Stellus Capital Investment (SCM) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited consolidated financial statements, management's discussion and analysis, market risk disclosures, and internal controls for the reporting period Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including the statements of assets and liabilities, operations, changes in net assets, cash flows, and detailed schedules of investments, along with comprehensive notes explaining the company's nature, accounting policies, and financial instruments Consolidated Statements of Assets and Liabilities This statement provides a snapshot of the company's financial position, detailing its assets, liabilities, and net assets at specific reporting dates | Metric | March 31, 2022 (Unaudited) | December 31, 2021 | | :---------------------------------- | :-------------------------- | :------------------- | | Total Assets | $866,669,806 | $821,262,018 | | Total Liabilities | $581,633,405 | $536,150,785 | | Net Assets | $285,036,401 | $285,111,233 | | Net Asset Value Per Share | $14.59 | $14.61 | Consolidated Statements of Operations This statement outlines the company's financial performance over a period, showing investment income, operating expenses, and net increase in net assets from operations | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Total Investment Income | $15,494,404 | $13,987,864 | | Total Operating Expenses | $9,980,221 | $8,927,233 | | Net Investment Income | $5,514,183 | $5,060,631 | | Net Increase in Net Assets Resulting from Operations | $5,222,164 | $4,937,788 | | Net Investment Income Per Share – basic and diluted | $0.28 | $0.26 | | Net Increase in Net Assets Resulting from Operations Per Share – basic and diluted | $0.27 | $0.25 | Consolidated Statements of Changes in Net Assets This statement details the changes in the company's net assets over a period, reflecting investment income, realized gains, unrealized changes, and distributions | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net investment income | $5,514,183 | $5,060,631 | | Net realized gain on non-controlled, non-affiliated investments | $3,458,090 | $462,228 | | Net change in unrealized depreciation (appreciation) on non-controlled, non-affiliated investments | $(3,721,602) | $121,983 | | Distributions from net investment income | $(5,464,666) | $(4,869,552) | | Balances at March 31 | $285,036,401 | $273,428,885 | Consolidated Statements of Cash Flows This statement summarizes the cash inflows and outflows from operating, investing, and financing activities, showing the net change in cash over the period | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Net Cash Used In Operating Activities | $(62,924,974) | $(57,052,324) | | Net Cash Provided by Financing Activities | $43,380,901 | $69,024,357 | | Net (Decrease) Increase in Cash and Cash Equivalents | $(19,544,073) | $11,972,033 | | Cash and Cash Equivalents Balance at End of Period | $24,630,783 | $30,449,635 | Consolidated Schedules of Investments This schedule provides a detailed breakdown of the company's investment portfolio, including fair values, cost, and concentrations by industry and geography Total Non-controlled, non-affiliated investments | Date | Amortized Cost | Fair Value | % of Net Assets | | :------------- | :------------- | :------------- | :-------------- | | March 31, 2022 | $853,845,723 | $837,991,490 | 293.99% | | Dec 31, 2021 | $785,005,957 | $772,873,326 | 271.08% | Top 3 Industries by Fair Value (March 31, 2022) | Industry | Fair Value | % of Total Investments | | :-------------------------------- | :------------- | :--------------------- | | Services: Business | $214,616,580 | 25.61% | | Healthcare & Pharmaceuticals | $97,787,282 | 11.67% | | Aerospace & Defense | $62,601,416 | 7.47% | Top 3 Geographical Concentrations by Fair Value (March 31, 2022) | Location | Fair Value | % of Total Investments | | :---------------- | :------------- | :--------------------- | | Texas | $176,467,790 | 21.06% | | California | $158,784,883 | 18.95% | | Illinois | $69,032,012 | 8.24% | Notes to Unaudited Financial Statements These notes provide essential details and explanations regarding the company's accounting policies, financial instruments, and other significant financial information NOTE 1—NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES This note describes the company's business model, investment objectives, regulatory status, and key accounting principles applied in its financial reporting - The company operates as an externally managed, closed-end, non-diversified investment management company, regulated as a