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Stellus Capital Investment Corp - Quarter Report: 2023 June (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 1-35730

STELLUS CAPITAL INVESTMENT CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Maryland

    

46-0937320

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer
Identification No.)

4400 Post Oak Parkway, Suite 2200

Houston, Texas 77027

(Address of Principal Executive Offices) (Zip Code)

(713) 292-5400

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, par value $0.001 per share

SCM

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

    

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No 

The number of shares of the issuer’s Common Stock, $0.001 par value per share, outstanding as of August 9, 2023 was 22,557,904.

Table of Contents

STELLUS CAPITAL INVESTMENT CORPORATION

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

   

Item 1.

    

Financial Statements

Consolidated Statements of Assets and Liabilities as of June 30, 2023 (unaudited) and December 31, 2022

1

Consolidated Statements of Operations for the three and six-month periods ended June 30, 2023 and 2022 (unaudited)

2

Consolidated Statements of Changes in Net Assets for the three and six-month periods ended June 30, 2023 and 2022 (unaudited)

3

Consolidated Statements of Cash Flows for the three and six-month periods ended June 30, 2023 and 2022 (unaudited)

4

Consolidated Schedules of Investments as of June 30, 2023 (unaudited) and December 31, 2022

5

Notes to Unaudited Financial Statements

27

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

57

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

74

Item 4.

Controls and Procedures

75

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

76

Item 1A.

Risk Factors

76

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

76

Item 3.

Defaults Upon Senior Securities

76

Item 4.

Mine Safety Disclosures

76

Item 5.

Other Information

77

Item 6.

Exhibits

77

SIGNATURES

78

Table of Contents

PART I — FINANCIAL INFORMATION

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

June 30, 2023

    

(unaudited)

    

December 31, 2022

ASSETS

 

  

 

  

Non-controlled, non-affiliated investments, at fair value (amortized cost of $922,796,573 and $875,823,177, respectively)

 

$

881,666,450

$

844,733,638

Cash and cash equivalents

 

14,924,382

 

48,043,329

Receivable for sales and repayments of investments

 

207,077

 

718,794

Interest receivable

 

4,638,649

 

3,984,409

Other receivables

 

25,369

 

34,245

Related party receivable

883

Deferred offering costs

 

 

1,100

Prepaid expenses

 

309,747

 

667,267

Total Assets

$

901,772,557

$

898,182,782

LIABILITIES

 

 

  

Notes payable

$

98,771,216

$

98,549,692

Credit Facility payable

 

170,229,321

 

197,685,281

SBA-guaranteed debentures

 

308,519,553

 

307,895,195

Dividends payable

 

3,006,969

 

Management fees payable

 

1,865,589

 

7,150,407

Income incentive fees payable

 

3,176,395

 

2,464,408

Capital gains incentive fees payable

 

 

569,528

Interest payable

 

4,783,098

 

4,640,841

Related party payable

 

775,794

 

1,060,321

Unearned revenue

 

221,711

 

320,675

Administrative services payable

 

407,265

 

356,919

Income tax payable

 

782,358

 

1,175,373

Deferred tax liability

 

206,049

 

61,936

Other accrued expenses and liabilities

702,211

475,593

Total Liabilities

$

593,447,529

$

622,406,169

Commitments and contingencies (Note 7)

 

  

 

  

Net Assets

$

308,325,028

$

275,776,613

NET ASSETS

 

  

 

  

Common stock, par value $0.001 per share (100,000,000 shares authorized; 22,557,904 and 19,666,769 issued and outstanding, respectively)

$

22,558

$

19,667

Paid-in capital

 

315,823,482

 

275,114,720

Total distributable (loss) earnings

 

(7,521,012)

 

642,226

Net Assets

$

308,325,028

$

275,776,613

Total Liabilities and Net Assets

$

901,772,557

$

898,182,782

Net Asset Value Per Share

$

13.67

$

14.02

1

Table of Contents

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

For the three

For the three

For the six

For the six

months ended

months ended

months ended

months ended

    

June 30, 2023

June 30, 2022

    

June 30, 2023

June 30, 2022

INVESTMENT INCOME

 

  

 

  

  

 

  

Interest income

$

25,662,895

$

15,658,018

$

49,071,499

$

30,774,969

Other income

 

922,122

451,027

1,588,865

828,480

Total Investment Income

$

26,585,017

$

16,109,045

$

50,660,364

$

31,603,449

OPERATING EXPENSES

 

  

 

  

 

  

 

  

Management fees

$

3,865,588

$

3,705,053

$

7,600,690

$

7,197,766

Valuation fees

 

46,422

30,029

193,495

169,617

Administrative services expenses

 

466,378

466,903

928,342

941,221

Income incentive fees

 

2,603,004

4,727,839

Capital gains incentive fee reversal

 

(983,575)

(569,528)

(1,025,792)

Professional fees

 

169,836

217,404

600,684

529,466

Directors’ fees

 

93,250

74,500

210,500

171,000

Insurance expense

 

121,885

125,890

242,431

250,397

Interest expense and other fees

 

8,101,975

5,524,378

15,988,399

10,415,975

Income tax expense

 

371,786

426,236

746,549

705,653

Other general and administrative expenses

 

331,649

347,656

510,099

559,392

Total Operating Expenses

$

16,171,773

$

9,934,474

$

31,179,500

$

19,914,695

Net Investment Income

$

10,413,244

$

6,174,571

$

19,480,864

$

11,688,754

Net realized (loss) gain on non-controlled, non-affiliated investments

$

(310,588)

$

(352,723)

$

(275,621)

$

3,105,367

Net realized loss on foreign currency translation

(10,704)

(50,616)

(7,350)

Net change in unrealized depreciation on non-controlled, non-affiliated investments

(6,295,233)

(4,289,591)

(10,544,875)

(8,011,193)

Net change in unrealized depreciation on foreign currency translation

(20,323)

(35,754)

(18,449)

(35,754)

Provision for taxes on net unrealized appreciation on investments

(65,353)

(160,656)

(144,113)

(181,813)

Net Increase in Net Assets Resulting from Operations

3,711,043

1,335,847

$

8,447,190

$

6,558,011

Net Investment Income Per Share—basic and diluted

$

0.49

$

0.32

$

0.95

$

0.60

Net Increase in Net Assets Resulting from Operations Per Share – basic and diluted

$

0.17

$

0.07

$

0.41

$

0.34

Weighted Average Shares of Common Stock Outstanding—basic and diluted

 

21,231,979

 

19,543,117

 

20,509,995

 

19,530,509

Distributions Per Share—basic and diluted

$

0.41

$

0.34

$

0.81

$

0.62

2

Table of Contents

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (unaudited)

Common Stock

Total

Number 

Par 

Paid-in 

distributable

    

of shares

    

value

    

capital

    

earnings (loss)

    

Net Assets

Balances at December 31, 2021

 

19,517,595

$

19,518

$

274,559,121

$

10,532,594

$

285,111,233

Net investment income

 

 

 

 

5,514,183

 

5,514,183

Net realized gain on non-controlled, non-affiliated investments

 

 

 

 

3,458,090

 

3,458,090

Net realized loss on foreign currency translation

 

 

 

 

(7,350)

 

(7,350)

Net change in unrealized depreciation on non-controlled, non-affiliated investments

 

 

 

 

(3,721,602)

 

(3,721,602)

Provision for taxes on unrealized appreciation on investments

 

 

 

(21,157)

 

(21,157)

Distributions from net investment income

 

 

 

 

(5,464,666)

 

(5,464,666)

Issuance of common stock, net of offering costs(1)

 

14,924

 

15

 

167,655

 

 

167,670

Balances at March 31, 2022

19,532,519

$

19,533

$

274,726,776

$

10,290,092

$

285,036,401

Net investment income

6,174,571

6,174,571

Net realized loss on non-controlled, non-affiliated investments

(352,723)

(352,723)

Net change in unrealized depreciation on non-controlled, non-affiliated investments

(4,289,591)

(4,289,591)

Net change in unrealized depreciation on foreign currency translations

(35,754)

(35,754)

Provision for taxes on unrealized appreciation on investments

(160,656)

(160,656)

Distributions from net investment income

(6,643,663)

(6,643,663)

Issuance of common stock, net of offering costs(1)

13,416

13

137,520

137,533

Balances at June 30, 2022

 

19,545,935

$

19,546

$

274,864,296

$

4,982,276

$

279,866,118

Balances at December 31, 2022

19,666,769

$

19,667

$

275,114,720

$

642,226

$

275,776,613

Net investment income

 

9,067,620

9,067,620

Net realized gain on non-controlled, non-affiliated investments

 

34,967

34,967

Net realized loss on foreign currency translation

(39,912)

(39,912)

Net change in unrealized depreciation on non-controlled, non-affiliated investments

 

(4,249,642)

(4,249,642)

Net change in unrealized appreciation on foreign currency translations

 

1,874

1,874

Provision for taxes on unrealized appreciation on investments

 

(78,760)

(78,760)

Distributions from net investment income

(7,951,284)

(7,951,284)

Issuance of common stock, net of offering costs(1)

581,614

 

581

 

8,289,988

 

 

8,290,569

Balances at March 31, 2023

 

20,248,383

$

20,248

$

283,404,708

$

(2,572,911)

$

280,852,045

Net investment income

10,413,244

10,413,244

Net realized loss on non-controlled, non-affiliated investments

(310,588)

(310,588)

Net realized loss on foreign currency translation

(10,704)

(10,704)

Net change in unrealized depreciation on non-controlled, non-affiliated investments

(6,295,233)

(6,295,233)

Net change in unrealized depreciation on foreign currency translations

(20,323)

(20,323)

Provision for taxes on unrealized appreciation on investments

(65,353)

(65,353)

Distributions from net investment income

(8,659,144)

(8,659,144)

Issuance of common stock, net of offering costs(1)

 

2,309,521

 

2,310

 

32,418,774

 

 

32,421,084

Balances at June 30, 2023

 

22,557,904

$

22,558

$

315,823,482

$

(7,521,012)

$

308,325,028

(1) See Note 4 to the Consolidated Financial Statements contained herein for more information on offering costs.

3

Table of Contents

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

For the six

For the six

months ended

months ended

    

June 30, 2023

    

June 30, 2022

Cash flows from operating activities

 

  

 

  

Net increase in net assets resulting from operations

$

8,447,190

$

6,558,011

Adjustments to reconcile net increase in net assets from operations to net cash used in operating activities:

 

 

Purchases of investments

 

(87,741,479)

(142,053,995)

Proceeds from sales and repayments of investments

 

44,269,661

58,182,238

Net change in unrealized depreciation on investments

 

10,544,875

8,011,193

Net change in unrealized depreciation on foreign currency translations

18,306

35,754

Increase in investments due to PIK

 

(1,904,853)

(653,534)

Amortization of premium and accretion of discount, net

 

(1,360,629)

(1,174,220)

Deferred tax provision

 

144,113

181,813

Amortization of loan structure fees

 

289,243

272,959

Amortization of deferred financing costs

 

221,524

221,524

Amortization of loan fees on SBA-guaranteed debentures

 

624,358

589,020

Net realized loss (gain) on investments

 

275,621

(3,105,367)

Changes in other assets and liabilities

 

  

 

Increase in interest receivable

(654,240)

(28,511)

Decrease (increase) in other receivable

8,876

(122,781)

Increase in related party receivable

(883)

(187,132)

Decrease in prepaid expenses

357,520

226,175

(Decrease) increase in management fees payable

(5,284,818)

250,828

Increase (decrease) in income incentive fees payable

711,987

(1,459,942)

Decrease in capital gains incentive fees payable

(569,528)

(1,025,791)

Increase in administrative services payable

50,346

13,373

Increase in interest payable

142,257

259,771

Decrease in related party payable

(284,527)

Decrease in unearned revenue

(98,964)

(18,860)

Decrease in income tax payable

(393,015)

(2,544,219)

Increase in other accrued expenses and liabilities

226,618

637,471

Net Cash Used in Operating Activities

$

(31,960,441)

$

(76,934,222)

Cash flows from Financing Activities

 

  

 

  

Proceeds from the issuance of common stock

$

41,448,945

$

420,004

Sales load for common stock issued

(614,721)

(5,957)

Offering costs paid for common stock issued

(121,471)

(183,114)

Stockholder distributions paid

(13,603,459)

(11,064,831)

Proceeds from SBA-guaranteed debentures

43,600,000

Financing costs paid on SBA-guaranteed debentures

(1,061,660)

Financing costs paid on Credit facility

(131,768)

Borrowings under Credit Facility

37,000,000

89,588,800

Repayments of Credit Facility

(65,267,800)

(61,940,000)

Net Cash (Used) Provided by Financing Activities

$

(1,158,506)

$

59,221,474

Net Decrease in Cash and Cash Equivalents

$

(33,118,947)

$

(17,712,748)

Cash and Cash Equivalents Balance at Beginning of Period

$

48,043,329

$

44,174,856

Cash and Cash Equivalents Balance at End of Period

$

14,924,382

$

26,462,108

Supplemental and Non-Cash Activities

 

  

 

  

Cash paid for interest expense

$

14,711,017

$

9,072,909

Income and excise tax paid

 

1,139,564

3,132,755

Increase in dividends payable

 

3,006,969

1,043,498

(Decrease) increase in deferred offering costs

 

(1,100)

74,270

4

Table of Contents

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

June 30, 2023

(unaudited)

Principal

% of  

  

  

  

  

  

  

  

Investment

  

  

Headquarters/ 

  

Amount/

  

Amortized

  

Fair 

  

Net  

 

Investments

Footnotes

Security(2)

Coupon

Floor

Cash

PIK

Date

 

Maturity

Industry

Shares(3)

Cost

Value(1)

Assets

 

Non-controlled, non-affiliated investments

(4)(5)

  

  

  

  

  

2X LLC

(9)

Berwyn, PA

Term Loan

(11)

First Lien

3M SOFR+

6.50

%

2.00

%

11.74

%

6/5/2023

6/5/2028

Services: Business

$

5,500,208

5,364,330

5,364,330

1.74

%

2X Investors LP Class A Units

Equity

6/5/2023

  

58,949

589,496

589,490

0.19

%

Total

$

5,953,826

$

5,953,820

1.93

%

Ad.Net Acquisition, LLC

(9)

Los Angeles, CA

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

6.00

%

1.00

%

11.50

%

5/7/2021

5/7/2026

Services: Business

$

15,276,471

15,134,674

15,200,089

4.93

%

Revolver

(11)

First Lien

3M SOFR+

6.00

%

1.00

%

11.50

%

5/7/2021

5/7/2026

909,314

909,314

904,767

0.29

%

Ad.Net Holdings, Inc. Series A Common Stock (SBIC II)

(5)

Equity

5/7/2021

7,794

77,941

75,110

0.02

%

Ad.Net Holdings, Inc. Series A Preferred Stock (SBIC II)

(5)

Equity

5/7/2021

7,015

701,471

675,986

0.22

%

Total

$

16,823,400

$

16,855,952

5.46

%

ADS Group Opco, LLC

(9)

Lakewood, CO

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

6.75

%

2.00

%

12.09

%

6/4/2021

6/4/2026

Aerospace & Defense

$

14,400,000

14,215,738

14,256,000

4.63

%

Revolver

(11)

First Lien

3M SOFR+

6.75

%

2.00

%

12.09

%

6/4/2021

6/4/2026

90,000

90,000

89,100

0.03

%

ADS Group Topco, LLC Class A Units

Equity

6/4/2021

77,626

288,691

-

0.00

%

ADS Group Topco, LLC Class B Units

Equity

6/4/2021

56,819

211,309

-

0.00

%

ADS Group Topco, LLC Class Z Units

Equity

6/15/2022

72,043

267,929

-

0.00

%

ADS Group Topco, LLC Class Y Units

Equity

4/11/2023

23,859

88,733

180,525

0.06

%

Total

$

15,162,400

$

14,525,625

4.72

%

American Refrigeration, LLC

(9)

Jacksonville, FL

Term Loan (SBIC)

(4)(11)

First Lien

3M SOFR+

6.50

%

1.50

%

11.74

%

3/31/2023

3/31/2028

Services: Business

$

8,254,988

8,056,257

8,254,988

2.68

%

Revolver

(11)

First Lien

3M SOFR+

6.50

%

1.50

%

11.73

%

3/31/2023

3/31/2028

10,000

10,000

10,000

0.00

%

AR-USA Holdings, LLC Class A Units

Equity

3/31/2023

141

141,261

229,069

0.07

%

Total

$

8,207,518

$

8,494,057

2.75

%

Advanced Barrier Extrusions, LLC

Rhinelander, WI

Term Loan B (SBIC)

(4)(11)

First Lien

1M SOFR+

7.50

%

1.00

%

12.63

%

11/30/2020

11/30/2026

Containers, Packaging, & Glass

$

17,062,500

16,848,669

14,417,813

4.69

%

GP ABX Holdings Partnership, L.P. Partner Interests

Equity

8/8/2018

644,737

528,395

-

0.00

%

GP ABX Holdings Partnership, L.P. Series B Preferred Interests

Equity

1/5/2023

353

35,308

6,343

0.00

%

Total

$

17,412,372

$

14,424,156

4.69

%

Anne Lewis Strategies, LLC

(9)

Washington, DC

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

6.50

%

2.00

%

11.74

%

3/5/2021

5/9/2028

Services: Business

$

10,350,000

10,227,396

10,350,000

3.36

%

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

6.50

%

2.00

%

11.74

%

4/15/2022

5/9/2028

3,229,922

3,183,239

3,229,922

1.05

%

Revolver

(11)

First Lien

3M SOFR+

6.50

%

2.00

%

11.74

%

3/5/2021

5/9/2028

30,000

30,000

30,000

0.01

%

SG AL Investment, LLC Common Units

(6)

Equity

3/5/2021

1,000

658,411

2,896,022

0.94

%

Total

$

14,099,046

$

16,505,944

5.36

%

APE Holdings, LLC

Deer Park, TX

Class A Units

Equity

9/5/2014

Chemicals, Plastics, & Rubber

375,000

375,000

19,874

0.01

%

Total

$

375,000

$

19,874

0.01

%

Atmosphere Aggregator Holdings II, L.P.

Atlanta, GA

Common Units

Equity

1/26/2016

Services: Business

254,250

-

2,317,698

0.75

%

Stratose Aggregator Holdings, L.P. Common Units

Equity

6/30/2015

750,000

-

6,836,868

2.22

%

Total

$

-

$

9,154,566

2.97

%

ArborWorks Acquisition LLC

(9)

Oakhurst, CA

Term Loan

(11)

First Lien

3M SOFR+

10.00

%

1.00

%

12.23

%

3.00

%

11/23/2021

11/9/2026

Environmental Industries

$

14,923,831

14,818,863

12,759,876

4.14

%

Revolver

(11)

First Lien

1M SOFR+

10.00

%

1.00

%

12.20

%

3.00

%

11/23/2021

11/9/2026

2,430,617

2,430,617

2,078,178

0.67

%

ArborWorks Holdings LLC Units

Equity

12/29/2021

  

115

115,385

-

0.00

%

ArborWorks Holdings LLC Class A-1 Units

Equity

5/15/2023

  

29

15,515

-

0.00

%

Total

$

17,380,380

$

14,838,054

4.81

%

5

Table of Contents

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

June 30, 2023

(unaudited)

Principal

% of  

  

  

  

  

  

  

  

Investment  

  

  

Headquarters/ 

  

Amount/

  

Amortized

  

Fair 

  

Net  

Investments

Footnotes

Security(2)

Coupon

Floor

Cash

PIK

Date

Maturity

Industry

Shares(3)

Cost

Value(1)

Assets

Archer Systems, LLC

(9)

Houston, TX

Term Loan

(11)

First Lien

3M SOFR+

6.00

%

1.00

%

11.39

%

8/11/2022

8/11/2027

Services: Business

$

4,444,868

4,394,802

4,444,868

1.44

%

CF Arch Holdings LLC Class A Units

Equity

8/10/2022

  

100,000

100,000

129,525

0.04

%

Total

$

4,494,802

$

4,574,393

1.48

%

Axis Portable Air, LLC

(9)

Phoenix, AZ

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

5.75

%

2.00

%

11.14

%

3/22/2022

3/22/2028

Capital Equipment

$

12,000,000

11,801,894

12,000,000

3.89

%

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

5.75

%

2.00

%

11.14

%

4/17/2023

3/22/2028

Capital Equipment

$

1,893,610

1,856,705

1,893,610

0.61

%

Delayed Draw Term Loan

(11)

First Lien

3M SOFR+

5.75

%

1.00

%

11.14

%

3/22/2022

3/22/2028

100,000

99,123

100,000

0.03

%

Axis Air Parent, LLC Preferred Units

Equity

3/22/2022

4,436

443,636

729,770

0.24

%

Total

$

14,201,358

$

14,723,380

4.77

%

Baker Manufacturing Company, LLC

Evansville, IN

Term Loan (SBIC II)

(5)(10)(12)

First Lien

3M SOFR+

5.25

%

1.00

%

11.36

%

7/5/2022

7/5/2027

Capital Equipment

$

13,863,087

13,625,931

13,793,772

4.47

%

BSC Blue Water Holdings, LLC Series A Units (SBIC II)

(5)

Equity

7/5/2022

743,770

743,770

791,588

0.26

%

Total

$

14,369,701

$

14,585,360

4.73

%

BLP Buyer, Inc.

(9)

Houston, TX

Term Loan

(11)

First Lien

3M SOFR+

6.25

%

1.25

%

11.44

%

2/1/2022

2/1/2027

Capital Equipment

$

6,147,613

6,054,239

6,055,399

1.96

%

Term Loan

(11)

First Lien

1M SOFR+

6.75

%

2.00

%

11.94

%

4/14/2023

2/1/2027

Capital Equipment

$

1,729,958

1,680,856

1,704,009

0.55

%

Revolver

(11)

First Lien

1M SOFR+

6.25

%

1.25

%

11.44

%

2/1/2022

2/1/2027

76,566

76,566

75,418

0.02

%

BL Products Parent, L.P. Class A Units

Equity

2/1/2022

  

879,060

983,608

1,325,335

0.43

%

Total

$

8,795,269

$

9,160,161

2.96

%

Café Valley, Inc.

Phoenix, AZ

Term Loan

(11)

First Lien

3M SOFR+

7.24

%

2.00

%

12.48

%

8/28/2019

8/28/2024

Beverage, Food, & Tobacco

$

15,636,905

15,552,807

15,558,720

5.06

%

CF Topco LLC Units

Equity

8/28/2019

9,160

916,015

1,390,618

0.45

%

Total

$

16,468,822

$

16,949,338

5.51

%

Camp Profiles LLC

(9)

Boston, MA

Term Loan (SBIC)

(4)(11)

First Lien

3M SOFR+

5.25

%

1.00

%

10.64

%

9/3/2021

9/3/2026

Media: Advertising, Printing & Publishing

$

10,070,625

9,933,236

10,070,625

3.27

%

CIVC VI-A 829 Blocker, LLC Units

Equity

9/3/2021

250

250,000

486,929

0.16

%

Total

$

10,183,236

$

10,557,554

3.43

%

CEATI International Inc.

(7)(9)

Montreal, Canada

Term Loan

(11)

First Lien

3M SOFR+

6.50

%

1.00

%

11.94

%

2/19/2021

2/19/2026

Services: Business

$

12,576,575

12,429,688

12,450,809

4.04

%

CEATI Holdings, LP Class A Units

Equity

2/19/2021

250,000

250,000

247,238

0.08

%

Total

$

12,679,688

$

12,698,047

4.12

%

Cerebro Buyer, LLC

(9)

Columbia, SC

Term Loan

(11)

First Lien

1M SOFR+

6.75

%

1.00

%

11.95

%

3/15/2023

3/15/2029

Healthcare & Pharmaceuticals

$

4,670,617

4,558,255

4,600,558

1.49

%

Cerebro Holdings Partnership, L.P. Series A Partner Interests

Equity

3/15/2023

62,961

62,961

371,893

0.12

%

Cerebro Holdings Partnership, L.P. Series B Partner Interests

Equity

3/15/2023

341,091

341,091

-

0.00

%

Total

$

4,962,307

$

4,972,451

1.61

%

CF512, Inc.

