the 200% 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$374.7 million and$277.3 million in assets atJune 30, 2021 andDecember 31, 2020 , respectively, which accounted for approximately 46.6% and 41.1% of our total consolidated assets atJune 30, 2021 andDecember 31, 2020 , respectively. SBA-guaranteed debentures have fixed interest rates that equal prevailing 10-yearU.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 beforeOctober 1, 2019 incurred upfront fees of 3.425%, which consisted of a 1.00% commitment fee and a 2.425% issuance discount, which are being 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 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. 72 As ofJune 30, 2021 andDecember 31, 2020 , 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 are estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. AtJune 30, 2021 andDecember 31, 2020 the SBA-guaranteed debentures would be deemed to be Level 3 as defined in Note 6 to the Consolidated Financial Statements). As ofJune 30, 2021 , we have incurred$8.4 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 ofJune 30, 2021 andDecember 31, 2020 ,$5.0 million and$3.3 million of prepaid financing costs had yet to be amortized, respectively. These prepaid 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 amortized fees on the SBA-guaranteed debentures for the three and six months endedJune 30, 2021 and 2020 (in millions): For the three months ended For the six months ended June 30, June 30, June 30, June 30, 2021 2020 2021 2020 Interest expense $ 1.6 $ 1.3$ 3.0 $ 2.7
Debenture fee amortization 0.3 0.2 0.5 0.3
Total interest and financing expenses $ 1.9 $ 1.5
Weighted average interest rate 2.9 % 3.3 % 2.9 % 3.3 % Effective interest rate (including fee amortization) 3.3 % 3.8 % 3.4 % 3.8 % Average debt outstanding$ 224.1 $ 161.0 $ 207.2 $ 161.0 Cash paid for interest $ - $ -$ 2.7 $ 2.7 Notes Offering OnAugust 21, 2017 , we issued$42.5 million in aggregate principal amount of 5.75% fixed-rate notes dueSeptember 15, 2022 (the "2022 Notes"). OnSeptember 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. OnJanuary 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 ofAugust 21, 2017 , between the Company andU.S. Bank National Association , as trustee. We redeemed all$48.875 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, we 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 three
months endedJune 30, 2021 . 73
The following table summarizes the interest expense and deferred financing costs
on the 2022 Notes for the three and six months ended
For the three months ended For the six months ended
June 30, June 30, June 30, June 30,
2021 2020 2021 2020
Interest expense $ - $ 0.7 $ 0.3 $ 1.4 Deferred financing costs - 0.1 0.1 0.2 Total interest and financing expenses $ - $ 0.8$ 0.4 $ 1.6 Loss on extinguishment of debt (1) - - 0.5 - Weighted average interest rate (2) 0.0 % 5.8 % 5.7 % 5.8 % Effective interest rate (including fee amortization) (2) 0.0 % 6.4 % 6.4 % 6.5 % Average debt outstanding (3) $ - $ 48.9
$ 48.9 $ 48.9 Cash paid for interest $ - $ 0.7$ 0.5 $ 1.4
(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 six months ended
period
2022 Notes
OnJanuary 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 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 outstanding principal, plus accrued and unpaid interest. Interest is payable semi-annually beginningSeptember 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
Prior to their redemption onFebruary 12, 2021 , the 2022 Notes were listed onNew York Stock Exchange under the trading symbol "SCA". As ofDecember 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$2.1 million remains to be amortized as ofJune 30, 2021 . These financing costs are presented on the consolidated statement of assets and liabilities as a deduction from the debt liability. 74
The following table summarizes the interest expense and deferred financing costs
on the 2026 Notes for the three and six months ended
For the three months ended For the six months ended
June 30, June 30, June 30, June 30,
2021 2020 2021 2020
Interest expense $ 1.2 $ - $ 2.3 $ -
Deferred financing costs 0.1 - 0.2 -Total interest and financing expenses $ 1.3 $
- $ 2.5 $ -
Weighted average interest rate 4.9 % 0.0 % 4.9 % 0.0 % Effective interest rate (including fee amortization) 5.3 % 0.0 % 5.4 % 0.0 % Average debt outstanding (1) $ 100.0 $
-$ 100.0 $ -
(1) Calculated for the period from
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 ofJune 30, 2021 andDecember 31, 2020 , our off-balance sheet arrangements consisted of$25.7 million and$28.9 million , respectively, of unfunded commitments to provide debt financing to 27 and 19 of our portfolio companies, respectively. As ofJune 30, 2021 , 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 to be treated as a RIC under Subchapter M of the Code and intend to operate in a manner to qualify annually for the tax treatment applicable to RICs. 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 aU.S. federal excise tax on our undistributed earnings of a RIC. As ofDecember 31, 2020 , the Company had$21,051,549 of undistributed taxable income that was carried forward toward distributions paid during the year endingDecember 31, 2021 . We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, the covenants contained in the Credit Facility may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement. In addition, we may retain for investment some or all 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. 75
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 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 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 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 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 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 the best interests of the Company and its shareholders' to take advantage of theIRS 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
On
Credit Facility
The outstanding balance under the Credit Facility as of
SBA-guaranteed Debentures
The total consolidated balance of SBA-guaranteed debentures outstanding as of
76
Dividend Declared
On
Ex-Dividend Record Payment Regular Supplemental Total
Declared Date Date Date Amount per Share Amount per Share per Share
7/19/2021 7/29/2021 7/30/2021 8/13/2021 $ 0.09 $ 0.01 $ 0.10
7/19/2021 8/30/2021 8/31/2021 9/15/2021 $ 0.09 $ 0.01 $ 0.10
7/19/2021 9/29/2021 9/30/2021 10/15/2021 $ 0.09 $ 0.01 $ 0.10 © Edgar Online, source