Business Development Company (BDC) and treated as a Regulated Investment Company (RIC) for tax purposes[54] - The investment objective is to maximize total return through current income and capital appreciation via debt and related equity investments in private U.S. middle-market companies (typically with $5.0 million to $50.0 million of EBITDA)[65] - The asset coverage ratio applicable to the company decreased from 200% to 150% effective June 29, 2018, following Board and stockholder approval. As of March 31, 2022, the asset coverage ratio was 193%[63][64] - The COVID-19 pandemic's impact on portfolio companies could materially adversely affect future net investment income and the fair value of investments[72] - As of March 31, 2022, the company had three loans on non-accrual status, representing approximately 3.9% of its loan portfolio at cost and 0.7% at fair value, with $11,354,332 of unaccrued income[88] - The company adopted ASU 2020-04 (Reference Rate Reform) in March 2020 and plans to apply its amendments to account for contract modifications as LIBOR is phased out[103] NOTE 2—RELATED PARTY ARRANGEMENTS This note details the company's arrangements with its investment adviser, including management and incentive fees, and co-investment policies - The company pays its investment adviser, Stellus Capital, an annual base management fee of 1.75% of gross assets (excluding cash and cash equivalents) and an incentive fee with two components: investment income and capital gains[105] Management Fees and Incentive Fees | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Base Management Fees Expense | $3,492,713 | $2,963,861 | | Capital Gains Incentive Fee (Reversal) Incurred | $(42,217) | $83,281 | | Incentive Fee Payable (March 31, 2022) | $4,095,064 | $5,137,281 (Dec 31, 2021) | - The company has an SEC exemptive order (the "Order") that permits co-investment with private funds, other BDCs, and registered investment companies managed by Stellus Capital or its affiliates, subject to certain conditions[115] NOTE 3—DISTRIBUTIONS This note outlines the company's dividend distributions to shareholders, including amounts declared and details of its dividend reinvestment plan Distributions Declared | Period | Amount per Share | | :------------------------------------ | :--------------- | | Three Months Ended March 31, 2022 | $0.28 | | Total Since Inception (through Mar 31, 2022) | $12.33 | - The company has an "opt out" dividend reinvestment plan (DRIP), but no shares were issued through the DRIP during the three months ended March 31, 2022, or 2021[126] NOTE 4—EQUITY OFFERINGS AND RELATED EXPENSES This note provides information on the company's equity issuance activities, including shares issued, gross proceeds, and associated expenses Equity Issuance (Three Months Ended March 31, 2022) | Metric | Amount | | :------------------------- | :----------- | | Shares Issued | 14,924 | | Gross Proceeds | $209,006 | | Underwriting & Other Expenses | $53,506 | | Advisor Reimbursement | $12,170 | | Net Proceeds | $167,670 | | Average Per Share Offering Price | $14.00 | NOTE 5—NET INCREASE IN NET ASSETS PER COMMON SHARE This note presents the net increase in net assets attributable to common shareholders on a per-share basis for the reporting periods Net Increase in Net Assets from Operations Per Share | Period | Amount per Share | | :------------------------------------ | :--------------- | | Three Months Ended March 31, 2022 | $0.27 | | Three Months Ended March 31, 2021 | $0.25 | NOTE 6—PORTFOLIO INVESTMENTS AND FAIR VALUE This note details the company's investment portfolio, including its composition by security type, fair value hierarchy, and concentrations, along with unfunded commitments - The company classifies its investments into a three-level fair value hierarchy, with 100% of its total investments categorized as Level 3 due to the use of significant unobservable inputs in their valuation[133][139][140] Investment Portfolio Composition (Fair Value) | Security Type | March 31, 2022 | December 31, 2021 | | :------------------------ | :------------- | :---------------- | | Senior Secured – First Lien | $706,079,324 | $646,352,935 | | Senior Secured – Second Lien | $61,221,062 | $56,733,110 | | Unsecured Debt | $4,800,358 | $4,883,854 | | Equity | $65,890,746 | $64,903,427 | | Total Investments | $837,991,490 | $772,873,326 | - As of March 31, 2022, the company had $34,161,938 in aggregate unfunded commitments to 38 portfolio companies, maintaining sufficient liquidity to fund these commitments[138][155] Top 3 Industry Concentrations (March 31, 2022) | Industry | Fair Value | % of Total Investments | | :-------------------------------- | :------------- | :--------------------- | | Services: Business | $214,616,580 | 25.61% | | Healthcare & Pharmaceuticals | $97,787,282 | 11.67% | | Aerospace & Defense | $66,430,440 | 7.47% | Level 3 Fair Value Measurements (March 31, 2022) | Description | Fair Value | Valuation Technique | Unobservable Inputs | Range (Average) | | :---------------- | :------------- | :------------------ | :------------------------------------------------ | :-------------- | | First lien debt | $706,079,324 | Income/Market | HY credit spreads, Risk free rates, Market multiples | -3.74% to 0.66% (0.00%) for HY spreads | | Second lien debt | $61,221,062 | Income/Market | HY credit spreads, Risk free rates, Market multiples | -1.64% to 0.72% (-0.23%) for HY spreads | | Unsecured debt | $4,800,358 | Income/Market | HY credit spreads, Risk free rates, Market multiples | 1.15% to 1.15% (1.15%) for HY spreads | | Equity investments | $65,890,746 | Market approach | Underwriting multiple/EBITDA Multiple | 1.5x to 24.8x (11.3x) | NOTE 7—COMMITMENTS AND CONTINGENCIES This note discloses the company's material legal proceedings, unfunded commitments, and other contingent liabilities that may impact its financial position - The company is not currently subject to any material legal proceedings, nor are any threatened that are expected to have a material effect on its business or financial condition[154] - As of March 31, 2022, the company had $33,855,842 in unfunded debt commitments and $306,096 in unfunded equity commitments to 38 existing portfolio companies, with sufficient liquidity to fund them[155] NOTE 8—FINANCIAL HIGHLIGHTS This note provides a summary of key financial metrics and ratios, offering a concise overview of the company's performance and financial health Key Financial Highlights | Metric | March 31, 2022 | March 31, 2021 | | :---------------------------------------- | :------------- | :------------- | | Net asset value at end of period | $14.59 | $14.03 | | Net investment income per share | $0.28 | $0.26 | | Asset coverage ratio | 1.93x | 2.03x | | Annualized ratio of net investment income to net assets | 7.84% | 7.45% | | Portfolio turnover | 1.25% | 4.91% | NOTE 9—CREDIT FACILITY This note details the company's senior secured revolving credit facility, including its capacity, interest rates, outstanding balances, and compliance with covenants - The company has a senior secured revolving credit facility with a maximum borrowing capacity of $250,000,000 (committed) and an accordion feature up to $280,000,000[161] - Borrowings bear interest at LIBOR plus 2.50% (or 2.75% if asset coverage ratio is at or below 1.90:1.00) with a 0.25% LIBOR floor. The commitment expires on September 18, 2024, and principal matures on September 18, 2025[162][163] Credit Facility Outstanding and Expenses | Metric | March 31, 2022 | December 31, 2021 | | :------------------------------------ | :------------- | :---------------- | | Outstanding Balance | $205,488,800 | $177,340,000 | | Total Interest and Financing Expenses (Q1) | $1,550,273 | $1,209,600 | | Effective Interest Rate (Q1) | 3.3% | 3.5% | - The company was in compliance with all Credit Facility covenants as of March 31, 2022, including maintaining an asset coverage ratio of at least 1.67 to 1.00[164] NOTE 10—SBA-GUARANTEED DEBENTURES This note describes the company's Small Business Administration (SBA)-guaranteed debentures, including regulatory capital, leverage limits, and interest expenses - The SBIC subsidiaries can issue SBA-guaranteed debentures, subject to regulatory leverage limits (up to two times regulatory capital). The SBIC subsidiary has $75.0 million in regulatory capital, and the SBIC II subsidiary has $87.5 million[167][168] - The company obtained exemptive relief from the SEC to exclude SBA-guaranteed debt from its asset coverage test, increasing borrowing flexibility by up to $325,000,000[169] SBA-Guaranteed Debentures Outstanding | Metric | March 31, 2022 | December 31, 2021 | | :------------------------------------ | :------------- | :---------------- | | Total SBA-guaranteed debentures | $270,000,000 | $250,000,000 | | Total Interest and Financing Expenses (Q1) | $2,007,424 | $1,619,647 | | Effective Interest Rate (Q1) | 3.2% | 3.5% | NOTE 11—NOTES This note provides details on the company's fixed-rate notes, including issuance, redemption, outstanding balances, and associated interest and financing expenses - The company redeemed all $48,875,000 of its 5.75% fixed-rate notes due 2022 on February 12, 2021, resulting in a $539,250 loss on debt