(9)

Blue Bell, PA

Term Loan (SBIC)

(4)(11)

First Lien

3M LIBOR+

6.00

%

1.00

%

11.50

%

9/1/2021

9/1/2026

Media: Advertising, Printing & Publishing

$

13,982,410

13,791,654

13,702,762

4.44

%

Delayed Draw Term Loan

(11)

First Lien

3M SOFR+

6.00

%

1.00

%

11.43

%

9/1/2021

9/1/2026

3,019,259

2,997,819

2,958,874

0.96

%

StellPen Holdings, LLC Membership Interests

Equity

9/1/2021

22.09%

220,930

237,140

0.08

%

Total

$

17,010,403

$

16,898,776

5.48

%

6

Table of Contents

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

June 30, 2023

(unaudited)

Principal

% of  

  

  

  

  

  

  

  

Investment  

  

  

Headquarters/ 

  

Amount/

  

Amortized

  

Fair 

  

Net  

Investments

Footnotes

Security(2)

Coupon

Floor

Cash

PIK

Date

Maturity

Industry

Shares(3)

Cost

Value(1)

Assets

CompleteCase, LLC

(9)

Seattle, WA

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

6.50

%

2.00

%

11.89

%

12/21/2020

12/21/2025

Services: Consumer

$

6,721,944

6,648,059

6,654,725

2.16

%

CompleteCase Holdings, Inc. Class A Common Stock (SBIC II)

(5)

Equity

12/21/2020

417

5

5

0.00

%

CompleteCase Holdings, Inc. Series A Preferred Stock (SBIC II)

(5)

Equity

12/21/2020

522

521,734

521,734

0.17

%

CompleteCase Holdings, Inc. Class A Common Stock

Equity

4/27/2023

89

1

1

0.00

%

CompleteCase Holdings, Inc. Series C Preferred Stock

Equity

4/27/2023

111

111,408

111,409

0.04

%

Total

$

7,281,207

$

7,287,874

2.37

%

COPILOT Provider Support Services, LLC

(9)

Maitland, FL

Term Loan

(11)

First Lien

3M SOFR+

6.50

%

2.00

%

11.89

%

11/22/2022

11/22/2027

Healthcare & Pharmaceuticals

$

4,962,500

4,872,128

4,912,875

1.59

%

QHP Project Captivate Blocker, Inc. Common Stock

Equity

11/22/2022

4

285,714

286,799

0.09

%

Total

$

5,157,842

$

5,199,674

1.68

%

Craftable Intermediate II Inc.

(9)

Dallas, TX

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

6.50

%

1.50

%

11.74

%

6/30/2023

6/30/2028

High Tech Industries

$

10,083,715

9,882,041

9,882,041

3.21

%

Gauge Craftable LP Partnership Interests

Equity

6/30/2023

  

626,690

626,690

626,690

0.20

%

Total

$

10,508,731

$

10,508,731

3.41

%

Credit Connection, LLC

(9)

Fresno, CA

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

5.75

%

1.00

%

11.14

%

7/30/2021

7/30/2026

Software

$

9,825,000

9,695,877

9,677,625

3.14

%

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

5.75

%

1.00

%

11.14

%

3/31/2022

7/30/2026

7,406,250

7,296,176

7,295,156

2.37

%

Series A Units

Equity

7/30/2021

804,384

804,384

924,503

0.30

%

Total

$

17,796,437

$

17,897,284

5.81

%

Curion Holdings, LLC

Chicago, IL

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

6.75

%

1.00

%

12.14

%

7/29/2022

7/29/2027

Services: Business

$

12,962,051

12,741,683

12,378,759

4.01

%

Revolver

(11)

First Lien

3M SOFR+

6.75

%

1.00

%

12.14

%

7/29/2022

7/29/2027

100,000

100,000

95,500

0.03

%

SP CS Holdings LLC Class A Units

Equity

7/29/2022

  

739,999

739,999

228,218

0.07

%

Total

$

13,581,682

$

12,702,477

4.11

%

Data Centrum Communications, Inc.

Montvale, NJ

Health Monitor Holdings, LLC Series A Preferred Units

Equity

5/15/2019

Media: Advertising, Printing & Publishing

1,000,000

1,000,000

1,000,000

0.32

%

Total

$

1,000,000

$

1,000,000

0.32

%

Douglas Products Group, LP

Liberty, MO

Partnership Interests

Equity

12/27/2018

Chemicals, Plastics, & Rubber

322

-

648,462

0.21

%

Total

$

-

$

648,462

0.21

%

Dresser Utility Solutions, LLC

Bradford, PA

Term Loan (SBIC)

(4)(11)

Second Lien

1M SOFR+

8.50

%

1.00

%

13.70

%

10/1/2018

4/1/2026

Utilities: Oil & Gas

$

10,000,000

9,931,992

10,000,000

3.24

%

Total

$

9,931,992

$

10,000,000

3.24

%

DRS Holdings III, Inc.

(9)

St. Louis, MO

Term Loan

(11)

First Lien

1M SOFR+

6.25

%

1.00

%

11.45

%

11/1/2019

11/1/2025

Consumer Goods: Durable

$

9,140,990

9,100,052

9,095,285

2.95

%

Total

$

9,100,052

$

9,095,285

2.95

%

DTE Enterprises, LLC

(9)

Roselle, IL

DTE Holding Company, LLC Class A-2 Units

Equity

4/13/2018

Energy: Oil & Gas

776,316

466,204

276,224

0.09

%

DTE Holding Company, LLC Class AA Units

Equity

4/13/2018

  

723,684

723,684

1,211,159

0.39

%

Total

$

1,189,888

$

1,487,383

0.48

%

EH Real Estate Services, LLC

Skokie, IL

Term Loan A-1 (SBIC)

(4)(18)

First Lien

-

%

-

%

9/3/2021

9/3/2026

FIRE: Real Estate

$

6,340,891

6,246,775

1,902,267

0.62

%

Term Loan A-2 (SBIC)

(4)(18)

First Lien

-

%

-

%

4/3/2023

9/3/2026

$

1,140,558

1,140,558

1,140,558

0.37

%

Term Loan A-2

(18)

First Lien

-

%

-

%

4/3/2023

9/3/2026

$

570,279

570,279

570,279

0.18

%

Term Loan A-3 (SBIC)

(4)(18)

First Lien

-

%

-

%

6/7/2023

9/3/2026

$

392,910

392,910

392,910

0.13

%

Term Loan A-3

(18)

First Lien

-

%

-

%

6/7/2023

9/3/2026

$

196,455

196,455

196,455

0.06

%

EH Holdco, LLC Series A Preferred Units

Equity

9/3/2021

7,892

7,891,642

-

0.00

%

Total

$

16,438,619

$

4,202,469

1.36

%

7

Table of Contents

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

June 30, 2023

(unaudited)

Principal

% of  

  

  

  

  

  

  

  

Investment  

  

  

Headquarters/ 

  

Amount/

  

Amortized

  

Fair 

  

Net  

 

Investments

Footnotes

Security(2)

Coupon

Floor

Cash

PIK

Date

Maturity

Industry

Shares(3)

Cost

Value(1)

Assets

 

Elliott Aviation, LLC

(9)

Moline, IL

Term Loan

(11)

First Lien

1M SOFR+

8.00

%

2.00

%

11.25

%

2.00

%

1/31/2020

1/31/2025

Aerospace & Defense

$

10,112,300

10,042,519

8,747,140

2.84

%

Revolver A

(11)

First Lien

1M SOFR+

8.00

%

2.00

%

11.25

%

2.00

%

1/31/2020

1/31/2025

1,396,180

1,396,180

1,207,696

0.39

%

SP EA Holdings LLC Class A Units

Equity

1/31/2020

  

900,000

900,000

-

0.00

%

Total

$

12,338,699

$

9,954,836

3.23

%

EOS Fitness Holdings, LLC

Phoenix, AZ

Class A Preferred Units

Equity

12/30/2014

Hotel, Gaming, & Leisure

118

-

239,419

0.08

%

Class B Common Units

Equity

12/30/2014

3,017

-

591,711

0.19

%

Total

$

-

$

831,130

0.27

%

Equine Network, LLC

(9)

Boulder, CO

Term A Loan (SBIC)

(4)(11)

First Lien

1M SOFR+

6.50

%

1.00

%

11.72

%

5/22/2023

5/22/2028

Services: Consumer

$

5,008,219

4,884,531

4,884,531

1.58

%

Total

$

4,884,531

$

4,884,531

1.58

%

Evriholder Acquisition, Inc.

(9)

Anaheim, CA

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

6.75

%

1.50

%

12.14

%

1/23/2023

1/24/2028

Consumer Goods: Durable

$

12,918,750

12,615,939

12,854,156

4.17

%

KEJ Holdings LP Class A Units

Equity

1/23/2023

873,333

873,333

873,284

0.28

%

Total

$

13,489,272

$

13,727,440

4.45

%

Exacta Land Surveyors, LLC

(9)

Cleveland, OH

Term Loan (SBIC)

(4)(11)

First Lien

3M SOFR+

6.75

%

1.50

%

11.14

%

1.00

%

2/8/2019

2/8/2024

Services: Business

$

16,318,863

16,238,417

16,207,928

5.27

%

Term Loan (SBIC)

(4)(11)

First Lien

3M SOFR+

6.75

%

1.50

%

11.14

%

1.00

%

7/15/2022

2/8/2024

991,792

981,701

985,050

0.32

%

SP ELS Holdings LLC Class A Units

Equity

2/8/2019

1,122,250

1,122,250

526,770

0.17

%

Total

$

18,342,368

$

17,719,748

5.76

%

Exigo, LLC

(9)

Dallas, TX

Term Loan

(11)

First Lien

1M SOFR+

5.75

%

1.00

%

10.95

%

3/16/2022

3/16/2027

Software

$

8,856,973

8,753,057

8,856,973

2.87

%

Gauge Exigo Coinvest, LLC Common Units

Equity

3/16/2022

  

377,535

377,535

377,535

0.12

%

Total

$

9,130,592

$

9,234,508

2.99

%

Florachem Corporation

(9)

Jacksonville, FL

Term Loan (SBIC)

(4)(11)

First Lien

3M SOFR+

6.50

%

1.00

%

11.89

%

4/29/2022

4/29/2028

Chemicals, Plastics, & Rubber

$

9,900,000

9,733,329

9,751,500

3.16

%

Revolver

(11)

First Lien

3M SOFR+

6.50

%

1.00

%

11.89

%

4/29/2022

4/29/2028

70,000

70,000

68,950

0.02

%

SK FC Holdings, L.P. Class A Units

Equity

4/29/2022

362

362,434

289,949

0.09

%

Total

$

10,165,763

$

10,110,399

3.27

%

General LED OPCO, LLC

San Antonio, TX

Term Loan

(11)(14)

Second Lien

3M SOFR+

9.00

%

1.50

%

-

%

5/1/2018

3/31/2026

Services: Business

$

4,500,000

4,467,706

4,230,000

1.37

%

Total

$

4,467,706

$

4,230,000

1.37

%

GS HVAM Intermediate, LLC

(9)

Carlsbad, CA

Term Loan

(11)

First Lien

1M SOFR+

6.50

%

1.00

%

11.70

%

10/18/2019

10/2/2024

Beverage, Food, & Tobacco

$

12,458,681

12,421,108

12,458,681

4.04

%

HV GS Acquisition, LP Class A Interests

Equity

10/2/2019

  

2,144

1,967,133

2,763,378

0.90

%

Total

$

14,388,241

$

15,222,059

4.94

%

Heartland Business Systems, LLC

(9)

Little Chute, WI

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

6.25

%

1.00

%

11.64

%

8/26/2022

8/26/2027

Services: Business

$

9,925,000

9,753,229

9,925,000

3.22

%

Delayed Draw Term Loan

(11)

First Lien

3M SOFR+

6.25

%

1.00

%

11.64

%

8/26/2022

8/26/2027

49,875

49,400

49,875

0.02

%

AMCO HBS Holdings, LP Class A Units

(6)

Equity

8/26/2022

2,861

261,372

609,233

0.20

%

Total

$

10,064,001

$

10,584,108

3.44

%

Heat Makes Sense Shared Services, LLC

(9)

Brooklyn, NY

Term Loan

(11)

First Lien

6M SOFR+

5.25

%

0.75

%

10.26

%

7/1/2022

7/1/2029

Consumer Goods: Non-Durable

$

99,250

97,437

99,250

0.03

%

Ishtar Co-Invest-B LP Partnership Interests

Equity

7/1/2022

  

77,778

77,778

134,314

0.04

%

Oshun Co-Invest-B LP Partnership Interests

Equity

7/1/2022

  

22,222

22,222

38,375

0.01

%

Total

$

197,437

$

271,939

0.08

%

8

Table of Contents

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

June 30, 2023

(unaudited)

Principal

% of  

  

  

  

  

  

  

Investment  

  

  

Headquarters/ 

  

Amount/

  

Amortized

  

Fair 

  

Net  

 

Investments

Footnotes

Security(2)

Coupon

Floor

Cash

PIK

Date

Maturity

Industry

Shares(3)

Cost

Value(1)

Assets

 

HV Watterson Holdings, LLC

(9)

Schaumburg, IL

Term Loan

(11)

First Lien

3M SOFR+

6.25

%

1.00

%

11.64

%

12/17/2021

12/17/2026

Services: Business

$

13,235,053

13,039,185

13,036,527

4.23

%

Revolver

(11)

First Lien

3M SOFR+

6.25

%

1.00

%

11.64

%

12/17/2021

12/17/2026

64,000

64,000

63,040

0.02

%

Delayed Draw Term Loan

(11)

First Lien

3M SOFR+

6.25

%

1.00

%

11.64

%

12/17/2021

12/17/2026

321,489

318,790

316,667

0.10

%

HV Acquisition VI, LLC Class A Units

Equity

12/17/2021

  

1,632

1,631,591

1,762,272

0.57

%

Total

$

15,053,566

$

15,178,506

4.92

%

I2P Holdings, LLC

Cleveland, OH

Series A Preferred Units

Equity

1/31/2018

Services: Business

750,000

-

3,295,767

1.07

%

Total

$

-

$

3,295,767

1.07

%

ICD Holdings, LLC

(7)

San Francisco, CA

Class A Units

(6)

Equity

1/1/2018

Finance

9,962

458,494

1,756,706

0.57

%

Total

$

458,494

$

1,756,706

0.57

%

Impact Home Services LLC

(9)

Tampa, FL

Term Loan (SBIC)

(4)(11)

First Lien

3M SOFR+

6.50

%

2.00

%

11.74

%

4/28/2023

4/28/2028

Services: Consumer

$

5,936,899

5,792,109

5,792,109

1.88

%

Term Loan (SBIC)

(4)(11)

First Lien

3M SOFR+

6.50

%

2.00

%

11.74

%

6/30/2023

4/28/2028

Services: Consumer

$

269,859

263,113

263,278

0.09

%

Revolver

(11)

First Lien

3M SOFR+

6.50

%

2.00

%

11.74

%

4/28/2023

4/28/2028

12,500

12,500

12,195

0.00

%

Impact Holdings Georgia LLC Class A Units

Equity

4/28/2023

  

311

310,844

310,844

0.10

%

Total

$

6,378,566

$

6,378,426

2.07

%

Infolinks Media Buyco, LLC

(9)

Ridgewood, NJ

Term Loan (SBIC II)

(5)(11)

First Lien

1M SOFR+

5.50

%

1.00

%

10.70

%

11/1/2021

11/1/2026

Media: Advertising, Printing & Publishing

$

8,397,125

8,277,407

8,355,139

2.71

%

Delayed Draw Term Loan

(11)

First Lien

1M SOFR+

5.50

%

1.00

%

10.70

%

11/1/2021

11/1/2026

$

1,485,000

1,470,150

1,477,575

0.48

%

Tower Arch Infolinks Media, LP LP Interests

(6)(17)

Equity

10/28/2021

449,369

421,837

768,207

0.25

%

Total

$

10,169,394

$

10,600,921

3.44

%

Inoapps Bidco, LLC

(9)

Houston, TX

Term Loan B

(11)

First Lien

3M SONIA+

5.75

%

1.00

%

10.34

%

2/15/2022

2/15/2027

High Tech Industries

£

9,900,000

$

13,218,295

$

12,445,368

4.04

%

Delayed Draw Term Loan

(11)

First Lien

3M LIBOR+

5.75

%

1.00

%

11.02

%

2/15/2022

2/15/2027

$

82,708

82,021

81,881

0.03

%

Inoapps Holdings, LLC Series A-1 Preferred Units

Equity

2/15/2022

  

739,844

783,756

767,623

0.25

%

Total

$

14,084,072

$

13,294,872

4.32

%

Integrated Oncology Network, LLC

(9)

Newport Beach, CA

Term Loan

(11)

First Lien

3M SOFR+

6.00

%

1.00

%

11.04

%

7/17/2019

6/24/2025

Healthcare & Pharmaceuticals

$

15,752,918

15,680,175

15,437,860

5.01

%

Term Loan

(11)

First Lien

3M SOFR+

6.00

%

1.00

%

11.04

%

11/1/2021

6/24/2025

1,090,422

1,081,708

1,068,614

0.35

%

Revolver

(11)

First Lien

3M SOFR+

6.00

%

1.00

%

11.19

%

7/17/2019

6/24/2025

498,165

498,165

488,202

0.16

%

Total

$

17,260,048

$

16,994,676

5.52

%

International Designs Holdings LLC

Farmingville, NY

Common Units

Equity

4/1/2022

Construction & Building

200,000

200,000

176,204

0.06

%

Total

$

200,000

$

176,204

0.06

%

Interstate Waste Services, Inc.

Amsterdam, OH

Common Stock

Equity

1/15/2020

Environmental Industries

21,925

946,125

582,307

0.19

%

Total

$

946,125

$

582,307

0.19

%

Intuitive Health, LLC

Plano, TX

Term Loan (SBIC II)

(5)(10)(12)

First Lien

3M SOFR+

5.50

%

1.50

%

12.08

%

10/18/2019

10/18/2027

Healthcare & Pharmaceuticals

$

5,820,000

5,760,693

5,820,000

1.89

%

Term Loan

(10)(12)

First Lien

3M SOFR+

5.50

%

1.50

%

12.08

%

10/18/2019

10/18/2027

8,185,612

8,102,601

8,185,612

2.65

%

Term Loan (SBIC II)

(5)(10)(12)

First Lien

3M SOFR+

5.50

%

1.50

%

12.08

%

8/31/2021

10/18/2027

3,065,650

3,031,322

3,065,650

0.99

%

Legacy Parent, Inc. Class A Common Stock

Equity

10/30/2020

58

-

185,874

0.06

%

Total

$

16,894,616

$

17,257,136

5.59

%

9

Table of Contents

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

June 30, 2023

(unaudited)

Principal

% of  

  

  

  

  

  

  

  

Investment  

  

  

Headquarters/ 

  

Amount/

  

Amortized

  

Fair 

  

Net  

 

Investments

Footnotes

Security(2)

Coupon

Floor

Cash

PIK

Date

Maturity

Industry

Shares(3)

Cost

Value(1)

Assets

 

Invincible Boat Company LLC

(9)

Opa Locka, FL

Term Loan

(11)

First Lien

3M LIBOR+

6.50

%

1.50

%

12.04

%

8/28/2019

8/28/2025

Consumer Goods: Durable

$

5,381,042

5,309,414

5,273,421

1.71

%

Term Loan (SBIC II)

(5)(11)

First Lien

3M LIBOR+

6.50

%

1.50

%

12.04

%

8/28/2019

8/28/2025

4,967,116

4,925,363

4,867,774

1.58

%

Term Loan (SBIC II)

(5)(11)

First Lien

3M LIBOR+

6.50

%

1.50

%

12.04

%

6/1/2021

8/28/2025

1,104,255

1,091,999

1,082,170

0.35

%

Revolver

(11)

First Lien

3M LIBOR+

6.50

%

1.50

%

12.04

%

8/28/2019

8/28/2025

638,298

638,298

625,532

0.20

%

Warbird Parent Holdco, LLC Class A Units

Equity

8/28/2019

1,362,575

1,299,691

827,207

0.27

%

Total

$

13,264,765

$

12,676,104

4.11

%

J.R. Watkins, LLC

San Francisco

Term Loan (SBIC)

(4)

First Lien

12.00

%

7.00

%

5.00

%

12/22/2017

3/31/2024

Consumer Goods: Non-Durable

$

13,027,616

13,027,616

11,789,992

3.82

%

J.R. Watkins Holdings, Inc. Class A Preferred Stock

Equity

12/22/2017

1,133

1,132,576

134,200

0.04

%

Total

$

14,160,192

$

11,924,192

3.86

%

Jurassic Acquisition Corp.

Sparks, MD

Term Loan

(11)

First Lien

1M SOFR+

5.50

%

-

%

10.70

%

12/28/2018

11/15/2024

Metals & Mining

$

16,712,500

16,644,442

16,545,375

5.38

%

Total

$

16,644,442

$

16,545,375

5.38

%

Kelleyamerit Holdings, Inc.

Walnut Creek, CA

Term Loan (SBIC)

(4)(10)(12)

First Lien

1M BSBY+

6.75

%

1.00

%

13.11

%

12/24/2020

12/24/2025

Automotive

$

9,750,000

9,642,668

9,750,000

3.16

%

Term Loan

(10)(12)

First Lien

1M BSBY+

6.75

%

1.00

%

13.11

%

12/24/2020

12/24/2025

1,500,000

1,483,487

1,500,000

0.49

%

Total

$

11,126,155

$

11,250,000

3.65

%

KidKraft, Inc.

Dallas, TX

Term Loan

(10)(12)

First Lien

1M SOFR+

6.00

%

1.00

%

11.24

%

4/3/2020

6/30/2023

Consumer Goods: Durable

$

1,580,768

1,580,768

1,359,460

0.44

%

KidKraft Group Holdings, LLC Preferred B Units

Equity

4/3/2020

4,000,000

4,000,000

-

0.00

%

Total

$

5,580,768

$

1,359,460

0.44

%

Ledge Lounger, Inc.

(9)

Katy, TX

Term Loan A (SBIC)

(4)(11)

First Lien

3M SOFR+

6.25

%

1.00

%

11.64

%

11/9/2021

11/9/2026

Consumer Goods: Durable

$

7,530,066

7,422,509

7,492,416

2.43

%

SP L2 Holdings LLC Class A Units (SBIC)

(4)

Equity

11/9/2021

  

375,000

375,000

264,355

0.09

%

Total

$

7,797,509

$

7,756,771

2.52

%

Lightning Intermediate II, LLC

(9)

Jacksonville, FL

Term Loan (SBIC)

(4)(11)

First Lien

6M SOFR+

6.50

%

1.00

%

12.09

%

6/6/2022

6/6/2027

Consumer Goods: Non-Durable

$

13,415,079

13,194,591

13,213,853

4.29

%

Gauge Vimergy Coinvest, LLC Units

Equity

6/6/2022

  

399

398,677

252,284

0.08

%

Total

$

13,593,268

$

13,466,137

4.37

%

MacKenzie-Childs Acquisition, Inc.

(9)

Aurora, NY

Term Loan

(11)

First Lien

6M SOFR+

6.00

%

1.00

%

11.11

%

9/2/2022

9/2/2027

Consumer Goods: Durable

$

99,250

97,959

98,258

0.03

%

Revolver

(11)

First Lien

6M SOFR+

6.00

%

1.00

%

11.11

%

9/2/2022

9/2/2027

86,667

86,667

85,800

0.03

%

MacKenzie-Childs Investment, LP Partnership Interests

Equity

9/2/2022

  

100,000

100,000

91,917

0.03

%

Total

$

284,626

$

275,975

0.09

%

Madison Logic Holdings, Inc.

(9)(19)

New York, NY

Term Loan

(11)

First Lien

3M SOFR+

7.00

%

1.00

%

12.24

%

12/30/2022

12/30/2028

Media: Broadcasting & Subscription

$

4,517,894

4,392,469

4,450,126

1.44

%

Total

$

4,392,469

$

4,450,126

1.44

%

Microbe Formulas LLC

(9)

Meridian, ID

Term Loan (SBIC II)

(5)(11)

First Lien

1M SOFR+

6.25

%

1.00

%

11.44

%

4/4/2022

4/3/2028

Consumer Goods: Non-Durable

$

9,216,892

9,140,420

9,216,892

2.99

%

Total

$

9,140,420

$

9,216,892

2.99

%

MOM Enterprises, LLC

(9)

Richmond, CA

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

6.48

%

1.00

%

11.72

%

5/19/2021

5/19/2026

Consumer Goods: Non-Durable

$

16,137,333

15,933,634

15,975,960

5.19

%

MBliss SPC Holdings, LLC Units

Equity

5/19/2021

933,333

933,333

911,747

0.30

%

Total

$

16,866,967

$

16,887,707

5.49

%

10

Table of Contents

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

June 30, 2023

(unaudited)

Principal

% of  

  

  

  

  

  

  

  

Investment  

  

  

Headquarters/ 

  

Amount/

  

Amortized

  

Fair 

  

Net  

 

Investments

Footnotes

Security(2)

Coupon

Floor

Cash

PIK

Date

Maturity

Industry

Shares(3)

Cost

Value(1)

Assets

 

Monitorus Holding, LLC

(7)

London, UK

Term Loan

(11)

First Lien

3M LIBOR+

7.00

%

1.00

%

12.54

%

5/24/2022

5/24/2027

Media: Diversified & Production

$

100,000

99,181

99,500

0.03

%

Revolver

(11)

First Lien

3M LIBOR+

7.00

%

1.00

%

12.54

%

5/24/2022

5/24/2027

100,000

108,717

107,917

0.04

%

Delayed Draw Term Loan

(11)

First Lien

3M LIBOR+

7.00

%

1.00

%

12.54

%

5/24/2022

5/24/2027

100,000

100,931

100,426

0.03

%

Sapphire Aggregator S.a r.l. Class A Shares

Equity

9/1/2022

557,689

11,156

13,695

0.00

%

Sapphire Aggregator S.a r.l. Class B Shares

Equity

9/1/2022

557,682

11,156

13,695

0.00

%

Sapphire Aggregator S.a r.l. Class C Shares

Equity

9/1/2022

557,682

11,156

13,695

0.00

%

Sapphire Aggregator S.a r.l. Class D Shares

Equity

9/1/2022

557,682

11,156

13,695

0.00

%

Sapphire Aggregator S.a r.l. Class E Shares

Equity

9/1/2022

557,682

11,156

13,695

0.00

%

Sapphire Aggregator S.a r.l. Class F Shares

Equity

9/1/2022

557,682

11,156

13,695

0.00

%

Sapphire Aggregator S.a r.l. Class G Shares

Equity

9/1/2022

557,682

11,156

13,695

0.00

%

Sapphire Aggregator S.a r.l. Class H Shares

Equity

9/1/2022

557,682

11,156

13,695

0.00

%

Sapphire Aggregator S.a r.l. Class I Shares

Equity

9/1/2022

557,682

11,156

13,695

0.00

%

Total

$

409,233

$

431,098

0.10

%

Naumann/Hobbs Material Handling Corporation II, Inc.

