Stellus Capital Investment (SCM) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited consolidated financial statements for Q2 2025, covering assets, operations, cash flows, and investments Consolidated Statements of Assets and Liabilities Total assets increased to $1,034.8 million, liabilities to $659.4 million, and NAV per share decreased to $13.21 Consolidated Balance Sheet Highlights (in millions) | Balance Sheet Item | June 30, 2025 (unaudited) | December 31, 2024 | | :--- | :--- | :--- | | Total Investments, at fair value | $985.9 | $953.5 | | Cash and cash equivalents | $40.0 | $20.1 | | Total Assets | $1,034.8 | $980.9 | | Total Liabilities | $659.4 | $611.0 | | Net Assets | $375.4 | $369.9 | | Net Asset Value Per Share | $13.21 | $13.46 | Consolidated Statements of Operations Net increase in net assets for H1 2025 was $15.1 million ($0.54 per share), down from $21.7 million in H1 2024 Key Operating Results (in millions, except per share data) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $25.7 | $26.6 | $50.6 | $52.6 | | Net Investment Income | $9.6 | $11.8 | $19.4 | $22.0 | | Net Increase in Net Assets | $10.1 | $8.5 | $15.1 | $21.7 | | Net Investment Income Per Share | $0.34 | $0.48 | $0.69 | $0.90 | | Net Increase in Net Assets Per Share | $0.36 | $0.35 | $0.54 | $0.89 | Consolidated Statements of Changes in Net Assets Net assets grew to $375.4 million, driven by stock issuance and net income, partially offset by distributions Reconciliation of Net Assets for the Six Months Ended June 30, 2025 (in millions) | Description | Amount | | :--- | :--- | | Net Assets at December 31, 2024 | $369.9 | | Net investment income | $19.4 | | Net realized loss on investments | ($6.8) | | Net change in unrealized appreciation | $2.6 | | Net Increase in Net Assets from Operations | $15.1 | | Distributions from net investment income | ($22.4) | | Issuance of common stock, net | $12.8 | | Net Assets at June 30, 2025 | $375.4 | Consolidated Statements of Cash Flows Net cash used in operations was $13.3 million, financing provided $33.2 million, increasing cash to $40.0 million Cash Flow Summary (in millions) | Cash Flow Activity | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($13.3) | ($8.6) | | Net Cash Provided by Financing Activities | $33.2 | $18.4 | | Net Increase in Cash and Cash Equivalents | $19.9 | $9.7 | | Cash and Cash Equivalents at End of Period | $40.0 | $35.9 | Consolidated Schedules of Investments Portfolio fair value was $985.9 million across 112 companies, primarily non-controlled, with $58.7 million unfunded commitments Portfolio Summary as of June 30, 2025 | Investment Type | Amortized Cost | Fair Value | % of Net Assets | | :--- | :--- | :--- | :--- | | Control investments | $32,732,016 | $13,046,041 | 3.47% | | Non-controlled, non-affiliated investments | $957,687,672 | $972,839,633 | 259.17% | | Total Investments | $990,419,688 | $985,885,674 | 262.64% | - As of June 30, 2025, the company had total unfunded debt commitments of $58,445,238 across numerous portfolio companies[53] - The company's investments are deemed to be Level 3 under the fair value hierarchy, meaning their valuation is determined using significant unobservable inputs[41] Notes to Unaudited Financial Statements Detailed explanations of accounting policies, related party transactions, debt, and BDC/RIC structure disclosures - The company operates as a Business Development Company (BDC) and has elected to be treated as a Regulated Investment Company (RIC) for tax purposes, utilizing two SBIC subsidiaries for SBA-guaranteed leverage[111][114][115] - The Investment Advisory Agreement stipulates a base management fee of 1.75% of gross assets (excluding cash) and a two-part incentive fee based on investment income and capital gains[172][174] - As of June 30, 2025, the company had five portfolio companies on non-accrual status, representing 3.8% of the loan portfolio at fair value[147] - Subsequent to the quarter end, the company made new and add-on investments totaling approximately $25.5 million and had one full repayment of $8.3 million[292][293] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion of financial performance, portfolio, investment activity, liquidity, and capital resources Portfolio Composition and Investment Activity Portfolio fair value was $985.9 million, 89% first-lien debt, with $78.2 million invested