extinguishment[179] - On January 14, 2021, the company issued $100,000,000 in aggregate principal amount of 4.875% fixed-rate notes due 2026, maturing on March 30, 2026[181] 2026 Notes Outstanding and Expenses | Metric | March 31, 2022 | March 31, 2021 | | :------------------------------------ | :------------- | :------------- | | Outstanding Balance | $100,000,000 | $100,000,000 | | Total Interest and Financing Expenses (Q1) | $1,333,900 | $1,136,936 | | Effective Interest Rate (Q1) | 5.4% | 5.4% | NOTE 12—SUBSEQUENT EVENTS This note discloses significant events that occurred after the reporting period, including new investments, repayments, and dividend declarations - The company made several new investments in April 2022, including Cancos Tile & Stone LLC, Tilley Chemical Company, Inc., Microbe Formulas, LLC, and Florachem Holdings, LLC, involving first lien term loans, unfunded revolvers, and equity[188][189][190][193] - Significant repayments and realized gains occurred in April 2022, including full repayment of equity in Energy Labs Holding Corp. ($1.3 million proceeds, $0.7 million gain) and full repayment of SQAD, LLC's first lien term loan ($14.1 million proceeds) and SQAD Holdco, Inc. equity ($2.4 million proceeds, $2.1 million gain)[190][192] - As of May 11, 2022, the Credit Facility outstanding balance was $204.1 million, and SBA-guaranteed debentures totaled $290.0 million[194][196] - On April 19, 2022, the Board declared regular monthly dividends of $0.0933 per share and supplemental monthly dividends of $0.02 per share for April, May, and June 2022[197] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, results of operations, liquidity, and capital resources for the three months ended March 31, 2022, and 2021, including an overview of its investment strategy, portfolio performance, and market risks Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to risks and uncertainties, which may cause actual results to differ materially - The report contains forward-looking statements that involve risks and uncertainties, including those related to the COVID-19 pandemic, and actual results may differ materially from expectations[199][201] Overview This overview describes the company's structure as an externally managed BDC and RIC, its investment objectives, asset coverage ratio, and the ongoing impact of the COVID-19 pandemic - The company is an externally managed BDC and RIC, aiming to maximize total return through debt and equity investments in middle-market companies[202][203][205] - The asset coverage ratio decreased from 200% to 150% effective June 28, 2019, following SBCAA changes. As of March 31, 2022, the asset coverage ratio was 193%[206][207] - The COVID-19 pandemic continues to pose a risk, potentially impacting the financial performance and fair value of the company's investments[208][210] Portfolio Composition and Investment Activity This section analyzes the company's investment portfolio structure, recent investment and repayment activities, and the quality of its assets Portfolio Composition This subsection details the breakdown of the investment portfolio by security type, fair value, and characteristics such as floating versus fixed interest rates Investment Portfolio Composition (Fair Value) | Security Type | March 31, 2022 | December 31, 2021 | | :------------------------ | :------------- | :---------------- | | Senior Secured – First Lien | 84% | 84% | | Senior Secured – Second Lien | 7% | 7% | | Unsecured Debt | 1% | 1% | | Equity | 8% | 8% | | Total Investments | $838.0 million | $772.9 million | - As of March 31, 2022, 97% of debt investments bore floating rates (subject to interest rate floors) and 3% bore fixed rates. The weighted average yield on all debt investments was approximately 8.0%[223][224] - Unfunded commitments totaled $34.2 million to 38 portfolio companies as of March 31, 2022, up from $31.0 million to 32 companies at December 31, 2021[215] Investment Activity This subsection summarizes the company's investment and repayment activities during the quarter, including new investments and proceeds from repayments - During Q1 2022, the company made $74.5 million in investments across six new and seven existing portfolio companies, and received $10.0 million from repayments[226] Asset Quality This subsection categorizes the investment portfolio by asset quality, assessing performance relative to expectations and identifying potential workout or loss situations Investment Category by Fair Value (March 31, 2022) | Investment Category | Fair Value ($M) | % of Total Portfolio | Number of Portfolio Companies | | :------------------ | :-------------- | :------------------- | :---------------------------- | | 1 (Above Expectations) | $104.8 | 13% | 15 | | 2 (Within Expectations) | $609.3 | 73% | 50 | | 3 (Below Expectations) | $118.6 | 14% | 10 | | 4 (Substantially Below Expectations, Work Out) | $3.7 | —% | 1 | | 5 (Substantially Below Expectations, Loss Expected) | $1.6 | —% | 2 | Loans and Debt Securities on Non-Accrual Status This subsection identifies loans and debt securities that are not accruing interest, detailing their proportion of the portfolio at cost and fair value - As of March 31, 2022, three loans were on non-accrual status, representing 3.9% of the loan portfolio at cost and 0.7% at fair value, with $11.4 million of unaccrued income[231] Results of Operations This section analyzes the company's financial performance, including revenues, expenses, net investment income, and changes in realized and unrealized gains/losses Revenues This subsection breaks down the company's total investment income, highlighting the primary drivers of changes in interest income and other fees Investment Income Breakdown | Metric | Three Months Ended March 31, 2022 ($M) | Three Months Ended March 31, 2021 ($M) | | :-------------- | :------------------------------------- | :------------------------------------- | | Interest income | $14.8 | $13.4 | | PIK interest | $0.3 | $0.1 | | Miscellaneous fees | $0.4 | $0.5 | | Total | $15.5 | $14.0 | - The increase in interest income was primarily driven by the growth in the overall investment portfolio[236] Expenses This subsection details the company's operating expenses, including management fees, interest expense, and other costs, explaining the reasons for changes Operating Expenses Breakdown | Expense Category | Three Months Ended March 31, 2022 ($M) | Three Months Ended March 31, 2021 ($M) | | :-------------------------------- | :------------------------------------- | :------------------------------------- | | Management fees | $3.5 | $3.0 | | Interest expense and other fees | $4.9 | $4.3 | | Total Operating Expenses | $10.0 | $8.9 | - Operating expenses increased due to higher interest expense from increased outstanding balances on SBA-guaranteed debentures and Notes, and higher management fees resulting from a larger investment portfolio[239] Net Investment Income This subsection reports the company's net investment income and per-share amounts, analyzing the factors contributing to its change over the period - Net investment income for Q1 2022 was $5.5 million ($0.28 per share), an increase from $5.1 million ($0.26 per share) in Q1 2021, driven by higher investment income offset by increased expenses[240][241] Net Realized Gains and Losses This subsection presents the company's net realized gains and losses from investment repayments, detailing the proceeds and the resulting gains Net Realized Gains | Metric | Three Months Ended March 31, 2022 ($M) | Three Months Ended March 31, 2021 ($M) | | :------------------------------------ | :------------------------------------- | :------------------------------------- | | Proceeds from repayments of investments | $10.0 | $33.5 | | Net realized gain | $3.5 | $0.5 | Net Change in Unrealized Appreciation (Depreciation) of Investments This subsection explains the net change in unrealized appreciation or depreciation of investments, attributing movements to accounting reversals and macroeconomic factors - Net change in unrealized depreciation on investments and cash equivalents totaled $(3.7) million in Q1 2022, compared to $0.1 million in appreciation in Q1 2021[245] - The depreciation was attributed to an accounting reversal upon realization of one portfolio company and the widening of credit spreads and swap rates due to the macro-economic environment[246] Provision for Taxes on Unrealized Appreciation on Investments This subsection reports the provision for income tax recognized on unrealized appreciation of investments, specifically related to the company's Taxable Subsidiaries - The company recognized a provision for income tax on unrealized investments of $(21.2) thousand in Q1 2022, related to its Taxable Subsidiaries[247] Net Increase in Net Assets Resulting from Operations This subsection summarizes the total net increase in net assets from operations and its per-share equivalent, driven by investment income, realized gains, and unrealized changes - Net increase in net assets from operations was $5.2 million ($0.27 per share) in Q1 2022, up from $4.9 million ($0.25 per share) in Q1 2021, driven by realized gains and net investment income, offset by unrealized depreciation[248][249] Financial condition, liquidity