(9)

Phoenix, AZ

Term Loan

(11)

First Lien

3M SOFR+

6.75

%

1.50

%

11.99

%

8/30/2019

8/30/2024

Services: Business

$

8,455,673

8,409,793

8,371,116

2.72

%

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

6.75

%

1.50

%

11.99

%

8/30/2019

8/30/2024

5,332,179

5,303,247

5,278,857

1.71

%

Naumann Hobbs Holdings, L.P. Class A-1 Units

Equity

9/29/2022

123

220,379

357,321

0.12

%

Naumann Hobbs Holdings, L.P. Class A-2 Units

Equity

9/29/2022

123

220,379

357,321

0.12

%

Total

$

14,153,798

$

14,364,615

4.67

%

NINJIO, LLC

(9)

Westlake Village, CA

Term Loan

(11)

First Lien

3M SOFR+

6.50

%

1.50

%

11.99

%

10/12/2022

10/12/2027

Media: Diversified & Production

$

4,975,000

4,886,934

4,950,125

1.61

%

Revolver

(11)

First Lien

3M SOFR+

6.50

%

1.50

%

11.99

%

10/12/2022

10/12/2027

66,667

66,667

66,334

0.02

%

NINJIO Holdings, LLC Units

Equity

10/12/2022

184

313,253

328,680

0.11

%

Total

$

5,266,854

$

5,345,139

1.74

%

NS412, LLC

Dallas, TX

Term Loan

(11)

Second Lien

3M LIBOR+

8.50

%

1.00

%

14.04

%

5/6/2019

11/6/2025

Services: Consumer

$

7,615,000

7,548,829

7,538,850

2.45

%

NS Group Holding Company, LLC Class A Units

Equity

5/6/2019

782

795,002

813,328

0.26

%

Total

$

8,343,831

$

8,352,178

2.71

%

NuMet Machining Techniques, LLC

(7)

Birmingham, United Kingdom

Term Loan

(11)(15)

Second Lien

PRIME+

8.00

%

-

%

-

%

11/5/2019

5/5/2026

Aerospace & Defense

$

12,675,000

12,543,458

1,330,875

0.43

%

Bromford Industries Limited Term Loan

(11)(15)

Second Lien

PRIME+

8.00

%

-

%

-

%

11/5/2019

5/5/2026

7,800,000

7,716,428

819,000

0.27

%

Total

$

20,259,886

$

2,149,875

0.70

%

NuSource Financial, LLC

Eden Prairie, MN

Term Loan (SBIC II)

(5)(11)

First Lien

1M LIBOR+

9.00

%

1.00

%

14.17

%

1/29/2021

1/29/2026

Services: Business

$

10,984,910

10,854,930

10,984,910

3.56

%

NuSource Financial Acquisition, Inc. (SBIC II)

(5)

Unsecured

13.75

%

4.00

%

9.75

%

1/29/2021

7/29/2026

5,947,879

5,885,742

5,620,746

1.82

%

NuSource Holdings, Inc. Warrants (SBIC II)

(5)

Equity

1/29/2021

  

54,966

-

-

0.00

%

Total

$

16,740,672

$

16,605,656

5.38

%

Nutritional Medicinals, LLC

(9)

Centerville, OH

Term Loan

(11)

First Lien

3M SOFR+

6.21

%

1.00

%

11.45

%

11/15/2018

11/15/2025

Healthcare & Pharmaceuticals

$

9,497,282

9,442,959

9,497,282

3.08

%

Term Loan

(11)

First Lien

3M SOFR+

6.21

%

1.00

%

11.45

%

10/28/2021

11/15/2025

4,009,520

3,971,754

4,009,520

1.30

%

Functional Aggregator, LLC Units

Equity

11/15/2018

12,500

972,803

1,874,213

0.61

%

Total

$

14,387,516

$

15,381,015

4.99

%

Onpoint Industrial Services, LLC

Deer Park, TX

Term Loan (SBIC)

(4)(11)

First Lien

3M SOFR+

7.00

%

1.75

%

12.24

%

11/16/2022

11/16/2027

Services: Business

$

12,828,792

12,595,013

12,700,504

4.12

%

Spearhead TopCo, LLC Class A Units

Equity

11/16/2022

606,742

606,742

688,293

0.22

%

Total

$

13,201,755

$

13,388,797

4.34

%

11

Table of Contents

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

June 30, 2023

(unaudited)

Principal

% of  

  

  

  

  

  

  

  

Investment  

  

  

Headquarters/ 

  

Amount/

  

Amortized

  

Fair 

  

Net  

 

Investments

Footnotes

Security(2)

Coupon

Floor

Cash

PIK

Date

Maturity

Industry

Shares(3)

Cost

Value(1)

Assets

 

PCP MT Aggregator Holdings, L.P.

(7)

Oak Brook, IL

Common Units

Equity

3/29/2019

Finance

825,020

119,281

3,023,143

0.98

%

Total

$

119,281

$

3,023,143

0.98

%

PCS Software, Inc.

(9)

Shenandoah, TX

Term Loan

(11)

First Lien

3M SOFR+

6.00

%

1.50

%

11.39

%

7/1/2019

7/1/2024

Transportation & Logistics

$

13,991,620

13,922,474

13,921,662

4.53

%

Term Loan (SBIC)

(4)(11)

First Lien

3M SOFR+

6.00

%

1.50

%

11.39

%

7/1/2019

7/1/2024

1,834,967

1,825,899

1,825,792

0.59

%

Delayed Draw Term Loan

(11)

First Lien

3M SOFR+

6.00

%

1.50

%

11.39

%

7/1/2019

7/1/2024

967,500

967,500

962,663

0.31

%

PCS Software Parent, LLC Class A Common Units

(6)

Equity

9/16/2022

461,216

-

450,071

0.15

%

Total

$

16,715,873

$

17,160,188

5.58

%

Pearl Media Holdings, LLC

(9)

Garland, TX

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

6.25

%

1.50

%

11.64

%

8/31/2022

8/31/2027

Consumer Goods: Durable

$

9,925,000

9,753,231

9,676,875

3.14

%

Total

$

9,753,231

$

9,676,875

3.14

%

Peltram Plumbing Holdings, LLC

(9)

Auburn, WA

Term Loan

(11)

First Lien

3M SOFR+

6.50

%

2.00

%

11.74

%

12/30/2021

12/30/2026

Construction & Building

$

16,242,452

16,002,684

16,080,027

5.22

%

Revolver

(11)

First Lien

3M SOFR+

6.50

%

2.00

%

11.74

%

12/30/2021

12/30/2026

42,500

42,500

42,075

0.01

%

Peltram Group Holdings LLC Class A Units

Equity

12/30/2021

508,516

508,516

286,826

0.09

%

Total

$

16,553,700

$

16,408,928

5.32

%

Premiere Digital Services, Inc.

(9)

Los Angeles, CA

Term Loan

(11)

First Lien

1M SOFR+

5.25

%

1.00

%

10.47

%

11/3/2021

11/3/2026

Media: Broadcasting & Subscription

$

13,284,316

13,237,180

13,284,316

4.31

%

Premiere Digital Holdings, Inc. Common Stock

Equity

10/18/2018

5,000

-

2,857,533

0.93

%

Total

$

13,237,180

$

16,141,849

5.24

%

Protect America, Inc.

Austin, TX

Term Loan

(11)(13)

Second Lien

3M LIBOR+

7.75

%

1.00

%

-

%

8/30/2017

9/1/2024

Services: Consumer

$

17,979,749

17,979,749

-

0.00

%

Total

$

17,979,749

$

-

0.00

%

Red's All Natural, LLC

Franklin, TN

Term Loan (SBIC II)

(5)(10)(12)

First Lien

3M SOFR+

6.00

%

1.50

%

12.25

%

1/31/2023

1/31/2029

Beverage, Food, & Tobacco

$

10,916,882

10,709,066

10,807,713

3.51

%

Centeotl Co-Invest B, LP Common Units

Equity

1/31/2023

710,600

710,600

700,032

0.23

%

Total

$

11,419,666

$

11,507,745

3.74

%

RIA Advisory Borrower, LLC

(9)

Coral Gables, FL

Term Loan

(4)(11)

First Lien

1M SOFR+

6.50

%

2.00

%

11.69

%

5/1/2023

8/2/2027

Services: Business

$

5,985,000

5,868,827

5,868,827

1.90

%

Revolver

(11)

First Lien

1M SOFR+

6.50

%

2.00

%

11.69

%

5/1/2023

8/2/2027

22,114

22,114

21,685

0.01

%

RIA Advisory Aggregator, LLC Class A Units

Equity

5/1/2023

143,055

165,078

125,332

0.04

%

RIA Products Aggregator, LLC Class A Units

Equity

5/1/2023

134,841

78,390

118,135

0.04

%

Total

$

6,134,409

$

6,133,979

1.99

%

Rogers Mechanical Contractors, LLC

(9)

Atlanta, GA

Term Loan

(11)

First Lien

6M SOFR+

8.00

%

1.00

%

12.28

%

1.00

%

4/28/2021

9/9/2025

Construction & Building

$

9,334,591

9,244,647

9,194,572

2.98

%

Delayed Draw Term Loan

(11)

First Lien

6M SOFR+

8.00

%

1.00

%

12.28

%

1.00

%

4/28/2021

9/9/2025

46,765

46,485

46,064

0.01

%

Total

$

9,291,132

$

9,240,636

2.99

%

Sales Benchmark Index, LLC

(9)

Dallas, TX

Term Loan

(11)

First Lien

3M SOFR+

6.00

%

1.00

%

11.44

%

1/7/2020

1/7/2025

Services: Business

$

12,481,823

12,392,647

12,419,414

4.03

%

SBI Holdings Investments LLC Class A Units

Equity

1/7/2020

66,573

665,730

473,763

0.15

%

Total

$

13,058,377

$

12,893,177

4.18

%

Service Minds Company, LLC

(9)

Bradenton, FL

Term Loan

(11)

First Lien

6M LIBOR+

5.50

%

1.00

%

10.68

%

2/7/2022

2/7/2028

Services: Consumer

$

5,330,827

5,245,209

5,250,865

1.70

%

Revolver

(11)

First Lien

3M LIBOR+

5.50

%

1.00

%

10.70

%

2/7/2022

2/7/2028

70,000

70,000

68,950

0.02

%

Delayed Draw Term Loan

(11)

First Lien

6M LIBOR+

5.50

%

1.00

%

10.68

%

2/7/2022

2/7/2028

99,258

98,369

97,769

0.03

%

Total

$

5,413,578

$

5,417,584

1.75

%

12

Table of Contents

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

June 30, 2023

(unaudited)

Principal

% of  

  

  

  

  

  

  

  

Investment  

  

  

Headquarters/ 

  

Amount/

  

Amortized

  

Fair 

  

Net  

 

Investments

Footnotes

Security(2)

Coupon

Floor

Cash

PIK

Date

Maturity

Industry

Shares(3)

Cost

Value(1)

Assets

 

SIB Holdings, LLC

(9)

Charleston, SC

Term Loan (SBIC)

(4)(11)

First Lien

3M SOFR+

6.25

%

1.00

%

11.68

%

10/29/2021

10/29/2026

Services: Business

$

12,626,617

12,448,042

12,310,952

3.99

%

Term Loan (SBIC)

(4)(11)

First Lien

3M SOFR+

6.25

%

1.00

%

11.68

%

6/15/2022

10/29/2026

848,864

832,103

827,642

0.27

%

Term Loan (SBIC)

(4)(11)

First Lien

3M SOFR+

6.25

%

1.00

%

11.68

%

7/20/2022

10/29/2026

2,263,636

2,226,709

2,207,045

0.72

%

Delayed Draw Term Loan

(11)

First Lien

3M SOFR+

6.25

%

1.00

%

11.68

%

10/29/2021

10/29/2026

2,829,545

2,807,313

2,758,806

0.89

%

Revolver

(11)

First Lien

3M SOFR+

6.25

%

1.00

%

11.68

%

10/29/2021

10/29/2026

100,000

100,000

97,500

0.03

%

SIB Holdings, LLC Units

Equity

10/29/2021

238,095

500,000

301,980

0.10

%

Total

$

18,914,167

$

18,503,925

6.00

%

TAC LifePort Holdings, LLC

Woodland, WA

Common Units

(6)

Equity

3/1/2021

Aerospace & Defense

546,543

537,049

665,282

0.22

%

Total

$

537,049

$

665,282

0.22

%

Tilley Distribution, Inc.

(9)

Baltimore, MD

Term Loan

(11)

First Lien

3M SOFR+

6.00

%

1.00

%

11.39

%

4/1/2022

12/31/2026

Chemicals, Plastics, & Rubber

$

98,743

97,581

95,287

0.03

%

Total

$

97,581

$

95,287

0.03

%

Trade Education Acquisition, L.L.C.

(9)

Austin, TX

Term Loan (SBIC)

(4)(11)

First Lien

1M SOFR+

6.25

%

1.00

%

11.45

%

12/28/2021

12/28/2027

Education

$

9,780,860

9,626,085

9,145,104

2.97

%

Trade Education Holdings, L.L.C. Class A Units

Equity

12/28/2021

662,660

662,660

257,594

0.08

%

Total

$

10,288,745

$

9,402,698

3.05

%

TradePending, LLC

(9)

Carrboro, NC

Term Loan (SBIC II)

(5)(11)

First Lien

3M LIBOR+

6.25

%

1.00

%

11.79

%

3/2/2021

3/2/2026

Software

$

9,676,263

9,562,242

9,531,119

3.09

%

TradePending Holdings, LLC Series A Units

(6)

Equity

3/2/2021

829,167

848,364

1,625,167

0.53

%

Total

$

10,410,606

$

11,156,286

3.62

%

Unicat Catalyst Holdings, LLC

(9)

Alvin, TX

Term Loan

(11)

First Lien

1M SOFR+

6.50

%

1.00

%

11.70

%

4/27/2021

4/27/2026

Chemicals, Plastics, & Rubber

$

7,125,000

7,037,371

6,697,500

2.17

%

Unicat Catalyst, LLC Class A Units

Equity

4/27/2021

7,500

750,000

163,865

0.05

%

Total

$

7,787,371

$

6,861,365

2.22

%

U.S. Auto Sales, Inc. et al

(7)

Lawrenceville, GA

USASF Blocker II LLC Units

Equity

6/8/2015

Finance

441

441,000

-

0.00

%

USASF Blocker III LLC 2018 Series Units

Equity

2/13/2018

50

50,000

-

0.00

%

USASF Blocker III LLC 2019 Series Units

Equity

12/27/2019

75

75,000

-

0.00

%

USASF Blocker IV LLC Units

Equity

5/27/2020

110

110,000

-

0.00

%

USASF Blocker IV LLC 2022 Series Units

Equity

7/28/2022

100

100,000

-

0.00

%

USASF Blocker V LLC Units

Equity

12/20/2022

200

200,000

-

0.00

%

USASF Blocker LLC Units

Equity

6/8/2015

9,000

9,000

-

0.00

%

Total

$

985,000

$

-

0.00

%

U.S. Expediters, LLC

(9)

Stafford, TX

Term Loan

(11)

First Lien

3M SOFR+

6.00

%

1.00

%

11.44

%

12/22/2021

12/22/2026

Healthcare & Pharmaceuticals

$

15,786,662

15,553,031

15,707,729

5.09

%

Cathay Hypnos LLC Units

Equity

12/22/2021

1,372,932

1,316,740

2,064,950

0.67

%

Total

$

16,869,771

$

17,772,679

5.76

%

Venbrook Buyer, LLC

Los Angeles, CA

Term Loan B (SBIC)

(4)(11)

First Lien

3M SOFR+

8.00

%

1.50

%

6.39

%

7.00

%

3/13/2020

3/13/2026

Services: Business

$

13,279,212

13,147,715

12,416,063

4.03

%

Term Loan B

(11)

First Lien

3M SOFR+

8.00

%

1.50

%

6.39

%

7.00

%

3/13/2020

3/13/2026

151,091

149,595

141,270

0.05

%

Revolver

(11)

First Lien

3M SOFR+

8.00

%

1.50

%

6.39

%

7.00

%

3/13/2020

3/13/2026

2,313,084

2,313,084

2,162,734

0.70

%

Delayed Draw Term Loan

(11)

First Lien

3M SOFR+

8.00

%

1.50

%

6.39

%

7.00

%

3/13/2020

3/13/2026

4,527,452

4,501,375

4,233,168

1.37

%

Venbrook Holdings, LLC Term Loan

(16)

Unsecured

10.00

%

-

%

10.00

%

3/31/2022

12/20/2028

93,830

93,830

87,731

0.03

%

Venbrook Holdings, LLC Common Units

Equity

3/13/2020

822,758

819,262

-

0.00

%

Total

$

21,024,861

$

19,040,966

6.18

%

13

Table of Contents

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

June 30, 2023

(unaudited)

Principal

% of  

  

  

  

  

  

  

  

Investment  

  

  

Headquarters/ 

  

Amount/

  

Amortized

  

Fair 

  

Net  

 

Investments

Footnotes

Security(2)

Coupon

Floor

Cash

PIK

Date

Maturity

Industry

Shares(3)

Cost

Value(1)

Assets

 

Vortex Companies, LLC

Houston, TX

Term Loan (SBIC II)

(5)(11)

Second Lien

3M SOFR+

9.50

%

1.00

%

14.84

%

12/21/2020

6/21/2026

Environmental Industries

$

10,000,000

9,876,242

10,000,000

3.24

%

Total

$

9,876,242

$

10,000,000

3.24

%

Whisps Holdings LP

Elgin, IL

Class A Units

Equity

4/18/2019

Beverage, Food, & Tobacco

500,000

500,000

-

0.00

%

Class A-1 Units

Equity

3/6/2023

Beverage, Food, & Tobacco

107,418

107,418

107,418

0.03

%

Total

$

607,418

$

107,418

0.03

%

Xanitos, Inc.

(9)

Newtown Square, PA

Term Loan (SBIC)

(4)(11)

First Lien

3M SOFR+

6.50

%

1.00

%

11.89

%

6/25/2021

6/25/2026

Healthcare & Pharmaceuticals

$

12,544,000

12,381,687

12,355,840

4.01

%

Revolver

(11)

First Lien

3M LIBOR+

6.50

%

1.00

%

12.05

%

6/25/2021

6/25/2026

43,500

43,500

42,848

0.01

%

Delayed Draw Term Loan

(11)

First Lien

3M SOFR+

6.50

%

1.00

%

11.89

%

6/25/2021

6/25/2026

2,209,963

2,194,396

2,176,814

0.71

%

Pure TopCo, LLC Class A Units

Equity

6/25/2021

442,133

1,053,478

924,675

0.30

%

Total

$

15,673,061

$

15,500,177

5.03

%

Total Non-controlled, non-affiliated investments

$

922,796,573

$

881,666,450

285.95

%

Net Investments

$

922,796,573

$

881,666,450

285.95

%

LIABILITIES IN EXCESS OF OTHER ASSETS

$

(573,341,422)

(185.95)

%

NET ASSETS

$

308,325,028

100.00

%

14

Table of Contents

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

June 30, 2023

(unaudited)

(1)
See Note 1 of the Notes to the Consolidated Financial Statements for a discussion of the methodologies used to value securities in the portfolio.
(2)
Debt investments are income producing and equity securities are non-income producing, unless otherwise noted.
(3)
Par amount is presented for debt investments, while the number of shares or units owned is presented for equity investments. Par amount is denominated in U.S. Dollars (“$”) unless otherwise noted, Euro (“€”), or Great British Pound (“£”).
(4)
Investments held by the SBIC subsidiary (as defined in Note 1), which include $3,664,515 of cash and $227,367,557 of investments (at cost), are excluded from the obligations to the lenders of the Credit Facility (as defined in Note 9). Stellus Capital Investment Corporation’s (the “Company”) obligations to the lenders of the Credit Facility are secured by a first priority security interest in all investments and cash and cash equivalents, except for cash and investments held by the SBIC subsidiaries (as defined in Note 1).
(5)
Investments held by the SBIC II subsidiary (as defined in Note 1), which include $8,551,166 of cash and $255,175,084 of investments (at cost), are excluded from the obligations to the lenders of the Credit Facility. The Company’s obligations to the lenders of the Credit Facility are secured by a first priority security interest in all investments and cash and cash equivalents, except for cash and investments held by the SBIC subsidiaries.
(6)
Security is income producing through dividends or distributions.
(7)
The investment is not a “qualifying asset” under the Investment Company Act of 1940, as amended. The Company may not acquire any non-qualifying assets unless, at the time of the acquisition, qualifying assets represent at least 70% of the Company’s total assets. Qualifying assets represent approximately 97.2% of the Company’s total assets as of June 30, 2023.
(8)
Represents a PIK interest security. At the option of the issuer, interest can be paid in cash or cash and PIK interest. The percentage of PIK interest shown is the maximum PIK interest that can be elected by the issuer.
(9)
June 30, 2023, the Company had the following outstanding revolver and delayed draw term loan commitments:
(10)

    

    

    

Unused 

    

Unfunded 

Commitment 

Investments

Security

Commitment

Fee

Maturity

2X LLC

Revolver

$

100,000

0.50%

June 5, 2028

Ad.Net Acquisition, LLC

Revolver

389,706

0.50%

May 7, 2026

ADS Group Opco, LLC

Revolver

10,000

0.50%

June 4, 2026

American Refrigeration, LLC

Revolver

90,000

0.50%

March 31, 2028

American Refrigeration, LLC

Delayed Draw Term Loan

100,000

1.00%

March 31, 2028

Anne Lewis Strategies, LLC

Revolver

70,000

0.50%

May 9, 2028

ArborWorks Acquisition LLC

Revolver

1,030,921

0.50%

November 9, 2026

Archer Systems, LLC

Revolver

100,000

0.50%

August 11, 2027

Axis Portable Air, LLC

Revolver

100,000

0.50%

March 22, 2028

BLP Buyer, Inc.

Revolver

23,434

0.50%

February 1, 2027

Camp Profiles LLC

Revolver

100,000

0.50%

September 3, 2026

CEATI International Inc.

Revolver

100,000

0.50%

February 19, 2026

Cerebro Buyer, LLC

Revolver

100,000

0.50%

March 15, 2029

CF512, Inc.

Revolver

100,000

0.50%

September 1, 2026

Channel Partners Intermediateco, LLC

Revolver

36,602

0.50%

February 7, 2027

CompleteCase, LLC

Revolver

166,667

0.50%

December 21, 2025

COPILOT Provider Support Services, LLC

Revolver

100,000

0.50%

November 22, 2027

Craftable Intermediate II Inc.

Revolver

100,000

0.50%

June 30, 2028

Credit Connection, LLC

Revolver

100,000

0.50%

July 30, 2026

DRS Holdings III, Inc.

Revolver

909,091

0.50%

November 1, 2025

Elliott Aviation, LLC

Revolver B

500,000

0.50%

September 1, 2023

Equine Network, LLC

Revolver

100,000

0.50%

May 22, 2028

Equine Network, LLC

Delayed Draw Term Loan

100,000

1.00%

May 22, 2028

Evriholder Acquisition, Inc.

Revolver

100,000

0.50%

January 24, 2028

Exacta Land Surveyors, LLC(a)

Revolver

1,500,000

0.50%

February 8, 2024

Exigo, LLC

Revolver

100,000

0.50%

March 16, 2027

Exigo, LLC

Delayed Draw Term Loan

100,000

0.50%

March 16, 2027

Florachem Corporation

Revolver

30,000

0.50%

April 29, 2028

Florachem Corporation

Delayed Draw Term Loan

100,000

0.50%

April 29, 2028

GS HVAM Intermediate, LLC

Revolver

2,651,515

0.50%

October 2, 2024

Heartland Business Systems, LLC

Delayed Draw Term Loan

50,000

0.50%

August 26, 2027

Heat Makes Sense Shared Services, LLC

Revolver

100,000

0.50%

July 1, 2028

HV Watterson Holdings, LLC

Revolver

36,000

0.50%

December 17, 2026

HV Watterson Holdings, LLC

Delayed Draw Term Loan

2,555,354

1.00%

December 17, 2026

Impact Home Services LLC

Revolver

87,500

0.50%

April 28, 2028

Infolinks Media Buyco, LLC

Delayed Draw Term Loan

990,000

0.50%

November 1, 2026

15

Table of Contents

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

June 30, 2023

(unaudited)

    

    

    

Unused 

    

Unfunded 

Commitment 

Investments

Security

Commitment

Fee

Maturity

Inoapps Bidco, LLC

Revolver

$

100,000

0.50%

February 15, 2027

Inoapps Bidco, LLC

Delayed Draw Term Loan

16,667

0.50%

February 15, 2027

Integrated Oncology Network, LLC

Revolver

55,352

0.50%

June 24, 2025

Invincible Boat Company LLC

Revolver

425,532

0.50%

August 28, 2025

Ledge Lounger, Inc.