and stable asset quality Portfolio Composition by Investment Type (at Fair Value) | Investment Type | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Senior Secured – First Lien | 89% | 90% | | Senior Secured – Second Lien | 1% | 1% | | Unsecured Debt | 1% | 1% | | Equity | 9% | 8% | - For the six months ended June 30, 2025, the company invested $78.2 million in 9 new and 13 existing portfolio companies and received $46.6 million in proceeds from repayments[323] Asset Quality Rating (% of Total Portfolio at Fair Value) | Investment Category | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | 1 - Performing Above Expectations | 25% | 24% | | 2 - Performing Within Expectations | 59% | 59% | | 3 - Performing Below Expectations | 12% | 12% | | 4 - Substantially Below (Loss of Return) | 3% | 4% | | 5 - Substantially Below (Loss of Principal) | 1% | 1% | Results of Operations Total investment income decreased to $50.6 million, net investment income to $19.4 million, due to lower rates Comparison of Operating Results (in millions) | Metric | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Total Investment Income | $50.6 | $52.6 | | Total Operating Expenses, net | $31.3 | $30.6 | | Net Investment Income | $19.4 | $22.0 | | Net Realized Loss | ($6.8) | ($18.4) | | Net Change in Unrealized Appreciation | $2.6 | $17.9 | | Net Increase in Net Assets | $15.1 | $21.7 | Financial Condition, Liquidity and Capital Resources Strong liquidity with $40.0 million cash, $315 million credit facility, and 211% asset coverage ratio - The company's asset coverage ratio was 211% as of June 30, 2025, well above the regulatory requirement of 150%[361] Key Debt Facilities as of June 30, 2025 (in millions) | Facility | Total Commitment/Issued | Outstanding Balance | | :--- | :--- | :--- | | Credit Facility | $315.0 | $163.1 | | SBA-guaranteed Debentures | $308.8 | $308.8 | | 2026 Notes Payable | $100.0 | $100.0 | | 2030 Notes Payable | $75.0 | $75.0 | - During the six months ended June 30, 2025, the company issued 935,030 shares under its ATM Program for gross proceeds of $13.2 million[383] Item 3. Quantitative and Qualitative Disclosures About Market Risk Primary exposure to interest rate risk with 91.2% floating-rate debt; 100 bps rate hike increases net income by $6.7 million - As of June 30, 2025, 91.2% of the loans in the company's portfolio bore interest at a floating rate, making interest rate changes a key market risk[399] Annual Impact on Net Income from Interest Rate Changes (in millions) | Change in Basis Points | Net Interest Income Impact | | :--- | :--- | | Up 200 | $13.3 | | Up 100 | $6.7 | | Up 50 | $3.3 | | Down 50 | ($3.3) | | Down 100 | ($6.7) | | Down 200 | ($13.3) | Item 4. Controls and Procedures Disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[404] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[405] PART II. OTHER INFORMATION Item 1. Legal Proceedings No material legal proceedings are currently active or threatened against the company - The company is not currently a party to any material legal proceedings[407] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the 2024 Annual Report on Form 10-K - During the three and six months ended June 30, 2025, there were no material changes to the risk factors discussed in the company's prior SEC filings[409] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or shares issued under dividend reinvestment program in Q2 2025 - No unregistered sales of equity securities occurred during the three months ended June 30, 2025[410] Item 3. Defaults Upon Senior Securities Not applicable, as there were no defaults on senior securities during the period - Not applicable[412] Item 4. Mine Safety Disclosures Not applicable, as the company does not engage in mining operations - Not applicable[413] Item 5. Other Information Updated fee and expense table as of June 30, 2025, detailing stockholder transaction and annual expenses Annual Expenses (as a percentage of net assets) | Expense Category | Percentage | | :--- | :--- | | Base management fee | 4.36% | | Incentive fees payable | 2.63% | | Interest payments on borrowed funds | 8.29% | | Other expenses | 1.91% | | Total annual expenses | 17.19% | Item 6. Exhibits List of exhibits filed, including CEO/CFO certifications and XBRL data files - The report includes CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[422]