and capital resources This section discusses the company's financial health, cash flow activities, sources of liquidity, capital structure, and compliance with regulatory requirements Cash Flows from Operating and Financing Activities This subsection analyzes the cash generated or used by operating and financing activities, highlighting key drivers such as investment purchases and debt issuances - Operating activities used $62.9 million in cash in Q1 2022, primarily for investment purchases, while financing activities provided $43.4 million from SBA-guaranteed debentures and Credit Facility borrowings[250] - In Q1 2021, operating activities used $57.1 million, and financing activities provided $69.0 million, mainly from 2026 Notes issuance offset by 2022 Notes repayment and Credit Facility repayments[251] Liquidity and Capital Resources This subsection identifies the company's sources of liquidity, how capital is utilized, its asset coverage ratio, and potential limitations on raising equity capital - Liquidity is derived from the Credit Facility, 2026 Notes, SBA-guaranteed debentures, and cash flows from operations, used primarily for investments, operating expenses, and dividends[252] - The company's asset coverage ratio was 193% as of March 31, 2022, above the 150% requirement, but raising equity capital may be limited if common stock trades below NAV per share[253][254] - Cash and cash equivalents were $24.6 million as of March 31, 2022, down from $44.2 million at December 31, 2021[254] Credit Facility This subsection details the terms of the company's Credit Facility, including its capacity, interest rates, outstanding balance, and compliance with covenants - The Credit Facility provides up to $250.0 million (committed) with an accordion feature up to $280.0 million, bearing interest at LIBOR plus 2.50% (or 2.75%) with a 0.25% LIBOR floor[256][257] - Outstanding balance was $205.5 million as of March 31, 2022, and the company was in compliance with all covenants, including an asset coverage ratio of at least 1.67 to 1.0[258][259] Credit Facility Interest and Financing Expenses | Metric | Three Months Ended March 31, 2022 ($M) | Three Months Ended March 31, 2021 ($M) | | :------------------------------------ | :------------------------------------- | :------------------------------------- | | Total interest and financing expenses | $1.6 | $1.2 | | Effective interest rate | 3.3% | 3.5% | SBA-Guaranteed Debentures This subsection outlines the company's SBA-guaranteed debentures, including regulatory capital, exemptive relief for asset coverage, and associated interest and financing expenses - The SBIC subsidiaries have $75.0 million and $87.5 million in regulatory capital, respectively, and the company has exemptive relief to exclude SBA-guaranteed debt from its asset coverage test[261][262][263] SBA-Guaranteed Debentures Interest and Financing Expenses | Metric | Three Months Ended March 31, 2022 ($M) | Three Months Ended March 31, 2021 ($M) | | :------------------------------------ | :------------------------------------- | :------------------------------------- | | Total interest and financing expenses | $2.0 | $1.6 | | Effective interest rate | 3.2% | 3.5% | Notes Offering This subsection details the redemption of previous notes and the issuance of new fixed-rate notes, including their principal amount, interest rate, and maturity - The company redeemed all $48.875 million of its 2022 Notes on February 12, 2021, incurring a $0.5 million loss on debt extinguishment[269] - On January 14, 2021, $100.0 million of 4.875% fixed-rate 2026 Notes were issued, maturing on March 30, 2026[270] 2026 Notes Interest and Financing Expenses | Metric | Three Months Ended March 31, 2022 ($M) | Three Months Ended March 31, 2021 ($M) | | :------------------------------------ | :------------------------------------- | :------------------------------------- | | Total interest and financing expenses | $1.3 | $1.1 | | Effective interest rate | 5.4% | 5.4% | Off-Balance Sheet Arrangements This subsection describes the company's off-balance sheet arrangements, primarily unfunded commitments to portfolio companies, and its ability to meet these obligations - As of March 31, 2022, off-balance sheet arrangements included $34.2 million in unfunded debt and equity commitments to 38 portfolio companies, for which the company maintains sufficient liquidity[274] Regulated Investment Company Status and Dividends This subsection explains the company's intent to qualify as a Regulated Investment Company (RIC) for tax purposes, including distribution requirements and potential limitations - The company intends to qualify annually as a RIC, requiring distribution of at least 90% of investment company net taxable income to avoid corporate-level taxes and 98% of ordinary income and 98.2% of net capital gains to avoid excise tax[275][277] - As of December 31, 2021, $25,182,518 of undistributed taxable income was carried forward. Distribution ability may be limited by Credit Facility covenants and the 1940 Act asset coverage test[277][279] Recent Accounting Pronouncements This subsection discusses the impact of recently issued accounting pronouncements on the company's financial statements and reporting practices Critical Accounting Policies This subsection outlines the company's critical accounting policies that require significant judgment and estimation, impacting the reported financial results Subsequent Events This subsection reports significant events occurring after the reporting period, including new investments, repayments, and dividend declarations, impacting future financial performance - New investments in April 2022 included Cancos Tile & Stone LLC, Tilley Chemical Company, Inc., Microbe Formulas, LLC, and Florachem Holdings, LLC[285][286][287][290] - Significant repayments and realized gains in April 2022 included Energy Labs Holding Corp. equity ($1.3 million proceeds, $0.7 million gain) and SQAD, LLC's first lien term loan ($14.1 million proceeds) and SQAD Holdco, Inc. equity ($2.4 million proceeds, $2.1 million gain)[287][289] - As of May 11, 2022, the Credit Facility outstanding balance was $204.1 million, and SBA-guaranteed debentures totaled $290.0 million[291][293] - On April 19, 2022, the Board declared regular monthly dividends of $0.0933 per share and supplemental monthly dividends of $0.02 per share for April, May, and June 2022[294] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to financial market risks, particularly interest rate fluctuations, and provides a sensitivity analysis of net interest income to hypothetical changes in interest rates - As of March 31, 2022, 97% of the company's debt investments bore interest at floating rates (subject to interest rate floors), with a weighted average interest rate floor of 1.12%[295] Annual Impact on Net Interest Income from Interest Rate Changes (March 31, 2022) | Change in Basis Points | Net Interest Income ($M) | | :--------------------- | :----------------------- | | Up 200 | $8.7 | | Up 150 | $6.0 | | Up 100 | $3.3 | | Up 50 | $1.1 | | Down 25 | $(0.1) | - The company did not engage in hedging activities for the three months ended March 31, 2022, or 2021[297] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures, concluding they were effective as of March 31, 2022, with no material changes in internal control over financial reporting - The company's disclosure controls and procedures were evaluated and deemed effective as of March 31, 2022[298] - No material changes in internal control over financial reporting were identified during the quarter ended March 31, 2022[299] PART II. OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings The company is not currently involved in any material legal proceedings, nor are any expected to materially affect its financial condition or results of operations - The company is not currently subject to any material legal proceedings, nor are any material legal proceedings threatened against it or its subsidiaries[302] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K as of December 31, 2021, beyond what is presented in this report - No material changes in risk factors have occurred since the Annual Report on Form 10-K as of December 31, 2021, other than as provided in this report[303] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no shares issued under its distribution reinvestment program (DRIP) during the three months ended March 31, 2022, or 2021 - No shares were issued under the distribution reinvestment program (DRIP) during the three months ended March 31, 2022, or 2021[304] Item 3. Defaults Upon Senior Securities This item is not applicable to the company - This item is not applicable[305] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[306] Item 5. Other Information There is no other information to report under this item - No other information is reported under this item[307] Item 6. Exhibits This section lists all exhibits filed as part of the report or incorporated by reference, including organizational documents and required certifications - Exhibits include Articles of Amendment and Restatement, Bylaws, Form of Stock Certificate, and CEO/CFO Certifications (Sarbanes-Oxley Act Sections 302 and 906)[308][309]