Revolver

100,000

0.50%

November 9, 2026

Lightning Intermediate II, LLC

Revolver

100,000

0.50%

June 6, 2027

MacKenzie-Childs Acquisition, Inc.

Revolver

13,333

0.50%

September 2, 2027

Madison Logic Holdings, Inc.

Revolver

100,000

0.50%

December 30, 2027

Microbe Formulas LLC

Revolver

100,000

0.50%

April 3, 2028

MOM Enterprises, LLC

Revolver

100,000

0.50%

May 19, 2026

Naumann/Hobbs Material Handling Corporation II, Inc.

Revolver – Working Capital

1,763,033

0.50%

August 30, 2024

NINJIO, LLC

Delayed Draw Term Loan

100,000

0.50%

October 12, 2027

NINJIO, LLC

Revolver

33,333

0.50%

October 12, 2027

Nutritional Medicinals, LLC

Revolver

2,000,000

0.50%

November 15, 2025

PCS Software, Inc.

Revolver

1,318,143

0.50%

July 1, 2024

Pearl Media Holdings, LLC

Delayed Draw Term Loan

100,000

0.50%

August 31, 2027

Pearl Media Holdings, LLC

Revolver

100,000

0.50%

August 31, 2027

Peltram Plumbing Holdings, LLC

Revolver

57,500

0.50%

December 30, 2026

Premiere Digital Services, Inc.

Revolver

576,923

0.50%

November 3, 2026

RIA Advisory Borrower, LLC

Revolver

77,886

0.50%

August 2, 2027

Rogers Mechanical Contractors, LLC

Revolver

83,333

0.75%

September 9, 2025

Sales Benchmark Index, LLC

Revolver

1,331,461

0.50%

January 7, 2025

Service Minds Company, LLC

Revolver

30,000

0.50%

February 7, 2028

SIB Holdings, LLC

Revolver

26,667

0.50%

October 29, 2026

Tilley Distribution, Inc.

Revolver

100,000

0.50%

December 31, 2026

TradePending, LLC

Revolver

100,000

0.50%

March 2, 2026

Unicat Catalyst Holdings, LLC(a)

Revolver

2,000,000

0.50%

April 27, 2026

U.S. Expediters, LLC

Revolver

100,000

0.50%

December 22, 2026

Xanitos, Inc.

Revolver

56,500

0.50%

June 25, 2026

(a)
(a)The Company has full discretion to fund this revolver commitment.

A

(10)
This loan is a unitranche investment.
(11)
These loans include an interest rate floor feature which is lower than the applicable rates; therefore, the floor is not in effect.
(12)
These loans are last-out term loans with contractual rates higher than the applicable rates; therefore, the floor is not in effect.
(13)
Investment has been on non-accrual since June 28, 2019.
(14)
Investment has been on non-accrual since December 31, 2020.
(15)
Investment has been on non-accrual since April 1, 2022.
(16)
This loan is convertible to common units at maturity or at the election of the issuer.
(17)
Excluded from the investment is an uncalled capital commitment in an amount not to exceed $300,631.
(18)
Term Loan A-1, Term Loan A-2, and Term Loan A-3 have been on non-accrual since January 1, 2023, April 3, 2023, and June 7, 2023, respectively.

Abbreviation Legend

BSBY —  Bloomberg Short-Term Bank Yield Index

LIBOR —  London Interbank Offered Rate

PIK — Payment-In-Kind

SOFR —  Secured Overnight Financing Rate

SONIA —  Sterling Overnight Index Average

16

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2022

Principal

% of  

  

  

  

  

  

  

  

Investment

  

  

Headquarters/ 

  

Amount/

  

Amortized

  

Fair 

  

Net  

Investments

Footnotes

Security(2)

Coupon

Floor

Cash

PIK

Date

 

Maturity

Industry

Shares(3)

Cost

Value(1)

Assets

Non-controlled, non-affiliated investments

(4)(5)

  

  

  

  

  

Ad.Net Acquisition, LLC

(9)

Los Angeles, CA

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

6.00

%

1.00

%

10.84

%

5/7/2021

5/7/2026

Services: Business

$

15,354,412

15,190,375

15,124,097

5.48

%

Revolver

(11)

First Lien

3M SOFR+

6.00

%

1.00

%

10.84

%

5/7/2021

5/7/2026

$

1,039,216

1,039,216

1,023,628

0.37

%

Ad.Net Holdings, Inc. Series A Common Stock (SBIC II)

(5)

Equity

5/7/2021

7,794

77,941

85,488

0.03

%

Ad.Net Holdings, Inc. Series A Preferred Stock (SBIC II)

(5)

Equity

5/7/2021

7,015

701,471

769,393

0.28

%

Total

$

17,009,003

$

17,002,606

6.16

%

ADS Group Opco, LLC

Lakewood, CO

Term Loan (SBIC II)

(5)(11)

First Lien

3M LIBOR+

6.75

%

1.00

%

11.48

%

6/4/2021

6/4/2026

Aerospace & Defense

$

14,550,000

14,337,005

13,822,500

5.01

%

Revolver

(11)

First Lien

3M LIBOR+

6.75

%

1.00

%

11.48

%

6/4/2021

6/4/2026

100,000

100,000

95,000

0.03

%

ADS Group Topco, LLC Class A Units

Equity

6/4/2021

77,626

288,691

48,571

0.02

%

ADS Group Topco, LLC Class B Units

Equity

6/4/2021

56,819

211,309

35,552

0.01

%

ADS Group Topco, LLC Class Z Units

Equity

6/15/2022

72,043

267,929

293,847

0.11

%

Total

$

15,204,934

$

14,295,470

5.18

%

Advanced Barrier Extrusions, LLC

Rhinelander, WI

Term Loan B (SBIC)

(4)(11)

First Lien

3M SOFR+

7.50

%

1.00

%

11.88

%

11/30/2020

11/30/2026

Containers, Packaging, & Glass

$

17,150,000

16,908,205

13,977,250

5.07

%

GP ABX Holdings Partnership, L.P. Partner Interests

Equity

8/8/2018

644,737

528,395

-

0.00

%

Total

$

17,436,600

$

13,977,250

5.07

%

AIP ATCO Buyer, LLC

(9)

Sterling Heights, MI

Term Loan

(11)

First Lien

6M SOFR+

6.50

%

1.00

%

11.31

%

5/17/2022

5/17/2028

Automotive

$

99,750

97,906

99,251

0.04

%

Revolver

(11)

First Lien

1M SOFR+

6.50

%

1.00

%

10.93

%

5/17/2022

5/17/2028

50,000

50,000

49,750

0.02

%

Total

$

147,906

$

149,001

0.06

%

Anne Lewis Strategies, LLC

(9)

Washington, DC

Term Loan (SBIC II)

(5)(11)

First Lien

3M LIBOR+

6.50

%

1.00

%

11.23

%

3/5/2021

3/5/2026

Services: Business

$

10,493,750

10,349,704

10,493,750

3.81

%

Term Loan (SBIC II)

(5)(11)

First Lien

3M LIBOR+

6.50

%

1.00

%

11.23

%

4/15/2022

3/5/2026

6,311,895

6,206,222

6,311,895

2.29

%

SG AL Investment, LLC Common Units

(6)

Equity

3/5/2021

1,000

680,630

4,318,702

1.57

%

Total

$

17,236,556

$

21,124,347

7.67

%

APE Holdings, LLC

Deer Park, TX

Class A Units

Equity

9/5/2014

Chemicals, Plastics, & Rubber

375,000

375,000

29,209

0.01

%

Total

$

375,000

$

29,209

0.01

%

Atmosphere Aggregator Holdings II, L.P.

Atlanta, GA

Common Units

Equity

1/26/2016

Services: Business

254,250

-

2,134,220

0.77

%

Stratose Aggregator Holdings, L.P. Common Units

Equity

6/30/2015

750,000

-

6,295,635

2.28

%

Total

$

-

$

8,429,855

3.05

%

ArborWorks Acquisition LLC

(9)

Oakhurst, CA

Term Loan

(11)

First Lien

3M LIBOR+

9.00

%

1.00

%

13.56

%

11/23/2021

11/9/2026

Environmental Industries

$

14,662,500

14,543,314

13,636,125

4.94

%

Revolver

(11)

First Lien

3M LIBOR+

9.00

%

1.00

%

13.41

%

11/23/2021

11/9/2026

2,307,692

2,307,692

2,146,154

0.78

%

ArborWorks Holdings LLC Units

Equity

12/29/2021

  

115

115,385

-

0.00

%

Total

$

16,966,391

$

15,782,279

5.72

%

Archer Systems, LLC

(9)

Houston, TX

Term Loan

(11)

First Lien

1M SOFR+

6.50

%

1.00

%

10.92

%

8/11/2022

8/11/2027

Services: Business

$

1,000,000

981,305

985,000

0.36

%

CF Arch Holdings LLC Class A Units

Equity

8/10/2022

  

100,000

100,000

106,221

0.04

%

Total

$

1,081,305

$

1,091,221

0.40

%

Axis Portable Air, LLC

(9)

Phoenix, AZ

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

5.75

%

1.00

%

10.48

%

3/22/2022

3/22/2028

Capital Equipment

$

12,000,000

11,784,686

11,940,000

4.33

%

Delayed Draw Term Loan

(11)

First Lien

3M SOFR+

5.75

%

1.00

%

10.48

%

3/22/2022

3/22/2028

$

100,000

99,050

99,500

0.04

%

Axis Air Parent, LLC Preferred Units

Equity

3/22/2022

4,436

443,636

686,447

0.25

%

Total

$

12,327,372

$

12,725,947

4.62

%

Baker Manufacturing Company, LLC

Evansville, IN

Term Loan (SBIC II)

(5)(10)(12)

First Lien

3M SOFR+

5.25

%

1.00

%

10.75

%

7/5/2022

7/5/2027

Capital Equipment

$

13,863,087

13,602,312

13,655,141

4.95

%

BSC Blue Water Holdings, LLC Series A Units (SBIC II)

(5)

Equity

7/5/2022

743,770

743,770

590,291

0.21

%

Total

$

14,346,082

$

14,245,432

5.16

%

17

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2022

Principal

% of  

  

  

  

  

  

  

  

Investment

  

  

Headquarters/ 

  

Amount/

  

Amortized

  

Fair 

  

Net  

Investments

Footnotes

Security(2)

Coupon

Floor

Cash

PIK

Date

 

Maturity

Industry

Shares(3)

Cost

Value(1)

Assets

BDS Solutions Intermediateco, LLC

(9)

Tampa Bay, FL

Term Loan (SBIC)

(4)(11)

First Lien

3M SOFR+

6.25

%

1.00

%

10.71

%

2/24/2022

2/7/2027

Retail

$

13,388,469

13,273,471

13,187,642

4.78

%

Revolver

(11)

First Lien

3M SOFR+

6.25

%

1.00

%

10.55

%

2/24/2022

2/7/2027

30,065

30,065

29,614

0.01

%

Total

$

13,303,536

$

13,217,256

4.79

%

BLP Buyer, Inc.

(9)

Houston, TX

Term Loan

(11)

First Lien

3M SOFR+

6.25

%

1.00

%

10.49

%

2/1/2022

2/1/2027

Capital Equipment

$

6,178,740

6,074,029

6,024,272

2.18

%

Revolver

(11)

First Lien

1M SOFR+

6.25

%

1.00

%

10.67

%

2/1/2022

2/1/2027

36,566

36,566

35,652

0.01

%

BL Products Parent, L.P. Class A Units

Equity

2/1/2022

  

754,598

754,598

770,648

0.28

%

Total

$

6,865,193

$

6,830,572

2.47

%

Café Valley, Inc.

Phoenix, AZ

Term Loan

(11)

First Lien

3M SOFR+

7.24

%

2.00

%

11.82

%

8/28/2019

8/28/2024

Beverage, Food, & Tobacco

$

15,725,000

15,606,117

15,410,501

5.60

%

CF Topco LLC Units

Equity

8/28/2019

9,160

916,015

976,521

0.35

%

Total

$

16,522,132

$

16,387,022

5.95

%

Camp Profiles LLC

(9)

Boston, MA

Term Loan (SBIC)

(4)(11)

First Lien

3M LIBOR+

5.25

%

1.00

%

9.98

%

9/3/2021

9/3/2026

Media: Advertising, Printing & Publishing

$

10,121,875

9,965,356

10,121,875

3.67

%

CIVC VI-A 829 Blocker, LLC Units

Equity

9/3/2021

250

250,000

405,784

0.15

%

Total

$

10,215,356

$

10,527,659

3.82

%

CEATI International Inc.

(7)(9)

Montreal, Canada

Term Loan

(11)

First Lien

3M LIBOR+

6.50

%

1.00

%

11.23

%

2/19/2021

2/19/2026

Services: Business

$

13,263,750

13,083,737

12,998,475

4.71

%

CEATI Holdings, LP Class A Units

Equity

2/19/2021

250,000

250,000

268,194

0.10

%

Total

$

13,333,737

$

13,266,669

4.81

%

CF512, Inc.

(9)

Blue Bell, PA

Term Loan (SBIC)

(4)(11)

First Lien

3M LIBOR+

6.00

%

1.00

%

10.76

%

9/1/2021

9/1/2026

Media: Advertising, Printing & Publishing

$

14,180,959

13,961,673

13,684,625

4.96

%

Delayed Draw Term Loan

(11)

First Lien

3M LIBOR+

6.00

%

1.00

%

10.73

%

9/1/2021

9/1/2026

3,062,093

3,037,434

2,954,920

1.07

%

StellPen Holdings, LLC Membership Interests

Equity

9/1/2021

22.09%

220,930

218,292

0.08

%

Total

$

17,220,037

$

16,857,837

6.11

%

CompleteCase, LLC

(9)

Seattle, WA

Term Loan (SBIC II)

(5)(11)

First Lien

3M LIBOR+

6.50

%

1.00

%

11.23

%

12/21/2020

12/21/2025

Services: Consumer

$

11,248,696

11,103,143

10,967,479

3.98

%

Revolver A

(11)

First Lien

3M LIBOR+

6.50

%

1.00

%

11.23

%

12/21/2020

12/21/2025

40,000

40,000

39,000

0.01

%

CompleteCase Holdings, Inc. Class A Common Stock (SBIC II)

(5)

Equity

12/21/2020

417

5

4

0.00

%

CompleteCase Holdings, Inc. Series A Preferred Stock (SBIC II)

(5)

Equity

12/21/2020

522

521,734

403,084

0.15

%

Total

$

11,664,882

$

11,409,567

4.14

%

COPILOT Provider Support Services, LLC

(9)

Maitland, FL

Term Loan

(11)

First Lien

3M SOFR+

6.50

%

2.00

%

11.23

%

11/22/2022

11/22/2027

Healthcare & Pharmaceuticals

$

4,987,500

4,888,742

4,888,742

1.77

%

QHP Project Captivate Blocker, Inc. Common Stock

Equity

11/22/2022

4

285,714

285,714

0.10

%

Total

$

5,174,456

$

5,174,456

1.87

%

Credit Connection, LLC

(9)

Fresno, CA

Term Loan (SBIC II)

(5)(11)

First Lien

3M LIBOR+

5.75

%

1.00

%

10.48

%

7/30/2021

7/30/2026

Software

$

9,875,000

9,726,674

9,776,250

3.54

%

Term Loan (SBIC II)

(5)(11)

First Lien

3M LIBOR+

5.75

%

1.00

%

10.48

%

3/31/2022

7/30/2026

7,443,750

7,317,403

7,369,313

2.67

%

Series A Units

Equity

7/30/2021

804,384

804,384

961,718

0.35

%

Total

$

17,848,461

$

18,107,281

6.56

%

Curion Holdings, LLC

(9)

Chicago, IL

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

6.25

%

1.00

%

10.98

%

7/29/2022

7/29/2027

Services: Business

$

13,027,351

12,784,145

12,701,667

4.61

%

Revolver

(11)

First Lien

3M SOFR+

6.25

%

1.00

%

10.98

%

7/29/2022

7/29/2027

70,000

70,000

68,250

0.02

%

SP CS Holdings LLC Class A Units

Equity

7/29/2022

  

739,999

739,999

590,535

0.21

%

Total

$

13,594,144

$

13,360,452

4.84

%

Data Centrum Communications, Inc.

Montvale, NJ

Term Loan B

(11)

First Lien

3M SOFR+

8.50

%

1.00

%

13.29

%

5/15/2019

5/15/2024

Media: Advertising, Printing & Publishing

$

15,760,360

15,661,301

15,445,154

5.61

%

Health Monitor Holdings, LLC Series A Preferred Units

Equity

5/15/2019

1,000,000

1,000,000

458,500

0.17

%

Total

$

16,661,301

$

15,903,654

5.78

%

18

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2022

Principal

% of  

  

  

  

  

  

  

  

Investment

  

  

Headquarters/ 

  

Amount/

  

Amortized

  

Fair 

  

Net  

Investments

Footnotes

Security(2)

Coupon

Floor

Cash

PIK

Date

 

Maturity

Industry

Shares(3)

Cost

Value(1)

Assets

Douglas Products Group, LP

Liberty, MO

Partnership Interests

(6)

Equity

12/27/2018

Chemicals, Plastics, & Rubber

322

-

695,072

0.25

%

Total

$

-

$

695,072

0.25

%

Dresser Utility Solutions, LLC

Bradford, PA

Term Loan (SBIC)

(4)(11)

Second Lien

1M LIBOR+

8.50

%

1.00

%

12.88

%

10/1/2018

4/1/2026

Utilities: Oil & Gas

$

10,000,000

9,921,469

9,800,000

3.55

%

Total

$

9,921,469

$

9,800,000

3.55

%

DRS Holdings III, Inc.

(9)

St. Louis, MO

Term Loan

(11)

First Lien

1M LIBOR+

5.75

%

1.00

%

10.13

%

11/1/2019

11/1/2025

Consumer Goods: Durable

$

9,190,990

9,142,111

8,961,215

3.25

%

Total

$

9,142,111

$

8,961,215

3.25

%

DTE Enterprises, LLC

(9)

Roselle, IL

Term Loan

(11)

First Lien

3M LIBOR+

7.50

%

1.50

%

12.24

%

4/13/2018

4/13/2023

Energy: Oil & Gas

$

6,134,219

6,124,342

6,134,219

2.22

%

DTE Holding Company, LLC Class A-2 Units

Equity

4/13/2018

776,316

466,204

706,459

0.26

%

DTE Holding Company, LLC Class AA Units

Equity

4/13/2018

  

723,684

723,684

514,396

0.19

%

Total

$

7,314,230

$

7,355,074

2.67

%

EH Real Estate Services, LLC

Skokie, IL

Term Loan (SBIC)

(4)

First Lien

10.00

%

10.00

%

9/3/2021

9/3/2026

FIRE: Real Estate

$

7,874,359

7,750,451

5,866,397

2.13

%

EH Holdco, LLC Series A Preferred Units

Equity

9/3/2021

7,892

7,891,642

-

0.00

%

Total

$

15,642,093

$

5,866,397

2.13

%

Elliott Aviation, LLC

Moline, IL

Term Loan

(11)

First Lien

1M LIBOR+

8.00

%

2.00

%

10.38

%

2.00

%

1/31/2020

1/31/2025

Aerospace & Defense

$

10,010,654

9,920,657

8,959,535

3.25

%

Revolver

(11)

First Lien

1M LIBOR+

8.00

%

2.00

%

10.38

%

2.00

%

1/31/2020

1/31/2025

1,382,146

1,382,146

1,237,021

0.45

%

SP EA Holdings LLC Class A Units

Equity

1/31/2020

  

900,000

900,000

146,541

0.05

%

Total

$

12,202,803

$

10,343,097

3.75

%

EOS Fitness Holdings, LLC

Phoenix, AZ

Class A Preferred Units

Equity

12/30/2014

Hotel, Gaming, & Leisure

118

-

232,320

0.08

%

Class B Common Units

Equity

12/30/2014

3,017

-

567,579

0.21

%

Total

$

-

$

799,899

0.29

%

Exacta Land Surveyors, LLC

(9)

Cleveland, OH

Term Loan (SBIC)

(4)(11)

First Lien

3M LIBOR+

5.75

%

1.50

%

10.48

%

2/8/2019

2/8/2024

Services: Business

$

16,374,375

16,286,433

16,128,760

5.86

%

Term Loan (SBIC)

(4)(11)

First Lien

3M LIBOR+

5.75

%

1.00

%

10.48

%

7/15/2022

2/8/2024

$

995,000

980,742

980,075

0.36

%

SP ELS Holdings LLC Class A Units

Equity

2/8/2019

1,122,250

1,122,250

969,726

0.35

%

Total

$

18,389,425

$

18,078,561

6.57

%

Exigo, LLC

(9)

Dallas, TX

Term Loan

(11)

First Lien

1M LIBOR+

5.75

%

1.00

%

10.13

%

3/16/2022

3/16/2027

Software

$

8,992,885

8,875,308

8,857,992

3.21

%

Revolver

(11)

First Lien

1M LIBOR+

5.75

%

1.00

%

10.13

%

3/16/2022

3/16/2027

20,000

20,000

19,700

0.01

%

Gauge Exigo Coinvest, LLC Common Units

Equity

3/16/2022

  

377,535

377,535

341,050

0.12

%

Total

$

9,272,843

$

9,218,742

3.34

%

Florachem Corporation

(9)

Jacksonville, FL

Term Loan (SBIC)

(4)(11)

First Lien

3M LIBOR+

6.50

%

1.00

%

11.23

%

4/29/2022

4/29/2028

Chemicals, Plastics, & Rubber

$

9,950,000

9,768,170

9,751,000

3.54

%

SK FC Holdings, L.P. Class A Units

Equity

4/29/2022

362

362,434

365,198

0.13

%

Total

$

10,130,604

$

10,116,198

3.67

%

General LED OPCO, LLC

San Antonio, TX

Term Loan

(11)(14)

Second Lien

3M LIBOR+

9.00

%

1.50

%

-

%

5/1/2018

3/31/2026

Services: Business

$

4,500,000

4,462,793

4,140,000

1.50

%

Total

$

4,462,793

$

4,140,000

1.50

%

GS HVAM Intermediate, LLC

(9)

Carlsbad, CA

Term Loan

(11)

First Lien

3M LIBOR+

6.50

%

1.00

%

11.24

%

10/18/2019

10/2/2024

Beverage, Food, & Tobacco

$

12,523,234

12,472,183

12,398,002

4.50

%

Revolver

(11)

First Lien

3M LIBOR+

6.50

%

1.00

%

11.24

%

10/18/2019

10/2/2024

2,539,470

2,539,470

2,514,075

0.91

%

HV GS Acquisition, LP Class A Interests

Equity

10/2/2019

  

2,144

1,967,133

1,455,955

0.53

%

Total

$

16,978,786

$

16,368,032

5.94

%

19

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2022

Principal

% of  

  

  

  

  

  

  

  

Investment

  

  

Headquarters/ 

  

Amount/

  

Amortized

  

Fair 

  

Net  

Investments

Footnotes

Security(2)

Coupon

Floor

Cash

PIK

Date

 

Maturity

Industry

Shares(3)

Cost

Value(1)

Assets

Heartland Business Systems, LLC

(9)

Little Chute, WI

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

6.25

%

1.00

%

10.79

%

8/26/2022

8/26/2027

Services: Business

$

9,975,000

9,785,984

9,825,375

3.56

%

Delayed Draw Term Loan

(11)

First Lien

3M SOFR+

6.25

%

1.00

%

10.91

%

8/26/2022

8/26/2027

25,000

24,753

24,625

0.01

%

AMCO HBS Holdings, LP Class A Units

Equity

8/26/2022

2,861

286,065

444,511

0.16

%

Total

$

10,096,802

$

10,294,511

3.73

%

Heat Makes Sense Shared Services, LLC

(9)

Brooklyn, NY

Term Loan

(11)

First Lien

6M SOFR+

5.50

%

0.75

%

9.63

%

7/1/2022

7/1/2029

Consumer Goods: Non-Durable

$

99,750

97,814

98,254

0.04

%

Revolver

(11)

First Lien

6M SOFR+

5.50

%

0.75

%

10.37

%

7/1/2022

7/1/2028

20,000

20,000

19,700

0.01

%

Ishtar Co-Invest-B LP Partnership Interests

Equity

7/1/2022

  

77,778

77,778

88,684

0.03

%

Oshun Co-Invest-B LP Partnership Interests

Equity

7/1/2022

  

22,222

22,222

25,338

0.01

%

Total

$

217,814

$

231,976

0.09

%

HV Watterson Holdings, LLC

(9)

Schaumburg, IL

Term Loan

(11)

First Lien

3M LIBOR+

6.25

%

1.00

%

10.98

%

12/17/2021

12/17/2026

Services: Business

$

13,302,236

13,081,774

12,903,169

4.68

%

Revolver

(11)

First Lien

3M LIBOR+

6.25

%

1.00

%

10.98

%

12/17/2021

12/17/2026

16,000

16,000

15,520

0.01

%

Delayed Draw Term Loan

(11)

First Lien

3M LIBOR+

6.25

%

1.00

%

10.98

%

12/17/2021

12/17/2026

323,108

320,082

313,415

0.11

%

HV Acquisition VI, LLC Class A Units

Equity

12/17/2021

  

1,632

1,631,591

1,374,844

0.50

%

Total

$

15,049,447

$

14,606,948

5.30

%

I2P Holdings, LLC

Cleveland, OH

Series A Preferred Units

(6)

Equity

1/31/2018

Services: Business

750,000

-

3,238,328

1.17

%

Total

$

-

$

3,238,328

1.17

%

ICD Holdings, LLC

(7)

San Francisco, CA

Class A Units

Equity

1/1/2018

Finance

9,962

464,619

1,033,332

0.37

%

Total

$

464,619

$

1,033,332

0.37

%

Infolinks Media Buyco, LLC

(9)

Ridgewood, NJ

Term Loan (SBIC II)

(5)(11)

First Lien

3M LIBOR+

5.50

%

1.00

%

10.23

%

11/1/2021

11/1/2026

Media: Advertising, Printing & Publishing

$

8,439,750

8,304,246

8,439,750

3.06

%

Tower Arch Infolinks Media, LP LP Interests

(6)(17)

Equity

10/28/2021

447,183

429,507

796,939

0.29

%

Total

$

8,733,753

$

9,236,689

3.35

%

Inoapps Bidco, LLC

(9)

Houston, TX

Term Loan B

(11)

First Lien

3M SONIA+

5.75

%

1.00

%

9.09

%

2/15/2022

2/15/2027

High Tech Industries

£

9,950,000

$

13,260,842

$

11,801,635

4.28

%

Delayed Draw Term Loan

(11)

First Lien

3M LIBOR+

5.75

%

1.00

%

10.19

%

2/15/2022

2/15/2027

$

83,125

82,356

81,463

0.03

%

Inoapps Holdings, LLC Series A-1 Preferred Units

Equity

2/15/2022

  

739,844

783,756

765,249

0.28

%

Total

$

14,126,954

$

12,648,347

4.59

%

Integrated Oncology Network, LLC

(9)

Newport Beach, CA

Term Loan

(11)

First Lien

3M SOFR+

6.00

%

1.00

%

9.71

%

7/17/2019

6/24/2025

Healthcare & Pharmaceuticals

$

15,832,478

15,724,809

15,357,505

5.58

%

Term Loan

(11)

First Lien

3M SOFR+

6.00

%

1.00

%

9.71

%

11/1/2021

6/24/2025

1,095,930

1,083,042

1,063,052

0.39

%

Total

$

16,807,851

$

16,420,557

5.97

%

International Designs Holdings LLC

Farmingville, NY

Common Units

Equity

4/1/2022

Construction & Building

200,000

200,000

195,412

0.07

%

Total

$

200,000

$

195,412

0.07

%

Interstate Waste Services, Inc.

Amsterdam, OH

Common Stock

Equity

1/15/2020

Environmental Industries

21,925

946,125

615,657

0.22

%

Total

$

946,125

$

615,657

0.22

%

Intuitive Health, LLC

Plano, TX

Term Loan (SBIC II)

(5)(11)

First Lien

3M LIBOR+

5.50

%

1.00

%

10.23

%

10/18/2019

10/18/2027

Healthcare & Pharmaceuticals

$

5,835,000

5,769,877

5,835,000

2.12

%

Term Loan

(11)

First Lien

3M LIBOR+

5.50

%

1.00

%

10.23

%

10/18/2019

10/18/2027

8,206,709

8,115,519

8,206,709

2.98

%

Term Loan (SBIC II)

(5)(11)

First Lien

3M LIBOR+

5.50

%

1.00

%

10.23

%

8/31/2021

10/18/2027

3,073,431

3,035,678

3,073,431

1.11

%

Legacy Parent, Inc. Class A Common Stock

Equity

10/30/2020

58

-

191,375

0.07

%

Total

$

16,921,074

$

17,306,515

6.28

%

20

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2022

Principal

% of  

  

  

  

  

  

  

  

Investment

  

  

Headquarters/ 

  

Amount/

  

Amortized

  

Fair 

  

Net  

Investments

Footnotes

Security(2)

Coupon

Floor

Cash

PIK

Date

 

Maturity

Industry

Shares(3)

Cost

Value(1)

Assets

Invincible Boat Company LLC

(9)

Opa Locka, FL

Term Loan

(11)

First Lien

3M LIBOR+

6.50

%

1.50

%

11.23

%

8/28/2019

8/28/2025

Consumer Goods: Durable

$

5,381,042

5,294,704

5,219,611

1.89

%

Term Loan (SBIC II)

(5)(11)

First Lien

3M LIBOR+

6.50

%

1.50

%

11.23

%

8/28/2019

8/28/2025

4,967,116

4,916,760

4,818,103

1.75

%

Term Loan (SBIC II)

(5)(11)

First Lien

3M LIBOR+

6.50

%

1.50

%

11.23

%

6/1/2021

8/28/2025

1,104,255

1,089,478

1,071,127

0.39

%

Revolver

(11)

First Lien

3M LIBOR+

6.50

%

1.50

%

11.23

%

8/28/2019

8/28/2025

319,149

319,149

309,575

0.11

%

Warbird Parent Holdco, LLC Class A Units

Equity

8/28/2019

1,362,575

1,299,691

733,149

0.27

%

Total

$

12,919,782

$

12,151,565

4.41

%

J.R. Watkins, LLC

San Francisco

Term Loan (SBIC)

(4)

First Lien

12.00

%

7.00

%

5.00

%

12/22/2017

3/31/2024

Consumer Goods: Non-Durable

$

12,764,441

12,764,441

11,168,886

4.05

%

J.R. Watkins Holdings, Inc. Class A Preferred Stock

Equity

12/22/2017

1,133

1,132,576

149,640

0.05

%

Total

$

13,897,017

$

11,318,526

4.10

%

Jurassic Acquisition Corp.

Sparks, MD

Term Loan

(11)

First Lien

1M SOFR+

5.50

%

-

%

9.92

%

12/28/2018

11/15/2024

Metals & Mining

$

16,800,000

16,708,750

16,464,001

5.98

%

Total

$

16,708,750

$

16,464,001

5.98

%

Kelleyamerit Holdings, Inc.

Walnut Creek, CA

Term Loan (SBIC)

(4)(10)(12)

First Lien

1M BSBY+

6.75

%

1.00

%

12.36

%

12/24/2020

12/24/2025

Automotive

$

9,750,000

9,624,052

9,701,250

3.52

%

Term Loan

(10)(12)

First Lien

1M BSBY+

6.75

%

1.00

%

12.36

%

12/24/2020

12/24/2025

1,500,000

1,480,623

1,492,500

0.54

%

Total

$

11,104,675

$

11,193,750

4.06

%

KidKraft, Inc.

Dallas, TX

Term Loan

(10)(12)

First Lien

3M LIBOR+

6.00

%

1.00

%

10.72

%

4/3/2020

6/30/2023

Consumer Goods: Durable

$

1,580,768

1,580,768

1,580,768

0.57

%

KidKraft Group Holdings, LLC Preferred B Units

Equity

4/3/2020

4,000,000

4,000,000

4,000,000

1.45

%

Total

$

5,580,768

$

5,580,768

2.02

%

Ledge Lounger, Inc.

(9)

Katy, TX

Term Loan A (SBIC)

(4)(11)

First Lien

3M SOFR+

6.25

%

1.00

%

10.98

%

11/9/2021

11/9/2026

Consumer Goods: Durable

$

7,568,289

7,446,619

7,416,923

2.69

%

Revolver

(11)

First Lien

3M SOFR+

6.25

%

1.00

%

10.98

%

11/9/2021

11/9/2026

33,333

33,333

32,666

0.01

%

SP L2 Holdings LLC Class A Units (SBIC)

(4)

Equity

11/9/2021

  

375,000

375,000

302,593

0.11

%

Total

$

7,854,952

$

7,752,182

2.81

%

Lightning Intermediate II, LLC

(9)

Jacksonville, FL

Term Loan (SBIC)

(4)(11)

First Lien

6M SOFR+

6.50

%

1.00

%

11.54

%

6/6/2022

6/6/2027

Consumer Goods: Non-Durable

$

13,587,067

13,340,843

13,179,455

4.78

%

Gauge Vimergy Coinvest, LLC Units

Equity

6/6/2022

  

399

398,677

298,376

0.11

%

Total

$

13,739,520

$

13,477,831

4.89

%

MacKenzie-Childs Acquisition, Inc.

(9)

Aurora, NY

Term Loan

(11)

First Lien

3M SOFR+

6.00

%

1.00

%

10.73

%

9/2/2022

9/2/2027

Consumer Goods: Durable

$

99,750

98,331

98,254

0.04

%

Revolver

(11)

First Lien

3M SOFR+

6.00

%

1.00

%

10.73

%

9/2/2022

9/2/2027

86,667

86,667

85,367

0.03

%

MacKenzie-Childs Investment, LP Partnership Interests

Equity

9/2/2022

  

100,000

100,000

91,659

0.03

%

Total

$

284,998

$

275,280

0.10

%

Madison Logic Holdings, Inc.

(9)

New York, NY

Term Loan

(11)

First Lien

3M SOFR+

7.00

%

1.00

%

11.58

%

12/30/2022

12/30/2028

Media: Broadcasting & Subscription

$

4,529,217

4,393,340

4,393,340

1.59

%

Total

$

4,393,340

$

4,393,340

1.59

%

Microbe Formulas LLC

(9)

Meridian, ID

Term Loan (SBIC II)

(5)(11)

First Lien

1M SOFR+

6.25

%

1.00

%

10.67

%

4/4/2022

4/3/2028

Consumer Goods: Non-Durable

$

9,962,730

9,873,093

9,863,103

3.58

%

Total

$

9,873,093

$

9,863,103

3.58

%

MOM Enterprises, LLC

(9)

Richmond, CA

Term Loan (SBIC II)

(5)(11)

First Lien

3M LIBOR+

6.25

%

1.00

%

10.98

%

5/19/2021

5/19/2026

Consumer Goods: Non-Durable

$

16,219,667

15,984,825

15,651,980

5.69

%

Revolver

(11)

First Lien

3M LIBOR+

6.25

%

1.00

%

10.98

%

5/19/2021

5/19/2026

37,500

37,500

36,188

0.01

%

MBliss SPC Holdings, LLC Units

Equity

5/19/2021

933,333

933,333

700,989

0.25

%

Total

$

16,955,658

$

16,389,157

5.95

%

21

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2022

Principal

% of  

  

  

  

  

  

  

  

Investment

  

  

Headquarters/ 

  

Amount/

  

Amortized

  

Fair 

  

Net  

Investments

Footnotes

Security(2)

Coupon

Floor

Cash

PIK

Date

 

Maturity

Industry

Shares(3)

Cost

Value(1)

Assets

Monitorus Holding, LLC

(7)(9)

London, UK

Term Loan

(11)

First Lien

3M LIBOR+

7.00

%

1.00

%

11.73

%

5/24/2022

5/24/2027

Media: Diversified & Production

$

100,000

99,095

99,000

0.04

%

Delayed Draw Term Loan

(11)

First Lien

3M LIBOR+

7.00

%

1.00

%

11.73

%

5/24/2022

5/24/2027

100,000

100,931

106,132

0.04

%

Sapphire Aggregator S.a r.l. Class A Shares

Equity

9/1/2022

557,689

11,156

12,511

0.00

%

Sapphire Aggregator S.a r.l. Class B Shares

Equity

9/1/2022

557,682

11,156

12,511

0.00

%

Sapphire Aggregator S.a r.l. Class C Shares

Equity

9/1/2022

557,682

11,156

12,511

0.00

%

Sapphire Aggregator S.a r.l. Class D Shares

Equity

9/1/2022

557,682

11,156

12,511

0.00

%

Sapphire Aggregator S.a r.l. Class E Shares

Equity

9/1/2022

557,682

11,156

12,511

0.00

%

Sapphire Aggregator S.a r.l. Class F Shares

Equity

9/1/2022

557,682

11,156

12,511

0.00

%

Sapphire Aggregator S.a r.l. Class G Shares

Equity

9/1/2022

557,682

11,156

12,511

0.00

%

Sapphire Aggregator S.a r.l. Class H Shares

Equity

9/1/2022

557,682

11,156

12,511

0.00

%

Sapphire Aggregator S.a r.l. Class I Shares

Equity

9/1/2022

557,682

11,156

12,511

0.00

%

Total

$

300,430

$

317,731

0.08

%

Naumann/Hobbs Material Handling Corporation II, Inc.

(9)

Phoenix, AZ

Term Loan

(11)

First Lien

3M SOFR+

6.75

%

1.50

%

11.33

%

8/30/2019

8/30/2024

Services: Business

$

8,552,022

8,487,053

8,423,742

3.05

%

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

6.75

%

1.50

%

11.33

%

8/30/2019

8/30/2024

5,392,937

5,351,968

5,312,043

1.93

%

Naumann Hobbs Holdings, L.P. Class A-1 Units

Equity

9/29/2022

123

220,379

314,486

0.11

%

Naumann Hobbs Holdings, L.P. Class A-2 Units

Equity

9/29/2022

123

220,379

314,486

0.11

%

Total

$

14,279,779

$

14,364,757

5.20

%

NINJIO, LLC

(9)

Westlake Village, CA

Term Loan

(11)

First Lien

3M SOFR+

6.50

%

1.50

%

11.33

%

10/12/2022

10/12/2027

Media: Diversified & Production

$

5,000,000

4,903,726

4,903,726

1.78

%

NINJIO Holdings, LLC Units

Equity

10/12/2022

184

313,253

313,253

0.11

%

Total

$

5,216,979

$

5,216,979

1.89

%

NS412, LLC

Dallas, TX

Term Loan

(11)

Second Lien

3M LIBOR+

8.50

%

1.00

%

13.23

%

5/6/2019

11/6/2025

Services: Consumer

$

7,615,000

7,536,527

7,386,550

2.68

%

NS Group Holding Company, LLC Class A Units

Equity

5/6/2019

782

795,002

536,120

0.19

%

Total

$

8,331,529

$

7,922,670

2.87

%

NuMet Machining Techniques, LLC

(7)

Birmingham, United Kingdom

Term Loan

(11)(15)

Second Lien

PRIME+

8.00

%

-

%

-

%

11/5/2019

5/5/2026

Aerospace & Defense

$

12,675,000

12,524,972

8,745,750

3.17

%

Bromford Industries Limited Term Loan

(11)(15)

Second Lien

PRIME+

8.00

%

-

%

-

%

11/5/2019

5/5/2026

7,800,000

7,704,685

5,382,000

1.95

%

Total

$

20,229,657

$

14,127,750

5.12

%

NuSource Financial, LLC

Eden Prairie, MN

Term Loan (SBIC II)

(5)(11)

First Lien

1M LIBOR+

9.00

%

1.00

%

13.12

%

1/29/2021

1/29/2026

Services: Business

$

11,562,548

11,403,406

11,215,672

4.07

%

NuSource Financial Acquisition, Inc. (SBIC II)

(5)

Unsecured

13.75

%

2.00

%

11.75

%

1/29/2021

7/29/2026

5,638,571

5,568,680

4,736,400

1.72

%

NuSource Holdings, Inc. Warrants (SBIC II)

(5)

Equity

1/29/2021

  

54,966

-

-

0.00

%

Total

$

16,972,086

$

15,952,072

5.79

%

Nutritional Medicinals, LLC

(9)

Centerville, OH

Term Loan

(11)

First Lien

3M LIBOR+

6.00

%

1.00

%

10.73

%

11/15/2018

11/15/2025

Healthcare & Pharmaceuticals

$

9,848,290

9,781,484

9,700,566

3.52

%

Term Loan

(11)

First Lien

3M LIBOR+

6.00

%

1.00

%

10.73

%

10/28/2021

11/15/2025

4,180,294

4,133,615

4,117,590

1.49

%

Functional Aggregator, LLC Units

Equity

11/15/2018

12,500

972,803

1,582,534

0.57

%

Total

$

14,887,902

$

15,400,690

5.58

%

Onpoint Industrial Services, LLC

Deer Park, TX

Term Loan (SBIC)

(4)(11)

First Lien

3M SOFR+

7.00

%

1.75

%

11.58

%

11/16/2022

11/16/2027

Services: Business

$

12,893,258

12,638,571

12,638,571

4.58

%

Spearhead TopCo, LLC Class A Units

Equity

11/16/2022

606,742

606,742

606,742

0.22

%

Total

$

13,245,313

$

13,245,313

4.80

%

PCP MT Aggregator Holdings, L.P.

(7)

Oak Brook, IL

Common Units

Equity

3/29/2019

Finance

825,020

119,281

1,686,647

0.61

%

Total

$

119,281

$

1,686,647

0.61

%

22

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2022

Principal

% of  

  

  

  

  

  

  

  

Investment

  

  

Headquarters/ 

  

Amount/

  

Amortized

  

Fair 

  

Net  

Investments

Footnotes

Security(2)

Coupon

Floor

Cash

PIK

Date

 

Maturity

Industry

Shares(3)

Cost

Value(1)

Assets

PCS Software, Inc.

(9)

Shenandoah, TX

Term Loan

(11)

First Lien

3M SOFR+

6.00

%

1.50

%

10.73

%

7/1/2019

7/1/2024

Transportation & Logistics

$

14,064,493

13,964,812

13,923,848

5.05

%

Term Loan (SBIC)

(4)(11)

First Lien

3M SOFR+

6.00

%

1.50

%

10.73

%

7/1/2019

7/1/2024

1,844,524

1,831,451

1,826,079

0.66

%

Delayed Draw Term Loan

(11)

First Lien

3M SOFR+

6.00

%

1.50

%

10.73

%

7/1/2019

7/1/2024

972,500

972,500

962,775

0.35

%

PCS Software Parent, LLC Class A Common Units

Equity

9/16/2022

461,216

-

449,270

0.16

%

Total

$

16,768,763

$

17,161,972

6.22

%

Pearl Media Holdings, LLC

(9)

Garland, TX

Term Loan (SBIC II)

(5)(11)

First Lien

3M SOFR+

6.25

%

1.50

%

10.98

%

8/31/2022

8/31/2027

Consumer Goods: Durable

$

9,975,000

9,785,984

9,775,500

3.54

%

Revolver

(11)

First Lien

3M SOFR+

6.25

%

1.50

%

10.93

%

8/31/2022

8/31/2027

33,333

33,333

32,666

0.01

%

Total

$

9,819,317

$

9,808,166

3.55

%

Peltram Plumbing Holdings, LLC

(9)

Auburn, WA

Term Loan

(11)

First Lien

3M LIBOR+

6.25

%

1.00

%

10.98

%

12/30/2021

12/30/2026

Construction & Building

$

16,579,758

16,304,977

15,999,467

5.81

%

Peltram Group Holdings LLC Class A Units

Equity

12/30/2021

508,516

508,516

311,668

0.11

%

Total

$

16,813,493

$

16,311,135

5.92

%

Premiere Digital Services, Inc.

(9)

Los Angeles, CA

Term Loan

(11)

First Lien

1M LIBOR+

5.25

%

1.00

%

9.64

%

11/3/2021

11/3/2026

Media: Broadcasting & Subscription

$

14,278,846

14,221,712

14,278,846

5.18

%

Premiere Digital Holdings, Inc. Common Stock

Equity

10/18/2018

5,000

-

2,773,121

1.01

%

Total

$

14,221,712

$

17,051,967

6.19

%

Protect America, Inc.

Austin, TX

Term Loan

(11)(13)

Second Lien

3M LIBOR+

7.75

%

1.00

%

-

%

8/30/2017

9/1/2024

Services: Consumer

$

17,979,749

17,979,749

-

0.00

%

Total

$

17,979,749

$

-

0.00

%

Rogers Mechanical Contractors, LLC

(9)

Atlanta, GA

Term Loan

(11)

First Lien

6M SOFR+

8.00

%

1.00

%

11.70

%

1.00

%

4/28/2021

9/9/2025

Construction & Building

$

10,001,068

9,884,999

9,851,052

3.57

%

Delayed Draw Term Loan

(11)

First Lien

6M SOFR+

8.00

%

1.00

%

11.70

%

1.00

%

4/28/2021

9/9/2025

50,000

49,643

49,250

0.02

%

Total

$

9,934,642

$

9,900,302

3.59

%

Sales Benchmark Index, LLC

(9)

Dallas, TX

Term Loan

(11)

First Lien

3M LIBOR+

6.00

%

1.00

%

10.73

%

1/7/2020

1/7/2025

Services: Business

$

12,481,823

12,366,809

12,169,777

4.41

%

SBI Holdings Investments LLC Class A Units

Equity

1/7/2020

66,573

665,730

390,822

0.14

%

Total

$

13,032,539

$

12,560,599

4.55

%

Service Minds Company, LLC

(9)

Bradenton, FL

Term Loan

(11)

First Lien

1M LIBOR+

5.00

%

1.00

%

9.29

%

2/7/2022

2/7/2028

Services: Consumer

$

5,357,887

5,264,150

5,223,940

1.89

%

Revolver

(11)

First Lien

1M SOFR+

5.00

%

1.00

%

9.44

%

2/7/2022

2/7/2028

30,000

30,000

29,250

0.01

%

Delayed Draw Term Loan

(11)

First Lien

1M LIBOR+

5.00

%

1.00

%

9.29

%

2/7/2022

2/7/2028

32,081

31,791

31,279

0.01

%

Total

$

5,325,941

$

5,284,469

1.91

%

SIB Holdings, LLC

(9)

Charleston, SC

Term Loan (SBIC)

(4)(11)

First Lien

1M LIBOR+

6.25

%

1.00

%

11.01

%

10/29/2021

10/29/2026

Services: Business

$

12,789,331

12,584,996

12,405,651

4.50

%

Term Loan (SBIC)

(4)(11)

First Lien

1M LIBOR+

6.25

%

1.00

%

11.01

%

6/15/2022

10/29/2026

859,747

842,658

833,955

0.30

%

Term Loan (SBIC)

(4)(11)

First Lien

1M LIBOR+

6.25

%

1.00

%

11.01

%

7/20/2022

10/29/2026

2,292,657

2,250,559

2,223,877

0.81

%

Delayed Draw Term Loan

(11)

First Lien

1M LIBOR+

6.25

%

1.00

%

11.01

%

10/29/2021

10/29/2026

2,865,822

2,840,406

2,779,847

1.01

%

Revolver

(11)

First Lien

1M LIBOR+

6.25

%

1.00

%

11.01

%

10/29/2021

10/29/2026

70,754

70,754

68,631

0.02

%

SIB Holdings, LLC Units

Equity

10/29/2021

238,095

500,000

342,821

0.12

%

Total

$

19,089,373

$

18,654,782

6.76

%

TAC LifePort Holdings, LLC

Woodland, WA

Common Units

Equity

3/1/2021

Aerospace & Defense

500,000

500,000

759,769

0.28

%

Total

$

500,000

$

759,769

0.28

%

Tilley Distribution, Inc.

(9)

Baltimore, MD

Term Loan

(11)

First Lien

3M SOFR+

5.50

%

1.00

%

10.14

%

4/1/2022

12/31/2026

Chemicals, Plastics, & Rubber

$

99,245

97,936

95,771

0.03

%

Revolver

(11)

First Lien

3M SOFR+

5.50

%

1.00

%

10.14

%

4/1/2022

12/31/2026

17,391

17,391

16,782

0.01

%

Total

$

115,327

$

112,553

0.04

%

23

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2022

Principal

% of  

  

  

  

  

  

  

  

Investment  

  

  

Headquarters/ 

  

Amount/

  

Amortized

  

Fair 

  

Net  

 

Investments

Footnotes

Security(2)

Coupon

Floor

Cash

PIK

Date

Maturity

Industry

Shares(3)

Cost

Value(1)

Assets

 

Trade Education Acquisition, L.L.C.

(9)

Austin, TX

Term Loan (SBIC)

(4)(11)

First Lien

1M LIBOR+

6.25

%

1.00

%

10.63

%

12/28/2021

12/28/2027

Education

$

10,496,533

10,315,261

9,919,224

3.60

%

Revolver

(11)

First Lien

1M LIBOR+

6.25

%

1.00

%

10.52

%

12/28/2021

12/28/2027

80,000

80,000

75,600

0.03

%

Trade Education Holdings, L.L.C. Class A Units

Equity

12/28/2021

662,660

662,660

503,936

0.18

%

Total

$

11,057,921

$

10,498,760

3.81

%

TradePending, LLC

(9)

Carrboro, NC

Term Loan (SBIC II)

(5)(11)

First Lien

3M LIBOR+

6.25

%

1.00

%

10.98

%

3/2/2021

3/2/2026

Software

$

9,725,758

9,592,801

9,531,243

3.46

%

TradePending Holdings, LLC Series A Units

Equity

3/2/2021

829,167

868,750

1,117,989

0.41

%

Total

$

10,461,551

$

10,649,232

3.87

%

Unicat Catalyst Holdings, LLC

(9)

Alvin, TX

Term Loan

(11)

First Lien

3M LIBOR+

6.50

%

1.00

%

11.23

%

4/27/2021

4/27/2026

Chemicals, Plastics, & Rubber

$

7,218,750

7,116,275

6,821,719

2.47

%

Unicat Catalyst, LLC Class A Units

Equity

4/27/2021

7,500

750,000

129,248

0.05

%

Total

$

7,866,275

$

6,950,967

2.52

%

U.S. Auto Sales, Inc. et al

(7)

Lawrenceville, GA

USASF Blocker II LLC Units

Equity

6/8/2015

Finance

441

441,000

-

0.00

%

USASF Blocker III LLC 2018 Series Units

Equity

2/13/2018

50

50,000

53,040

0.02

%

USASF Blocker III LLC 2019 Series Units

Equity

12/27/2019

75

75,000

79,560

0.03

%

USASF Blocker IV LLC Units

Equity

5/27/2020

110

110,000

330,000

0.12

%

USASF Blocker IV LLC 2022 Series Units

Equity

7/28/2022

100

100,000

300,000

0.11

%

USASF Blocker V LLC Units

Equity

12/20/2022

200

200,000

600,000

0.22

%

USASF Blocker LLC Units

Equity

6/8/2015

9,000

9,000

-

0.00

%

Total

$

985,000

$

1,362,600

0.50

%

U.S. Expediters, LLC

(9)

Stafford, TX

Term Loan

(11)

First Lien

3M LIBOR+

6.00

%

1.00

%

10.73

%

12/22/2021

12/22/2026

Healthcare & Pharmaceuticals

$

15,866,798

15,603,833

15,866,799

5.76

%

Cathay Hypnos LLC Units

(6)

Equity

12/22/2021

1,372,932

1,316,740

2,702,795

0.98

%

Total

$

16,920,573

$

18,569,594

6.74

%

Venbrook Buyer, LLC

Los Angeles, CA

Term Loan B (SBIC)

(4)(11)

First Lien

3M SOFR+

8.00

%

1.50

%

5.73

%

7.00

%

3/13/2020

3/13/2026

Services: Business

$

12,872,663

12,719,565

12,615,210

4.57

%

Term Loan B

(11)

First Lien

3M SOFR+

8.00

%

1.50

%

5.73

%

7.00

%

3/13/2020

3/13/2026

146,465

144,723

143,536

0.05

%

Revolver

(11)

First Lien

3M SOFR+

8.00

%

1.50

%

5.73

%

7.00

%

3/13/2020

3/13/2026

2,231,119

2,231,119

2,186,497

0.79

%

Delayed Draw Term Loan

(11)

First Lien

3M SOFR+

8.00

%

1.50

%

5.73

%

7.00

%

3/13/2020

3/13/2026

4,388,645

4,358,279

4,300,872

1.56

%

Venbrook Holdings, LLC Term Loan

(16)

Unsecured

10.00

%

-

%

10.00

%

3/31/2022

12/20/2028

89,284

89,284

87,498

0.03

%

Venbrook Holdings, LLC Common Units

Equity

3/13/2020

822,758

819,262

121,938

0.04

%

Total

$

20,362,232

$

19,455,551

7.04

%

Vortex Companies, LLC

Houston, TX

Term Loan (SBIC II)

(5)(11)

Second Lien

3M SOFR+

9.50

%

1.00

%

14.18

%

12/21/2020

6/21/2026

Environmental Industries

$

10,000,000

9,859,282

9,850,000

3.57

%

Total

$

9,859,282

$

9,850,000

3.57

%

Whisps Holdings LP

Elgin, IL

Class A Units

Equity

4/18/2019

Beverage, Food, & Tobacco

500,000

500,000

-

0.00

%

Total

$

500,000

$

-

0.00

%

Xanitos, Inc.

(9)

Newtown Square, PA

Term Loan (SBIC)

(4)(11)

First Lien

3M LIBOR+

6.50

%

1.00

%

11.23

%

6/25/2021

6/25/2026

Healthcare & Pharmaceuticals

$

12,608,000

12,421,258

12,166,720

4.41

%

Revolver

(11)

First Lien

3M LIBOR+

6.50

%

1.00

%

11.24

%

6/25/2021

6/25/2026

80,000

80,000

77,200

0.03

%

Delayed Draw Term Loan

(11)

First Lien

3M LIBOR+

6.50

%

1.00

%

11.23

%

6/25/2021

6/25/2026

2,221,181

2,203,262

2,143,440

0.78

%

Pure TopCo, LLC Class A Units

Equity

6/25/2021

442,133

1,053,478

844,147

0.31

%

Total

$

15,757,998

$

15,231,507

5.53

%

Total Non-controlled, non-affiliated investments

$

875,823,177

$

844,733,638

306.31

%

Net Investments

$

875,823,177

$

844,733,638

306.31

%

LIABILITIES IN EXCESS OF OTHER ASSETS

$

(563,881,593)

(206.31)

%

NET ASSETS

$

280,852,045

100.00

%

24

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2022

(1)
See Note 1 of the Notes to the Consolidated Financial Statements for a discussion of the methodologies used to value securities in the portfolio.
(2)
Debt investments are income producing and equity securities are non-income producing, unless otherwise noted.
(3)
Par amount is presented for debt investments, while the number of shares or units owned is presented for equity investments. Par amount is denominated in U.S. Dollars (“$”) unless otherwise noted, Euro (“€”), or Great British Pound (“£”).
(4)
Investments held by the SBIC subsidiary (as defined in Note 1), which include $19,716,893 of cash and $207,971,244 of investments (at cost), are excluded from the obligations to the lenders of the Credit Facility (as defined in Note 9). Stellus Capital Investment Corporation’s (the “Company”) obligations to the lenders of the Credit Facility are secured by a first priority security interest in all investments and cash and cash equivalents, except for cash and investments held by the SBIC subsidiaries (as defined in Note 1).
(5)
Investments held by the SBIC II subsidiary (as defined in Note 1), which include $26,303,849 of cash and $224,768,652 of investments (at cost), are excluded from the obligations to the lenders of the Credit Facility. The Company’s obligations to the lenders of the Credit Facility are secured by a first priority security interest in all investments and cash and cash equivalents, except for cash and investments held by the SBIC subsidiaries.
(6)
Security is income producing through dividends or distributions.
(7)
The investment is not a “qualifying asset” under the Investment Company Act of 1940, as amended. The Company may not acquire any non-qualifying assets unless, at the time of the acquisition, qualifying assets represent at least 70% of the Company’s total assets. Qualifying assets represent approximately 95.7% of the Company’s total assets as of June 30, 2023.
(8)
Represents a PIK interest security. At the option of the issuer, interest can be paid in cash or cash and PIK interest. The percentage of PIK interest shown is the maximum PIK interest that can be elected by the issuer.
(9)
At December 31, 2022, the Company had the following outstanding revolver and delayed draw term loan commitments:

    

    

    

Unused 

    

Unfunded 

Commitment 

Investments

Security

Commitment

Fee

Maturity

Ad.Net Acquisition, LLC

Revolver

$

259,804

0.50%

May 7, 2026

AIP ATCO Buyer, LLC

Revolver

50,000

0.50%

May 17, 2028

Anne Lewis Strategies, LLC

Revolver

100,000

0.50%

March 5, 2026

ArborWorks Acquisition LLC (a)

Revolver

1,153,846

0.50%

November 9, 2026

Archer Systems, LLC

Revolver

100,000

0.50%

August 11, 2027

Axis Portable Air, LLC

Revolver

100,000

0.50%

March 22, 2028

BDS Solutions Intermediateco, LLC

Revolver

69,935

0.50%

February 7, 2027

BLP Buyer, Inc.

Revolver

63,434

0.50%

February 1, 2027

Camp Profiles LLC

Delayed Draw Term Loan

3,750,000

1.00%

September 3, 2026

Camp Profiles LLC

Revolver

100,000

0.50%

September 3, 2026

CEATI International Inc.

Revolver

100,000

0.50%

February 19, 2026

CF512, Inc.

Delayed Draw Term Loan

220,930

0.50%

September 1, 2026

CF512, Inc.

Revolver

100,000

0.50%

September 1, 2026

CompleteCase, LLC

Revolver A

60,000

0.50%

December 21, 2025

COPILOT Provider Support Services, LLC

Revolver

100,000

0.50%

November 22, 2027

Credit Connection, LLC

Revolver

100,000

0.50%

July 30, 2026

Curion Holdings, LLC

Delayed Draw Term Loan

100,000

0.50%

July 29, 2027

Curion Holdings, LLC

Revolver

30,000

0.50%

July 29, 2027

DRS Holdings III, Inc.

Revolver

909,091

0.50%

November 1, 2025

DTE Enterprises, LLC

Revolver

750,000

0.50%

April 13, 2023

Exacta Land Surveyors, LLC

Revolver

1,500,000

0.50%

February 8, 2024

Exigo, LLC

Revolver

80,000

0.50%

March 16, 2027

Exigo, LLC

Delayed Draw Term Loan

100,000

0.50%

March 16, 2027

Florachem Corporation

Revolver

100,000

0.50%

April 29, 2028

Florachem Corporation

Delayed Draw Term Loan

100,000

0.50%

April 29, 2028

GS HVAM Intermediate, LLC

Revolver

112,045

0.50%

October 2, 2024

Heartland Business Systems, LLC

Delayed Draw Term Loan

75,000

0.50%

August 26, 2027

Heat Makes Sense Shared Services, LLC

Revolver

80,000

0.50%

July 1, 2028

HV Watterson Holdings, LLC

Revolver

84,000

0.50%

December 17, 2026

HV Watterson Holdings, LLC

Delayed Draw Term Loan

2,555,354

1.00%

December 17, 2026

Infolinks Media Buyco, LLC

Delayed Draw Term Loan

2,475,000

0.50%

November 1, 2026

Inoapps Bidco, LLC

Revolver

100,000

0.50%

February 15, 2027

Inoapps Bidco, LLC

Delayed Draw Term Loan

16,667

0.50%

February 15, 2027

Integrated Oncology Network, LLC

Revolver

553,517

0.50%

June 24, 2025

Invincible Boat Company LLC

Revolver

744,681

0.50%

August 28, 2025

Ledge Lounger, Inc.

Revolver

66,667

0.50%

November 9, 2026

25

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2022

    

    

    

Unused 

    

Unfunded 

Commitment 

Investments

Security

Commitment

Fee

Maturity

Lightning Intermediate II, LLC

Revolver

$

100,000

0.50%

June 6, 2027

MacKenzie-Childs Acquisition, Inc.

Revolver

13,333

0.50%

September 2, 2027

Madison Logic Holdings, Inc.

Revolver

100,000

0.50%

December 30, 2027

Microbe Formulas LLC

Revolver

100,000

0.50%

April 3, 2028

MOM Enterprises, LLC

Revolver

62,500

0.50%

May 19, 2026

Monitorus Holding, LLC

Revolver

100,000

0.50%

May 24, 2027

Naumann/Hobbs Material Handling Corporation II, Inc.

Revolver – Working Capital

1,763,033

0.50%

August 30, 2024

NINJIO, LLC

Delayed Draw Term Loan

100,000

0.50%

October 12, 2027

NINJIO, LLC

Revolver

100,000

0.50%

October 12, 2027

Nutritional Medicinals, LLC

Revolver

2,000,000

0.50%

November 15, 2025

PCS Software, Inc.

Revolver

1,318,143

0.50%

July 1, 2024

Pearl Media Holdings, LLC

Delayed Draw Term Loan

100,000

0.50%

August 31, 2027

Pearl Media Holdings, LLC

Revolver

66,667

0.50%

August 31, 2027

Peltram Plumbing Holdings, LLC

Revolver

100,000

0.50%

December 30, 2026

Premiere Digital Services, Inc.

Revolver

576,923

0.50%

November 3, 2026

Rogers Mechanical Contractors, LLC

Revolver

83,333

0.75%

September 9, 2025

Rogers Mechanical Contractors, LLC

Delayed Draw Term Loan

50,000

1.00%

September 9, 2025

Sales Benchmark Index, LLC

Revolver

1,331,461

0.50%

January 7, 2025

Service Minds Company, LLC

Revolver

70,000

0.50%

February 7, 2028

Service Minds Company, LLC

Delayed Draw Term Loan

67,677

1.00%

February 7, 2028

SIB Holdings, LLC

Revolver

29,246

0.50%

October 29, 2026

Tilley Distribution, Inc.

Revolver

82,609

0.50%

December 31, 2026

Trade Education Acquisition, L.L.C.

Revolver

20,000

0.50%

December 28, 2027

TradePending, LLC

Revolver

100,000

0.50%

March 2, 2026

Unicat Catalyst Holdings, LLC

Revolver

2,000,000

0.50%

April 27, 2026

U.S. Expediters, LLC

Revolver

100,000

0.50%

December 22, 2026

Xanitos, Inc.

Revolver

20,000

0.50%

June 25, 2026

(a)The Company has full discretion to fund this revolver commitment.

A

(10)
This loan is a unitranche investment.
(11)
These loans include an interest rate floor feature which is lower than the applicable rates; therefore, the floor is not in effect.
(12)
These loans are last-out term loans with contractual rates higher than the applicable rates; therefore, the floor is not in effect.
(13)
Investment has been on non-accrual since June 28, 2019.
(14)
Investment has been on non-accrual since December 31, 2020.
(15)
Investment has been on non-accrual since April 1, 2022.
(16)
This loan is convertible to common units at maturity or at the election of the issuer.
(17)
Maturity date is under ongoing negotiations with portfolio company and other lenders.
(18)
Excluded from the investment is an uncalled capital commitment in an amount not to exceed $302,817.

Abbreviation Legend

BSBY —  Bloomberg Short-Term Bank Yield Index

LIBOR —  London Interbank Offered Rate

PIK — Payment-In-Kind

SOFR —  Secured Overnight Financing Rate

26

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

NOTE 1 — NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Stellus Capital Investment Corporation (“we”, “us”, “our” and the “Company”) was formed as a Maryland corporation on May 18, 2012 (“Inception”) and is an externally managed, closed-end, non-diversified investment management company. The Company is applying the guidance of Accounting Standards Codification (“ASC”) Topic 946, Financial Services Investment Companies (“ASC Topic 946”). The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), for U.S. federal income tax purposes. The Company’s investment activities are managed by our investment adviser, Stellus Capital Management, LLC (“Stellus Capital” or the “Advisor”).

As of June 30, 2023, the Company had issued a total of 22,557,904 shares and raised $330,122,125 in gross proceeds since Inception, incurring $10,590,466 in offering expenses and sales load fees. Additionally, the Company has received $672,917 in offering expenses reimbursements from the Advisor for net proceeds from offerings of $320,204,576. The Company’s shares are currently listed on the New York Stock Exchange under the symbol “SCM”. See Note 4 for further details.

The Company has established the following wholly owned subsidiaries: SCIC — Consolidated Blocker, Inc., SCIC — ICD Blocker 1, Inc., SCIC — Invincible Blocker 1, Inc., SCIC — SKP Blocker 1, Inc., SCIC — APE Blocker 1, Inc., SCIC — Venbrook Blocker, Inc., SCIC — CC Blocker 1, Inc., SCIC — ERC Blocker 1, Inc., and SCIC — Hollander Blocker 1, Inc., which are structured as Delaware entities, to hold equity or equity-like investments in portfolio companies organized as limited liability companies, or LLCs (or other forms of pass-through entities) (collectively, the “Taxable Subsidiaries”). The Taxable Subsidiaries are consolidated for U.S. generally accepted accounting principles (“U.S. GAAP”) reporting purposes, and the portfolio investments held by them are included in the consolidated financial statements.

On June 14, 2013, the Company formed Stellus Capital SBIC, LP (the “SBIC subsidiary”), a Delaware limited partnership, and its general partner, Stellus Capital SBIC GP, LLC, a Delaware limited liability company, as wholly owned subsidiaries of the Company. On June 20, 2014, the SBIC subsidiary received a license from the U.S. Small Business Administration (“SBA”) to operate as a Small Business Investment Company (“SBIC”) under Section 301(c) of the Small Business Investment Company Act of 1958, as amended (the “SBIC Act”). The SBIC subsidiary and its general partner are consolidated for U.S. GAAP reporting purposes, and the portfolio investments held by it are included in the consolidated financial statements.

On November 29, 2018, the Company formed Stellus Capital SBIC II, LP (the “SBIC II subsidiary”), a Delaware limited partnership. On August 14, 2019, the SBIC II subsidiary received a license from the SBA to operate as an SBIC under Section 301(c) of the SBIC Act. The SBIC II subsidiary is consolidated for U.S. GAAP reporting purposes, and the portfolio investments held by it are included in the consolidated financial statements.

The SBIC licenses allow the SBIC subsidiary and SBIC II subsidiary (together, “the SBIC subsidiaries”) to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten-year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with 10-year maturities. The SBA, as a creditor, will have a superior claim to the SBIC subsidiaries’ assets over the Company’s stockholders in the event the Company liquidates one or both of the SBIC subsidiaries or the SBA exercises its remedies under the SBA-guaranteed debentures issued by the SBIC subsidiaries upon an event of default. For the SBIC subsidiary, SBA regulations currently limit the amount that a single licensee may borrow to a maximum of $150,000,000 when it has at least $75,000,000 in regulatory capital, as such term is defined by the SBA, receives a capital commitment from the SBA and has been through an examination by the SBA subsequent to licensing. For the SBIC II subsidiary, SBA regulations limit these amounts to $175,000,000 of borrowings when it has at least $87,500,000 of regulatory capital.

27

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

As of both June 30, 2023 and December 31, 2022, the SBIC subsidiary had $75,000,000 in regulatory capital. As of both June 30, 2023 and December 31, 2022, the SBIC II subsidiary had $87,500,000 in regulatory capital.

As of both June 30, 2023 and December 31, 2022, the SBIC subsidiary had $150,000,000 of SBA-guaranteed debentures outstanding. As of both June 30, 2023 and December 31, 2022, the SBIC II subsidiary had $163,600,000 of SBA-guaranteed debentures outstanding. See footnote (2) of the Consolidated Schedule of Investments for additional information regarding the treatment of investments in the SBIC subsidiaries with respect to the Credit Facility (as defined in Note 9).

As a BDC, the Company is required to comply with certain regulatory requirements. On March 23, 2018, the Small Business Credit Availability Act (the “SBCAA”) was signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The SBCAA included changes to the 1940 Act to allow BDCs to decrease their asset coverage requirement to 150% from 200% subject to certain conditions.

On April 4, 2018, the Company’s board of directors (the “Board”), including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. At the Company’s 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 test applicable to the Company was decreased from 200% to 150%, effective June 29, 2018. 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. As of June 30, 2023, our asset coverage ratio was 214%.

The Company’s investment objective is to maximize the total return to its stockholders in the form of current income and capital appreciation through debt and related equity investments in middle-market companies. The Company seeks to achieve its investment objective by originating and investing primarily in private U.S. middle-market companies (typically those with $5,000,000 to $50,000,000 of EBITDA (earnings before interest, taxes, depreciation and amortization)) through first lien, second lien, unitranche and unsecured debt financing, with corresponding equity co-investments. The Company sources investments primarily through the extensive network of relationships that the principals of Stellus Capital have developed with financial sponsor firms, financial institutions, middle-market companies, management teams and other professional intermediaries.

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared on the accrual basis of accounting in conformity with generally accepted accounting principles in the U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, certain disclosures accompanying the annual financial statements prepared in accordance with U.S. GAAP are omitted. The unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.

In the opinion of management, the unaudited consolidated financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of the financial statements for the interim periods included herein. The results of operations for the three and six months ended June 30, 2023 and June 30, 2022 are not necessarily indicative of the operating results to be expected for the full year. Also, the unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2022.

In accordance with Regulation S-X under the Exchange Act, the Company does not consolidate portfolio company investments. The accounting records of the Company are maintained in U.S. dollars.

28

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

Economic Developments

Economic activity has continued to accelerate across sectors and regions. Nonetheless, we have observed and continue to observe supply chain interruptions, labor resource shortages, commodity inflation, rising interest rates, bank impairments and failures, economic sanctions in response to international conflicts and instances of geopolitical, economic and financial market instability in the United States and abroad. One or more of these factors may contribute to increased market volatility and may have long- and short-term effects in the United States and worldwide financial markets.

Portfolio Investment Classification

The Company classifies its portfolio investments in accordance with the requirements of the 1940 Act as follows: (a) “Control Investments” are defined as investments in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation, (b) “Affiliate Investments” are defined as investments in which the Company owns between 5% and 25% of the voting securities and does not have rights to maintain greater than 50% of the board representation, and (c) “Non-controlled, non-affiliate investments” are defined as investments that are neither Control Investments or Affiliate Investments.

Cash and Cash Equivalents

As of June 30, 2023, cash balances totaling $193,166, including foreign currency of $389 (acquisition cost of $388), did not exceed the Federal Deposit Insurance Corporation insurance protection levels of $250,000. In addition, as of June 30, 2023, the Company held $14,731,216 in cash equivalents, which are carried at cost, which approximates fair value. All of the Company’s cash deposits are held at large established high credit quality financial institutions and management believes that risk of loss associated with any uninsured balances is remote.

Cash consists of bank demand deposits. We deem certain U.S. Treasury Bills and other high-quality, short-term debt securities as cash equivalents.

Fair Value Measurements

We account for all of our financial instruments at fair value in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework used to measure fair value, and requires disclosures for fair value measurements, including the categorization of financial instruments into a three-level hierarchy based on the transparency of valuation inputs. ASC Topic 820 requires disclosure of the fair value of financial instruments for which it is practical to estimate such value. We believe that the carrying amounts of our financial instruments such as cash, receivables and payables approximate the fair value of these items due to the short maturity of these instruments. This is considered a Level 1 valuation technique.

The Credit Facility, SBA-guaranteed debentures, and 2026 Notes are carried at amortized cost in the Consolidated Statements of Assets and Liabilities. As of June 30, 2023, the estimated fair value of the Credit Facility approximates the carrying value because the interest rates adjust to the current market interest rate (Level 3 input). The estimated fair value of the SBA-guaranteed debentures and 2026 Notes was determined by discounting projected remaining payments using market interest rates for borrowings of the Company and entities with similar credit risks at the measurement date. At the measurement date, the estimated fair values of the SBA-guaranteed debentures and 2026 Notes as prepared for disclosure purposes was $287,630,000 and $91,730,000, respectively. See Note 6 to the consolidated financial statements for further discussion regarding the fair value measurements and hierarchy.

Consolidation

As permitted under Regulation S-X under the Exchange Act and ASC Topic 946, we generally do not consolidate our investment in a portfolio company other than an investment company subsidiary. Accordingly, we consolidated the results of the SBIC subsidiaries and the Taxable Subsidiaries. All intercompany balances have been eliminated upon consolidation.

29

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

Use of Estimates

The preparation of the Statements of Assets and Liabilities in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially. Additionally, as explained in Note 1 contained herein, the Consolidated Financial Statements includes investments in the portfolio whose values have been estimated by the Company, pursuant to procedures established by our Board, in the absence of readily ascertainable market values. Because of the inherent uncertainty of the investment portfolio valuations, those estimated values may differ materially from the values that would have been determined had a ready market for the securities existed.

Deferred Financing Costs

Deferred financing costs, prepaid loan fees on SBA-guaranteed debentures and prepaid loan structure fees consist of fees and expenses paid in connection with the closing of our Credit Facility, 2026 Notes and SBA-guaranteed debentures and are capitalized at the time of payment. These costs are amortized using the straight line method over the term of the respective instrument and presented as an offset to the corresponding debt on the Consolidated Statements of Assets and Liabilities.

Offering Costs

Deferred offering costs consist of fees and expenses incurred in connection with the offer and sale of the Company’s common stock, including legal, accounting, printing fees and other related expenses, as well as costs incurred in connection with the filing of a shelf registration statement. These costs are capitalized when incurred and recognized as a reduction of offering proceeds when the offering is consummated and shown on the Consolidated Statements of Changes in Net Assets and Liabilities as a reduction to Paid-in-capital.

Investments

In December 2020, the U.S. Securities and Exchange Commission (the “SEC”) adopted a new rule providing a framework for fund valuation practices. Rule 2a-5 under the 1940 Act (“Rule 2a-5”) establishes requirements for determining fair value in good faith for purposes of the 1940 Act. Rule 2a-5 permits boards, subject to board oversight and certain other conditions, to designate certain parties to perform fair value determinations. Rule 2a-5 also defines when market quotations are “readily available” for purposes of the 1940 Act and the threshold for determining whether a fund must determine the fair value of a security. The SEC also adopted new Rule 31a-4 under the 1940 Act (“Rule 31a-4”), which provides the recordkeeping requirements associated with fair value determinations. Finally, the SEC rescinded previously issued guidance on related issues, including the role of the board in determining fair value and the accounting and auditing of fund investments. Rule 2a-5 and Rule 31a-4 became effective on March 8, 2021, and had a compliance date of September 8, 2022. While our Board has not elected to designate a valuation designee, the Company has adopted certain revisions to its valuation policies and procedures in order to comply with the applicable requirements of Rule 2a-5 and Rule 31a-4.

As a BDC, the Company will generally invest in illiquid loans and securities including debt and equity securities of private middle-market companies. Section 2(a)(41) of the 1940 Act requires that a BDC value its assets as follows: (i) the third party price for securities for which a quotation is readily available; and (ii) for all other securities and assets, fair value, as determined in good faith by a BDC's Board. Under procedures established by our Board, the Company intends to value investments for which market quotations are readily available at such market quotations. The Company will obtain these market values from an independent pricing service or at the midpoint of the bid and ask prices obtained from at least two brokers or dealers (if available, otherwise by a principal market maker or a primary market dealer). Debt and equity securities that are not publicly traded or whose market prices are not readily available will be valued at fair value as determined in good faith by our Board. Such determination of fair values may involve subjective judgments and estimates. The Company also engages independent valuation providers to review the valuation of each portfolio investment that does not have a readily available market quotation at least twice annually.

Debt and equity investments purchased within approximately 90 days of the valuation date will be valued at cost, plus accreted discount, or minus amortized premium, which approximates fair value. With respect to unquoted securities, our Board will value each

30

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies that are public and other factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Board will use the pricing indicated by the external event to corroborate and/or assist us in our valuation. Because the Company expects that there will not be a readily available market quotation for many of the investments in its portfolio, the Company expects to value most of its portfolio investments at fair value as determined in good faith by the Board using a documented valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

In following these approaches, the types of factors that will be taken into account in fair value pricing investments will include, as relevant, but not be limited to:

available current market data, including relevant and applicable market trading and transaction comparables;
applicable market yields and multiples;
financial covenants;
call protection provisions;
information rights;
the nature and realizable value of any collateral;
the portfolio company’s ability to make payments, its earnings and discounted cash flows and the markets in which it does business;
comparisons of financial ratios of peer companies that are public;
comparable merger and acquisition transactions; and
the principal market and enterprise values.

Revenue Recognition

We record interest income on an accrual basis to the extent such interest is deemed collectible. Payment-in-kind (“PIK”) interest, represents contractual interest accrued and added to the loan balance that generally becomes due at maturity. We will not accrue any form of interest on loans and debt securities if we have reason to doubt our ability to collect such interest. Loan origination fees, original issue discount and market discount or premium are capitalized, and we then accrete or amortize such amounts using the effective interest method as interest income. Upon the prepayment of a loan or debt security, any unamortized loan origination fee is recorded as interest income. We record prepayment premiums on loans and debt securities as other income. Dividend income, if any, will be recognized on the declaration date.

31

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

A presentation of the interest income we have received from portfolio companies for the three and six months ended June 30, 2023 and 2022 is as follows:

    

For the three months ended

For the six months ended

    

June 30, 2023

    

June 30, 2022

June 30, 2023

    

June 30, 2022

Loan interest

$

23,514,608

$

14,620,267

    

$

45,399,697

$

28,732,340

PIK income

 

1,134,900

 

323,423

 

1,904,853

 

653,534

Fee amortization income(1)

 

760,023

 

670,324

 

1,482,846

 

1,301,461

Fee income acceleration(2)

 

253,364

 

44,004

 

284,103

 

87,634

Total Interest Income

$

25,662,895

$

15,658,018

$

49,071,499

$

30,774,969

(1)Includes amortization of fees on unfunded commitments.
(2)Unamortized loan origination fees recognized upon full or partial realization of investment.

To maintain our treatment as a RIC, substantially all of this income must be paid to stockholders in the form of distributions, even if we have not collected any cash.

Management considers portfolio company specific circumstances as well as other economic factors in determining collectability. As of June 30, 2023, we had four loans on non-accrual status, which represented approximately 5.9% of our loan portfolio at cost and 1.3% at fair value. As of December 31, 2022, we had three loans on non-accrual status, which represented approximately 5.2% of our loan portfolio at cost and 2.3% at fair value. As of June 30, 2023 and December 31, 2022, $8,730,251 and $4,828,880, respectively, of income from investments on non-accrual has not been accrued. If a loan or debt security’s status significantly improves regarding the debtor’s ability to service the debt or other obligations, or if a loan or debt security is sold or written off, we will remove it from non-accrual status.

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation

Realized gains or losses are measured by the difference between the net proceeds from the repayment, sale or disposition and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

Investment Transaction Costs

Costs that are material and associated with an investment transaction, including legal expenses, are included in the cost basis of purchases and deducted from the proceeds of sales unless such costs are reimbursed by the borrower.

Receivables and Payables for Unsettled Securities Transaction

The Company records all investments on a trade date basis.

U.S. Federal Income Taxes

The Company has elected, qualified, and intends to continue to qualify annually to be treated as a RIC under Subchapter M of the Code, and to operate in a manner to qualify for the tax treatment applicable to RICs. To qualify for tax treatment as a RIC, among other things, the Company is required to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. So long as the Company maintains its status as a RIC, it generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes at least annually to its stockholders as dividends. Rather, any tax liability related to income earned by the Company represents obligations of the Company’s investors and will not be reflected in the consolidated financial statements of the Company.

32

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

To avoid a 4% U.S federal excise tax on undistributed earnings, the Company is required to distribute each calendar year the sum of (i) 98% of its ordinary income for such calendar year (ii) 98.2% of its net capital gains for the one-year period ending December 31 (iii) any income recognized, but not distributed, in preceding years and on which the Company paid no federal income tax or the Excise Tax Avoidance Requirement. For this purpose, however, any net ordinary income or capital gain net income retained by the Company that is subject to corporate income tax for the tax year ending in that calendar year will be considered to have been distributed by year end (or earlier if estimated taxes are paid). The Company, at its discretion, may choose not to distribute all of its taxable income for the calendar year and pay a non-deductible 4% excise tax on this income. If the Company chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to stockholders. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes on estimated excess taxable income as taxable income is earned. Income tax expense for the three and six months ended June 30, 2023 of $371,786 and $746,549, respectively, was mostly related to excise and franchise taxes. Income tax expense for the three and six months ended June 30, 2022 of $426,236 and $705,653, respectively, was mostly related to excise and franchise taxes.

The Company evaluates tax positions taken or expected to be taken while preparing its tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the applicable period. As of June 30, 2023 and December 31, 2022, the Company had not recorded a liability for any unrecognized tax positions. Management’s evaluation of uncertain tax positions may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof. The Company’s policy is to include interest and penalties related to income taxes, if applicable, in general and administrative expenses. Any expenses for the three and six months ended June 30, 2023 and 2022 were de minimis.

The Taxable Subsidiaries are direct wholly-owned subsidiaries of the Company that have elected to be taxable entities. The Taxable Subsidiaries permit the Company to hold equity investments in portfolio companies that are “pass through” entities for tax purposes and continue to comply with the “source-of-income” requirements contained in RIC tax provisions of the Code. The Taxable Subsidiaries are not consolidated with the Company for income tax purposes and may generate 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 the Company’s consolidated financial statements.

The Taxable Subsidiaries use the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory tax rates in effect for the year in which the temporary differences are expected to reverse. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. Taxable income generally excludes net unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized.

For the three and six months ended June 30, 2023, the Company recorded deferred income tax provision of $65,353 and $144,113, respectively, related to the Taxable Subsidiaries. For the three and six months ended June 30, 2022, the Company recorded deferred income tax provision of $160,656 and $181,813, respectively, related to the Taxable Subsidiaries. In addition, as of June 30, 2023 and December 31, 2022, the Company had a deferred tax liability of $206,049 and $61,936, respectively.

Earnings per Share

Basic per share calculations are computed utilizing the weighted average number of shares of the Company’s common stock outstanding for the period. The Company has no common stock equivalents. As a result, there is no difference between diluted earnings per share and basic per share amounts.

33

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

Paid In Capital

The Company records the proceeds from the sale of shares of its common stock on a net basis to (i) capital stock and (ii) paid in capital in excess of par value, excluding all commissions and marketing support fees.

Distributable Earnings (Loss)

The components that make up distributable earnings (loss) on the Statements of Assets and Liabilities as of June 30, 2023 and December 31, 2022 are as follows:

    

June 30, 2023

December 31, 2022

Accumulated net realized gain from investments, net of cumulative dividends of $29,361,648 for both periods

$

2,349,482

$

2,675,719

Net unrealized depreciation on non-controlled, non-affiliated investments and cash equivalents, net of deferred tax liability of $206,049 and $61,936, respectively

 

(40,425,785)

 

(29,736,797)

Net unrealized (depreciation) appreciation on foreign currency translations

(12,409)

6,040

Accumulated undistributed net investment income

 

30,567,700

 

27,697,264

Total distributable (loss) earnings

$

(7,521,012)

$

642,226

Recently Issued Accounting Standards

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform. The amendments in ASU 2020-04 provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The standard is effective as of March 12, 2020 through December 31, 2022. The Company has agreements that have the London Interbank Offered Rate (“LIBOR”) as a reference rate with certain portfolio companies and with certain lenders. Many of these agreements include language for choosing an alternative successor rate if LIBOR reference is no longer considered to be appropriate. Contract modifications are required to be evaluated in determining whether the modifications result in the establishment of new contracts or the continuation of existing contracts. The Company adopted this amendment in March 2020 and plans to apply the amendments in this update to account for contract modifications as contracts are amended to include a new reference rate or when LIBOR reference is no longer used. The Company did not utilize the optional expedients and exceptions provided by ASU 2020-04 during the three and six months ended June 30, 2023.

From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. We believe the impact of the recently issued standards and any that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.

NOTE 2 — RELATED PARTY ARRANGEMENTS

Investment Advisory Agreement

The Company has entered into an investment advisory agreement with Stellus Capital pursuant to which Stellus Capital serves as its investment adviser. Pursuant to this agreement, the Company has agreed to pay to Stellus Capital an annual base management fee of 1.75% of gross assets, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents, and an incentive fee.

For the three and six months ended June 30, 2023, the Company recorded an expense for base management fees of $3,865,588 and $7,600,690, respectively. For the three and six months ended June 30, 2022, the Company recorded an expense for base management fees of $3,705,053 and $7,197,766, respectively. As of June 30, 2023 and December 31, 2022, $1,865,589 and $7,150,407 of such management fess, respectively, were payable to Stellus Capital.

The incentive fee has two components, the investment income incentive fee and the capital gains incentive fee, as follows:

34

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

Investment Income Incentive Fee

The investment income component (“Income Incentive Fee”) is calculated, and payable to the Advisor, quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter, subject to a cumulative total return requirement and to deferral of non-cash amounts. The pre-incentive fee net investment income, which is expressed as a rate of return on the value of the Company’s net assets attributable to the Company’s common stock, for the immediately preceding calendar quarter, will have a 2.0% (which is 8.0% annualized) hurdle rate (also referred to as the “Hurdle”). Pre-incentive fee net investment income means interest income, dividend income and any other income accrued during the calendar quarter, minus the Company’s operating expenses for the quarter excluding the incentive fee. Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that the Company has not yet received in cash. The Advisor receives no incentive fee for any calendar quarter in which the Company’s pre-incentive fee net investment income does not exceed the Hurdle. Subject to the cumulative total return requirement described below, the Advisor receives 100% of the Company’s pre-incentive fee net investment income for any calendar quarter with respect to that portion of the pre-incentive net investment income for such quarter, if any, that exceeds the Hurdle but is less than 2.5% (which is 10.0% annualized) of net assets (also referred to as the “Catch-up”) and 20.0% of the Company’s pre-incentive fee net investment income for such calendar quarter, if any, greater than 2.5% (10.0% annualized) of net assets.

The foregoing Income Incentive Fee is subject to a total return requirement, which provides that no Income Incentive Fee in respect of the Company’s pre-incentive fee net investment income is payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding calendar quarters exceeds the cumulative Income Incentive Fees accrued and/or paid for the 11 preceding quarters. In other words, any Income Incentive Fee that is payable in a calendar quarter is limited to the lesser of (i) 20% of the amount by which the Company’s pre-incentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, subject to the Catch-up, and (ii) (x) 20% of the cumulative net increase in net assets resulting from operations for the then current and 11 preceding quarters minus (y) the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the amount, if positive, of the sum of pre-incentive fee net investment income, realized gains and losses and unrealized appreciation and depreciation of the Company for the then current and 11 preceding calendar quarters. In addition, the Advisor is not paid the portion of such Income Incentive Fee that is attributable to deferred interest until the Company actually receives such interest in cash.

For the three and six months ended June 30, 2023, the Company incurred $2,603,004 and $4,727,839 of Income Incentive Fees, respectively. For both the three and six months ended June 30, 2022, the Company incurred $0 of Income Incentive Fees. As of June 30, 2023 and December 31, 2022, $3,176,395 and $2,464,408, respectively, of such Income Incentive Fees were payable to the Advisor, of which $2,823,046 and $2,083,928, respectively, are currently payable (as explained below). As of June 30, 2023 and December 31, 2022, $353,349 and $380,480, respectively, of Income Incentive Fees incurred but not paid by the Company were generated from deferred interest (i.e. PIK, certain discount accretion and deferred interest) and are not payable until such amounts are received by the Company in cash.

Capital Gains Incentive Fee

The Company also pays the Advisor an incentive fee based on capital gains (the “Capital Gains Incentive Fee”). The Capital Gains Incentive Fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment management agreement, as of the termination date). The Capital Gains Incentive Fee is equal to 20.0% of the Company’s cumulative aggregate realized capital gains from Inception through the end of that calendar year, computed net of the cumulative aggregate realized capital losses and cumulative aggregate unrealized capital depreciation through the end of such year. The aggregate amount of any previously paid Capital Gain Incentive Fees is subtracted from such Capital Gain Incentive Fees calculated.

U.S. GAAP requires that the Capital Gains Incentive Fee accrual considers the cumulative aggregate realized gains and losses and unrealized capital appreciation or depreciation of investments and other financial instruments in the calculation, as an incentive fee would be payable if such realized gains and losses and unrealized capital appreciation or depreciation were realized, even though such realized gains and losses and unrealized capital appreciation or depreciation is not permitted to be considered in calculating the Capital Gains Incentive Fee actually payable under the investment advisory agreement. There can be no assurance that unrealized appreciation or

35

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

depreciation will be realized in the future. Accordingly, such fees, as calculated and accrued, may not necessarily be payable under the investment advisory agreement, and may never be paid based upon the computation of incentive fees in subsequent periods.

For the three months ended June 30, 2023, the Company did not incur any Capital Gains Incentive Fees. For the six months ended June 30, 2023, the Company reversed $569,528 related to the Capital Gains Incentive Fee. For the three and six months ended June 30, 2022, the Company reversed $983,575 and $1,025,792, respectively, related to the Capital Gains Incentive Fee. As of June 30, 2023 and December 31, 2022, $0 and $569,528, respectively, of Capital Gains Incentive Fees were accrued but not currently payable to the Advisor.

The following tables summarize the components of the incentive fees discussed above:

    

For the three months ended

For the six months ended

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

Investment income incentive fees incurred

$

2,603,004

$

$

4,727,839

$

Capital gains incentive fees reversed

 

(983,575)

(569,528)

(1,025,792)

Incentive fees expense (reversal)

$

2,603,004

$

(983,575)

$

4,158,311

$

(1,025,792)

    

June 30, 2023

December 31, 2022

Investment income incentive fee currently payable

$

2,823,046

$

2,083,928

Investment income incentive fee deferred

 

353,349

 

380,480

Capital gains incentive fee deferred

 

 

569,528

Incentive fee payable

$

3,176,395

$

3,033,936

Director Fees

For the three and six months ended June 30, 2023, the Company recorded an expense relating to independent director fees of $93,250 and $210,500, respectively. For the three and six months ended June 30, 2022, the Company recorded an expense relating to director fees of $74,500 and $171,000, respectively. As of both June 30, 2023 and December 31, 2022, the Company had no unpaid independent director fees.

Co-Investment Pursuant to SEC Order

On October 23, 2013, the Company received an exemptive order as superseded by a new exemptive relief order on December 18, 2018 (the “Prior Order”) from the SEC to co-invest with private funds managed by Stellus Capital where doing so is consistent with the Company’s investment strategy as well as applicable law (including the terms and conditions of the exemptive order issued by the SEC). On May 9, 2022, the Company received a new exemptive order (the “Order”) that superseded the Prior Order and permits the Company greater flexibility to enter into co-investment transactions. The Order expands on the Prior Order and allows the Company to co-invest with additional types of private funds, other BDCs, and registered investment companies managed by Stellus Capital or an adviser that is controlled, controlling, or under common control with Stellus Capital, subject to the conditions included therein. Additionally, the Order provided added relief which allows the Company, subject to the satisfaction of certain conditions, to co-invest in existing portfolio companies with certain affiliates that are private funds if such private funds did not have an existing co-investment in such existing portfolio company. Pursuant to the Order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Company’s independent directors must make certain conclusions in connection with a co-investment transaction, including (1) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to the Company and its stockholders and do not involve overreaching of the Company or its stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of the Company’s stockholders and is consistent with its investment objectives and strategies. The Company co-invests, subject to the conditions in the Order, with private credit funds and a BDC managed by Stellus Capital or its affiliate that have an investment strategy that is similar or identical to the Company’s investment strategy, and the Company may co-invest with other BDCs, and registered investment companies managed by Stellus Capital or an adviser that is controlled, controlling, or under common control with Stellus Capital in the future. The Company believes that such co-investments may afford it additional investment opportunities and an ability to achieve greater diversification.

36

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

Administrative Agent

The Company serves as the administrative agent on certain investment transactions, including co-investments with its affiliates under the Order. As of June 30, 2023 and December 31, 2022, there was $389,329 and $0, respectively, due to other investment funds related to interest paid by a borrower to the Company as administrative agent which is included in “Other accrued expenses and liabilities” on the Consolidated Statements of Assets and Liabilities. Additionally, as of June 30, 2023 and December 31, 2022, there was $775,794 and $1,060,321, respectively, due to related parties related to interest paid by a borrower to the Company as administrative agent which is included in “Related party payable” on the Consolidated Statement of Assets and Liabilities. 

License Agreement

The Company has entered into a license agreement with Stellus Capital under which Stellus Capital has agreed to grant the Company a non-exclusive, royalty-free license to use the name “Stellus Capital.” Under this agreement, the Company has a right to use the “Stellus Capital” name for so long as Stellus Capital or one of its affiliates remains its investment adviser. Other than with respect to this limited license, the Company has no legal right to the “Stellus Capital” name. This license agreement will remain in effect for so long as the investment advisory agreement with Stellus Capital is in effect.

Administration Agreement

The Company entered into an administration agreement with Stellus Capital pursuant to which Stellus Capital will furnish the Company with office facilities and equipment and will provide the Company with the clerical, bookkeeping, recordkeeping and other administrative services necessary to conduct day-to-day operations. Under this administration agreement, Stellus Capital will perform, or oversee the performance of, its required administrative services, which includes, among other things, being responsible for the financial records which the Company is required to maintain and preparing reports to its stockholders and reports filed with the SEC.

For the three and six months ended June 30, 2023, the Company recorded expenses of $390,410 and $773,846, respectively, related to the administration agreement and are included in “Administrative services expenses” on our Consolidated Statements of Operations. For the three and six months ended June 30, 2022, the Company recorded expenses of $392,430 and $793,318, respectively, related to the administration agreement and are included in “Administrative services expenses” on our Consolidated Statements of Operations. As of June 30, 2023 and December 31, 2022, $390,410 and $343,817, respectively, remained payable to Stellus Capital related to the administration agreement and were included in administrative services payable on our Consolidated Statements of Assets and Liabilities.

Indemnifications

The investment advisory agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations under the investment advisory agreement, Stellus Capital and its officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of Stellus Capital’s services under the investment advisory agreement or otherwise as our investment adviser.

The Company has also entered into indemnification agreements with its directors. The indemnification agreements are intended to provide the Company’s directors the maximum indemnification permitted under Maryland law and the 1940 Act. Each indemnification agreement provides that the Company shall indemnify the director who is a party to the agreement (an “Indemnitee”), including the advancement of legal expenses, if, by reason of his or her corporate status, the Indemnitee is, or is threatened to be, made a party to or a witness in any threatened, pending, or completed proceeding, other than a proceeding by or in the right of the Company.

37

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

NOTE 3 — DISTRIBUTIONS

Distributions are generally declared by the Company’s Board each calendar quarter and recognized as distribution liabilities on the declaration date. The stockholder distributions, if any, will be determined by the Board. Any distribution to stockholders are declared out of assets legally available for distribution.

For the three and six months ended June 30, 2023 and 2022, the Company declared aggregate distributions of $0.40 and $0.80 per share on its common stock, respectively. For the three and six months ended June 30, 2022, the Company has declared aggregate distributions of $0.34 and $0.62 per share on its common stock, respectively. The Company has declared aggregate distributions of $14.15 per share on its common stock since Inception:

Date Declared

    

Record Date

    

Payment Date

    

Per Share(1)

Fiscal 2012

$

0.18

Fiscal 2013

 

  

 

$

1.36

Fiscal 2014

 

  

 

$

1.42

Fiscal 2015

 

  

 

$

1.36

Fiscal 2016

 

  

 

$

1.36

Fiscal 2017

Various

$

1.36

Fiscal 2018

 

  

$

1.36

Fiscal 2019

 

  

$

1.36

Fiscal 2020

 

  

$

1.15

Fiscal 2021

 

  

$

1.14

Fiscal 2022

$

1.30

Fiscal 2023

  

 

  

 

January 11, 2023

January 31, 2023

February 15, 2023

$

0.1333

January 11, 2023

February 28, 2023

March 15, 2023

$

0.1333

January 11, 2023

March 31, 2023

April 14, 2023

$

0.1333

April 19, 2023

May 1, 2023

May 15, 2023

$

0.1333

April 19, 2023

May 31, 2023

June 15, 2023

$

0.1333

April 19, 2023

June 30, 2023

July 14, 2023

$

0.1333

Total

  

$

14.15

(1)Distributions for fiscal years 2012 through 2022 are shown in aggregate amounts.

The Company has adopted an “opt out” dividend reinvestment plan (“DRIP”) pursuant to which a stockholder whose shares are held in his own name will receive distributions in shares of the Company’s common stock under the Company’s DRIP unless it elects to receive distributions in cash. Stockholders whose shares are held in the name of a broker or the nominee of a broker may have distributions reinvested only if such service is provided by the broker or the nominee, or if the broker of the nominee permits participation in the Company’s DRIP.

Although distributions paid in the form of additional shares of the Company’s common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, investors participating in the Company’s DRIP will not receive any corresponding cash distributions with which to pay any such applicable taxes. Any distributions reinvested through the issuance of shares through the Company’s DRIP will increase the Company’s gross assets on which the base management fee and the incentive fee are determined and paid to Stellus Capital. The Company did not issue shares through the DRIP during either of the three and six months ended June 30, 2023 or 2022.

38

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

NOTE 4 — EQUITY OFFERINGS AND RELATED EXPENSES

The table below illustrates the number of common stock shares the Company issued since Inception through various equity offerings and pursuant to the Company’s DRIP.

    

    

    

    

    

    

Average

Number of

    

Gross

    

Underwriting

    

Offering

    

Fees Covered

    

Net

    

Offering

Issuance of Common Stock

    

Shares

    

Proceeds(1)(2)

    

fees

    

Expenses

by Advisor

    

Proceeds(3)

    

Price

Year ended December 31, 2012

12,035,023

$

180,522,093

$

4,959,720

$

835,500

$

$

174,726,873

$

14.90

Year ended December 31, 2013

 

63,998

899,964

899,964

14.06

Year ended December 31, 2014

 

380,936

 

5,485,780

 

75,510

 

29,904

 

5,380,366

14.47

Year ended December 31, 2017

 

3,465,922

 

48,741,406

 

1,358,880

 

307,021

 

47,075,505

14.06

Year ended December 31, 2018

 

7,931

 

93,737

 

 

 

93,737

11.85

Year ended December 31, 2019

 

3,177,936

 

45,862,995

 

1,015,127

 

559,261

37,546

 

44,326,153

14.43

Year ended December 31, 2020

 

354,257

 

5,023,843

 

5,680

 

84,592

66,423

 

4,999,994

14.40

Year ended December 31, 2021

 

31,592

 

449,515

 

6,744

 

53,327

4,255

 

393,699

14.23

Year ended December 31, 2022

 

149,174

 

2,070,935

 

31,066

 

530,842

87,605

 

1,596,632

13.88

Three months ended March 31, 2023

 

581,614

8,418,160

126,303

 

70,255

68,967

 

8,290,569

14.47

Three months ended June 30, 2023

2,309,521

32,553,697

488,418

 

52,316

408,121

 

32,421,084

14.10

Total

 

22,557,904

$

330,122,125

$

8,067,448

$

2,523,018

$

672,917

$

320,204,576

 

  

(1)Net of partial share transactions. Such share transactions impacted gross proceeds by ($94), $757, ($1,051), ($142), ($31) and ($29) in 2020, 2019, 2018, 2017, 2016 and 2015, respectively.
(2)Includes common shares issued under the DRIP of $228,943 and $94,788 during the year ended December 31, 2020 and 2018, respectively; $0 for the three and six months ended June 30, 2023 and years ended 2022, 2021, 2019, 2017, 2016 and 2015, and $390,505, $938,385, $113,000 for the years ended 2014, 2013, and 2012, respectively.
(3)Net Proceeds per this equity table will differ from the Statements of Assets and Liabilities as of June 30, 2023 and December 31, 2022 in the amount of $4,358,536 which represents a tax reclassification of stockholders’ equity in accordance with U.S. GAAP. This reclassification reduces paid-in capital and increases (decreases) distributable earnings (loss) (by increasing (decreasing) accumulated undistributed gain (deficit)).

On November 16, 2021, the Company entered into an equity distribution agreement, as amended and restated on August 29, 2022 (the “Equity Distribution Agreement”), with Keefe Bruyette & Woods, Inc. and Raymond James & Associates, Inc., as sales agents and/or principal thereunder. Under the Equity Distribution Agreement, the Company may, issue and sell, from time to time, up to $50,000,000 in aggregate offering price of shares of common stock, par value $0.001 per share, with the intention to use the net proceeds from this at-the-market sales program (the “ATM Program”) to repay certain outstanding indebtedness and make investments in portfolio companies in accordance with its investment objective and strategies.

The Company issued 2,309,521 shares during the three months ended June 30, 2023 under the ATM Program, for gross proceeds of $32,421,084 and underwriting fees and other expenses of $540,734. The average per share offering price of shares issued in the ATM Program during the three months ended June 30, 2023 was $14.10. The Company issued 2,891,135 shares during the six months ended June 30, 2023 under the ATM Program, for gross proceeds of $40,971,857 and underwriting fees and other expenses of $737,292. The average per share offering price of shares issued under the ATM Program during the six months ended June 30, 2023 was $14.17. The Advisor agreed to reimburse the Company for underwriting fees to the extent the per share price of the shares to the public, less underwriting fees, was less then net asset value per share. For the three months ended June 30, 2023, the Advisor reimbursed the Company $408,121, which resulted in net proceeds of $32,473,400, or $14.06 per share, excluding the impact of offering expenses. For the six months ended June 30, 2023, the Advisor reimbursed the Company $477,088, which resulted in net proceeds of $40,834,244, or $14.12 per share, excluding the impact of offering expenses.

The Company issued 0 shares of common stock through the DRIP for both the three and six months ended June 30, 2023 and 2022.

39

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

NOTE 5 — NET INCREASE IN NET ASSETS PER COMMON SHARE

The following information sets forth the computation of net increase in net assets resulting from operations per common share for the three and six months ended June 30, 2023 and June 30, 2022.

For the three months ended

For the six months ended

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

Net increase in net assets resulting from operations

$

3,711,043

$

1,335,847

$

8,447,190

$

6,558,011

Weighted average common shares

21,231,979

19,543,117

20,509,995

19,530,509

Net increase in net assets resulting from operations per share

$

0.17

$

0.07

$

0.41

$

0.34

NOTE 6 — PORTFOLIO INVESTMENTS AND FAIR VALUE

In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Company discloses the fair value of its investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:

Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 — Quoted prices in markets that are not considered to be active or financial instruments for which significant inputs are observable, either directly or indirectly;

Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by management.

The Company considers whether the volume and level of activity for the asset or liability have significantly decreased and identifies transactions that are not orderly in determining fair value. Accordingly, if the Company determines that either the volume and/or level of activity for an asset or liability has significantly decreased (from normal conditions for that asset or liability) or price quotations or observable inputs are not associated with orderly transactions, increased analysis and management judgment will be required to estimate fair value. Valuation techniques such as an income approach might be appropriate to supplement or replace a market approach in those circumstances.

At June 30, 2023, the Company had investments in 93 portfolio companies. The total cost and fair value of the investments were $922,796,573 and $881,666,450, respectively. The composition of our investments as of June 30, 2023 is as follows:

Cost

Fair Value

Senior Secured – First Lien(1)

$

792,661,767

$

779,447,364

Senior Secured – Second Lien

 

70,064,404

33,918,725

Unsecured Debt

 

5,979,572

5,708,477

Equity

 

54,090,830

62,591,884

Total Investments

$

922,796,573

$

881,666,450

(1)Includes unitranche investments, which may combine characteristics of first lien senior secured, as well as second lien and/or subordinated loans. Our unitranche loans may expose us to certain risk associated with second lien and subordinated loans to the extent we invest in the “last-out” portion of the unitranche loans which account for 6.2% of our portfolio at fair value.

40

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

At December 31, 2022, the Company had investments in 85 portfolio companies. The total cost and fair value of the investments were $875,823,177 and $844,733,638, respectively. The composition of our investments as of December 31, 2022 was as follows:

    

Cost

    

Fair Value

Senior Secured – First Lien(1)

$

750,527,999

$

735,555,508

Senior Secured – Second Lien

 

69,989,477

45,304,300

Unsecured Debt

 

5,657,964

4,823,898

Equity

 

49,647,737

59,049,932

Total Investments

$

875,823,177

$

844,733,638

(1)Includes unitranche investments, which may combine characteristics of first lien senior secured, as well as second lien and/or subordinated loans. Our unitranche loans may expose us to certain risk associated with second lien and subordinated loans to the extent we invest in the “last-out” portion of the unitranche loans which account for 3.1% of our portfolio at fair value.

The Company’s investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2023 and December 31, 2022, the Company had 55 and 52 of such investments with aggregate unfunded commitments of $21,187,851 and $27,824,917, respectively. The Company maintains sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded loan commitments should the need arise.

The aggregate gross unrealized appreciation and depreciation and the aggregate cost and fair value of the Company’s portfolio company securities as of June 30, 2023 and December 31, 2022 were as follows:

    

2023

    

2022

Aggregate cost of portfolio company securities

$

922,796,573

$

875,823,177

Gross unrealized appreciation of portfolio company securities

 

34,656,786

 

28,927,746

Gross unrealized depreciation of portfolio company securities

 

(74,876,522)

 

(58,602,607)

Gross unrealized appreciation on foreign currency translations of portfolio company securities

9,166

Gross unrealized depreciation on foreign currency translations of portfolio company securities

(919,553)

(1,414,678)

Aggregate fair value of portfolio company securities

$

881,666,450

$

844,733,638

The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of June 30, 2023 are as follows:

    

Quoted Prices

    

    

    

in Active

Markets

Significant Other

Significant

for Identical

Observable

Unobservable

Securities

Inputs

Inputs

(Level 1)

(Level 2)

(Level 3)

Total

Senior Secured – First Lien

$

$

$

779,447,364

$

779,447,364

Senior Secured – Second Lien

 

 

 

33,918,725

 

33,918,725

Unsecured Debt

 

 

 

5,708,477

 

5,708,477

Equity

 

 

 

62,591,884

 

62,591,884

Total Investments

$

$

$

881,666,450

$

881,666,450

41

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of December 31, 2022 are as follows:

Quoted Prices

    

in Active

    

    

    

Markets

Significant Other

Significant

for Identical

Observable

Unobservable

Securities

Inputs

Inputs

(Level 1)

(Level 2)

(Level 3)

Total

Senior Secured – First Lien

$

$

$

735,555,508

$

735,555,508

Senior Secured – Second Lien

 

 

 

45,304,300

 

45,304,300

Unsecured Debt

 

 

 

4,823,898

 

4,823,898

Equity

 

 

 

59,049,932

 

59,049,932

Total Investments

$

$

$

844,733,638

$

844,733,638

The aggregate values of Level 3 portfolio investments change during the six months ended June 30, 2023 are as follows:

    

Senior Secured

    

Senior Secured

    

    

    

Loans-First

Loans-Second

Unsecured

 

Lien

Lien

Debt

Equity

Total

Fair value at beginning of period

$

735,555,508

$

45,304,300

$

4,823,898

$

59,049,932

$

844,733,638

Purchases of investments

 

83,194,907

 

 

 

4,546,572

 

87,741,479

Payment-in-kind interest

 

1,591,000

 

 

313,853

 

 

1,904,853

Sales and redemptions

 

(43,929,215)

 

 

 

(160,549)

 

(44,089,764)

Realized (losses) gains

 

(870)

 

 

 

57,068

 

56,198

Change in unrealized (depreciation) appreciation included in earnings(1)

 

1,255,813

 

(11,460,501)

 

562,973

 

(903,160)

 

(10,544,875)

Change in unrealized appreciation on foreign currency included in earnings

502,271

 

 

2,021

 

504,292

Amortization of premium and accretion of discount, net

 

1,277,950

 

74,926

 

7,753

 

 

1,360,629

Fair value at end of period

$

779,447,364

$

33,918,725

$

5,708,477

$

62,591,884

$

881,666,450

(1)Includes reversal of positions during the six months ended June 30, 2023.

There were no Level 3 transfers during the six months ended June 30, 2023.

42

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

The aggregate values of Level 3 portfolio investments change during the year ended December 31, 2022 are as follows:

    

Senior Secured

    

Senior Secured

    

    

    

Loans-First

Loans-Second

Unsecured

Lien

Lien

Debt

Equity

Total

Fair value at beginning of period

$

646,352,935

$

56,733,110

$

4,883,854

$

64,903,427

$

772,873,326

Purchases of investments

 

196,925,873

 

4,900,000

 

83,511

 

9,101,485

 

211,010,869

Payment-in-kind interest

 

826,816

 

 

530,361

 

 

1,357,177

Sales and redemptions

 

(98,160,329)

 

(10,809,276)

 

 

(18,873,195)

 

(127,842,800)

Realized (losses) gains

 

(3,929,334)

 

(4,109,525)

 

 

11,811,371

 

3,772,512

Change in unrealized depreciation included in earnings(1)

 

(7,342,462)

 

(1,611,688)

 

(687,778)

 

(7,900,302)

 

(17,542,230)

Change in unrealized (depreciation) appreciation on foreign currency included in earnings

(1,421,824)

 

 

7,146

 

(1,414,678)

Amortization of premium and accretion of discount, net

 

2,303,833

 

201,679

 

13,950

 

 

2,519,462

Fair value at end of period

$

735,555,508

$

45,304,300

$

4,823,898

$

59,049,932

$

844,733,638

(1)Includes reversal of positions during the twelve months ended December 31, 2022.

There were no Level 3 transfers during the twelve months ended December 31, 2022.

43

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

The following is a summary of geographical concentration of our investment portfolio as of June 30, 2023:

% of Total

 

Cost

Fair Value

Investments

 

Texas

 

$

206,004,010

 

$

182,903,863

 

20.74

%

California

 

179,278,481

 

177,882,024

 

20.17

%

Florida

 

83,269,639

 

82,798,145

 

9.39

%

Pennsylvania

 

48,569,282

 

48,352,773

 

5.48

%

Arizona

 

44,823,978

 

46,868,463

 

5.32

%

Illinois

 

59,329,153

 

46,656,232

 

5.29

%

Ohio

 

33,676,009

 

36,978,837

 

4.19

%

Wisconsin

 

27,476,373

 

25,008,264

 

2.84

%

Washington

 

24,371,956

 

24,362,084

 

2.76

%

South Carolina

 

23,876,474

 

23,476,376

 

2.66

%

Colorado

 

20,046,931

 

19,410,156

 

2.20

%

Georgia

 

10,276,132

 

18,395,202

 

2.09

%

Maryland

 

16,742,023

 

16,640,662

 

1.89

%

Minnesota

 

16,740,672

 

16,605,656

 

1.88

%

District of Columbia

 

14,099,046

 

16,505,944

 

1.87

%

Indiana

 

14,369,701

 

14,585,360

 

1.65

%

Canada

 

12,679,688

 

12,698,047

 

1.44

%

New Jersey

 

11,169,394

 

11,600,921

 

1.32

%

Tennessee

 

11,419,666

 

11,507,745

 

1.31

%

North Carolina

 

10,410,606

 

11,156,286

 

1.27

%

Massachusetts

 

10,183,236

 

10,557,554

 

1.20

%

Missouri

 

9,100,052

 

9,743,747

 

1.11

%

Idaho

 

9,140,420

 

9,216,892

 

1.05

%

New York

 

5,074,532

 

5,174,244

 

0.59

%

United Kingdom

 

20,669,119

 

2,580,973

 

0.29

%

$

922,796,573

$

881,666,450

 

100.00

%

44

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

The following is a summary of geographical concentration of our investment portfolio as of December 31, 2022:

    

    

    

% of Total

 

Investments

 

Cost

Fair Value

at fair value

 

Texas

 

$

191,422,143

 

$

171,165,597

 

20.26

%

California

 

167,833,384

 

165,340,017

 

19.57

%

Florida

 

60,593,839

 

59,421,775

 

7.03

%

Illinois

 

64,421,998

 

53,218,615

 

6.30

%

Arizona

 

43,129,283

 

44,277,625

 

5.24

%

Pennsylvania

 

42,899,504

 

41,889,344

 

4.96

%

Ohio

 

34,223,452

 

37,333,236

 

4.42

%

Washington

 

28,978,375

 

28,480,471

 

3.37

%

New Jersey

 

25,395,054

 

25,140,343

 

2.98

%

Wisconsin

 

27,533,402

 

24,271,761

 

2.87

%

District of Columbia

 

17,236,556

 

21,124,347

 

2.50

%

Georgia

 

10,919,642

 

19,692,757

 

2.33

%

South Carolina

 

19,089,373

 

18,654,782

 

2.21

%

Maryland

 

16,824,077

 

16,576,554

 

1.96

%

Minnesota

 

16,972,086

 

15,952,072

 

1.89

%

United Kingdom

 

20,530,087

 

14,445,481

 

1.71

%

Colorado

 

15,204,934

 

14,295,470

 

1.69

%

Indiana

 

14,346,082

 

14,245,432

 

1.69

%

Canada

 

13,333,737

 

13,266,669

 

1.57

%

North Carolina

 

10,461,551

 

10,649,232

 

1.26

%

Massachusetts

 

10,215,356

 

10,527,659

 

1.25

%

Idaho

 

9,873,093

 

9,863,103

 

1.17

%

Missouri

 

9,142,111

 

9,656,287

 

1.14

%

New York

 

5,096,152

 

5,096,008

 

0.61

%

Michigan

 

147,906

 

149,001

 

0.02

%

$

875,823,177

$

844,733,638

 

100.00

%

45

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

The following is a summary of industry concentration of our investment portfolio as of June 30, 2023:

% of Total

 

Cost

Fair Value

Investments

 

Services: Business

$

226,995,642

$

238,878,500

 

27.08

%

Healthcare & Pharmaceuticals

 

91,205,161

93,077,808

 

10.55

%

Consumer Goods: Durable

 

59,270,223

54,567,910

 

6.19

%

Consumer Goods: Non-Durable

 

53,958,284

51,766,867

 

5.87

%

Beverage, Food, & Tobacco

 

42,884,147

43,786,560

 

4.97

%

Media: Advertising, Printing & Publishing

 

38,363,033

39,057,251

 

4.43

%

Capital Equipment

 

37,366,328

38,468,901

 

4.36

%

Software

 

37,337,635

38,288,078

 

4.34

%

Services: Consumer

 

50,281,462

32,320,593

 

3.67

%

Aerospace & Defense

 

48,298,034

27,295,618

 

3.10

%

Construction & Building

 

26,044,832

25,825,768

 

2.93

%

Environmental Industries

 

28,202,747

25,420,361

 

2.88

%

High Tech Industries

 

24,592,803

23,803,603

 

2.70

%

Media: Broadcasting & Subscription

 

17,629,649

20,591,975

 

2.34

%

Chemicals, Plastics, & Rubber

 

18,425,715

17,735,387

 

2.01

%

Transportation & Logistics

 

16,715,873

17,160,188

 

1.95

%

Metals & Mining

 

16,644,442

16,545,375

 

1.88

%

Retail

 

14,953,930

14,921,785

 

1.69

%

Containers, Packaging, & Glass

 

17,412,372

14,424,156

 

1.64

%

Automotive

 

11,126,155

11,250,000

 

1.28

%

Utilities: Oil & Gas

 

9,931,992

10,000,000

 

1.13

%

Education

 

10,288,745

9,402,698

 

1.07

%

Media: Diversified & Production

 

5,676,087

5,776,237

 

0.66

%

Finance

 

1,562,775

4,779,849

 

0.54

%

FIRE: Real Estate

 

16,438,619

4,202,469

 

0.48

%

Energy: Oil & Gas

 

1,189,888

1,487,383

 

0.17

%

Hotel, Gaming, & Leisure

 

-

831,130

 

0.09

%

Total

$

922,796,573

$

881,666,450

 

100.00

%

46

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

The following is a summary of industry concentration of our investment portfolio as of December 31, 2022:

    

    

    

% of Total

 

Investments

 

Cost

Fair Value

at fair value

 

Services: Business

$

207,234,534

$

218,866,572

 

25.91

%

Healthcare & Pharmaceuticals

 

86,469,854

88,103,319

 

10.43

%

Media: Advertising, Printing & Publishing

 

52,830,447

52,525,839

 

6.22

%

Consumer Goods: Non-Durable

 

54,683,102

51,280,593

 

6.07

%

Consumer Goods: Durable

 

45,601,928

44,529,176

 

5.27

%

Aerospace & Defense

 

48,137,394

39,526,086

 

4.68

%

Software

 

37,582,855

37,975,255

 

4.50

%

Capital Equipment

 

33,538,647

33,801,951

 

4.00

%

Beverage, Food, & Tobacco

 

34,000,918

32,755,054

 

3.88

%

Construction & Building

 

26,948,135

26,406,849

 

3.13

%

Environmental Industries

 

27,771,798

26,247,936

 

3.11

%

Services: Consumer

 

43,302,101

24,616,706

 

2.92

%

Media: Broadcasting & Subscription

 

18,615,052

21,445,307

 

2.54

%

Chemicals, Plastics, & Rubber

 

18,487,206

17,903,999

 

2.12

%

Transportation & Logistics

 

16,768,763

17,161,972

 

2.03

%

Metals & Mining

 

16,708,750

16,464,001

 

1.95

%

Containers, Packaging, & Glass

 

17,436,600

13,977,250

 

1.65

%

Retail

 

13,303,536

13,217,256

 

1.56

%

High Tech Industries

 

14,126,954

12,648,347

 

1.50

%

Automotive

 

11,252,581

11,342,751

 

1.34

%

Education

 

11,057,921

10,498,760

 

1.24

%

Utilities: Oil & Gas

 

9,921,469

9,800,000

 

1.16

%

Energy: Oil & Gas

 

7,314,230

7,355,074

 

0.87

%

FIRE: Real Estate

 

15,642,093

5,866,397

 

0.69

%

Media: Diversified & Production

 

5,517,409

5,534,710

 

0.66

%

Finance

 

1,568,900

4,082,579

 

0.48

%

Hotel, Gaming, & Leisure

 

799,899

 

0.09

%

$

875,823,177

$

844,733,638

 

100.00

%

47

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

The following provides quantitative information about Level 3 fair value measurements as of June 30, 2023:

Description:

    

Fair Value

    

Valuation Technique

    

Unobservable Inputs

    

Range (Average)(1)(3)

First lien debt

$

779,447,364

 

Income/Market

 

HY credit spreads,

-2.67% to 7.94% (-0.03%)

 

approach(2)

 

Risk free rates

-0.05% to 4.32% (0.97%)

 

Market multiples

5.0x to 17.0x (10.4x)(4)

Second lien debt

$

33,918,725

Income/Market

 

HY credit spreads,

-0.97% to 8.70% (1.65%)

 

approach(2)

 

Risk free rates

0.00% to 3.06% (1.38%)

 

 

Market multiples

5.7x to 14.1x (11.5x)(4)

Unsecured debt

$

5,708,477

Income/Market

 

HY credit spreads,

5.30% to 5.30% (5.30%)

 

approach(2)

 

Risk free rates

4.06% to 4.06% (4.06%)

 

 

Market multiples

9.3x to 9.3x (9.3x)(4)

Equity investments

$

62,591,884

 

Market approach(5)

 

Underwriting multiple/

 

EBITDA Multiple

1.4x to 24.4x (12.5x)

Total Long Term Level 3 Investments

$

881,666,450

 

  

 

  

  

(1)Weighted average based on fair value as of June 30, 2023.
(2)Included but not limited to (a) the market approach, which is used to determine sufficient enterprise value, and (b) the income approach which is based on discounting future cash flows using an appropriate market yield.
(3)The Company calculates the price of the loan by discounting future cash flows, which include forecasted future BSBY, LIBOR, SOFR, or SONIA rates based on the published forward curve at the valuation date, using an appropriate yield calculated as of the valuation date. This yield is calculated based on the loan’s yield at the original investment and is adjusted as of the valuation date based on: changes in comparable credit spreads, changes in risk free interest rates (per swap rates), and changes in credit quality (via an estimated shadow rating). Significant movements in any of these factors could result in a significantly lower or higher fair value measurement. As an example, the “Range (Average)” for first lien debt instruments in the table above indicates that the change in the HY spreads between the date a loan closed and the valuation date ranged from -2.67% (-267 basis points) to 7.94% (794 basis points). The average of all changes was -0.03% (-3 basis points).
(4)Median of LTM (last twelve months) EBITDA multiples of comparable companies.
(5)The primary significant unobservable input used in the fair value measurement of the Company’s equity investments is the EBITDA multiple (the “Multiple”). Significant increases (decreases) in the Multiple in isolation could result in a significantly higher (lower) fair value measurement. To determine the Multiple for the market approach, the Company considers current market trading and/or transaction multiple, portfolio company performance (financial ratios) relative to public and private peer companies and leverage levels, among other factors. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate Multiple to use in the market approach.

The following provides quantitative information about Level 3 fair value measurements as of December 31, 2022:

48

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

 

 

Description:

    

Fair Value

    

Valuation Technique

    

Unobservable Inputs

    

Range (Average)(1)(3)

First lien debt

$

735,555,508

 

Income/Market

 

HY credit spreads,

-2.29% to 6.53% (1.52%)

 

approach(2)

 

Risk free rates

-1.43% to 4.31% (2.31%)

 

Market multiples

4.5x to 19.3x (10.1x)(4)

Second lien debt

$

45,304,300

Income/Market

 

HY credit spreads,

-0.17% to 5.18% (2.39%)

 

approach(2)

 

Risk free rates

-0.02% to 3.91% (1.94%)

 

 

Market multiples

5.6x to 15.1x (11.4x)(4)

Unsecured debt

$

4,823,898

Income/Market

 

HY credit spreads,

7.97% to 7.97% 7.97%)

 

approach(2)

 

Risk free rates

3.63% to 3.63% (3.63%)

 

 

Market multiples

9.1x to 9.1x (9.1x)(4)

Equity investments

$

59,049,932

 

Market approach(5)

 

Underwriting multiple/

 

EBITDA Multiple

1.3x to 24.8x (11.7x)

Total Long Term Level 3 Investments

$

844,733,638

 

  

 

  

  

(1)Weighted average based on fair value as of December 31, 2022.
(2)Inclusive of but not limited to (a) the market approach, which is used to determine sufficient enterprise value, and (b) the income approach which is based on discounting future cash flows using an appropriate market yield.
(3)The Company calculates the price of the loan by discounting future cash flows, which include forecasted future LIBOR rates based on the published forward LIBOR curve at the valuation date, using an appropriate yield calculated as of the valuation date. This yield is calculated based on the loan’s yield at the original investment and is adjusted as of the valuation date based on: changes in comparable credit spreads, changes in risk free interest rates (per swap rates), and changes in credit quality (via an estimated shadow rating). Significant movements in any of these factors would result in a significantly lower or higher fair value measurement. As an example, the “Range (Average)” for a first lien debt instruments in the table above indicates that the change in the HY spreads between the date a loan closed and the valuation date ranged from -2.29% (-229 basis points) to 6.53% (653 basis points). The average of all changes was 1.52% (152 basis points).
(4)Median of LTM (last twelve months) EBITDA multiples of comparable companies.
(5)The primary significant unobservable input used in the fair value measurement of the Company’s equity investments is the EBITDA multiple (the “Multiple”). Significant increases (decreases) in the Multiple in isolation would result in a significantly higher (lower) fair value measurement. To determine the Multiple for the market approach, the Company considers current market trading and/or transaction multiple, portfolio company performance (financial ratios) relative to public and private peer companies and leverage levels, among other factors. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate Multiple to use in the market approach.

NOTE 7 — COMMITMENTS AND CONTINGENCIES

The Company is currently not subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our business, financial condition or results of operations.

As of June 30, 2023, the Company had $20,492,453 in unfunded debt commitments and $695,398 in unfunded equity commitments to 55 existing portfolio companies. As of December 31, 2022, the Company had $27,522,100 in unfunded debt commitments and $302,817 in unfunded equity commitments to 52 existing portfolio companies. As of June 30, 2023, the Company had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded loan commitments should the need arise.

49

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

NOTE 8 — FINANCIAL HIGHLIGHTS

For the six months ended

    

June 30, 2023

June 30, 2022

    

(unaudited)

(unaudited)

Per Share Data:(1)

  

  

Net asset value at beginning of period

$

14.02

$

14.61

Net investment income

0.95

0.60

Change in unrealized depreciation on investments

 

(0.51)

 

(0.41)

 

Net realized (loss) gain

 

(0.02)

 

0.16

 

Provision for taxes on net unrealized appreciation on investments

(0.01)

(0.01)

Total from operations

 

$

0.41

 

$

0.34

 

Sales load

 

(0.03)

 

 

Offering costs

 

(0.01)

 

(0.01)

 

Stockholder distributions from:

 

 

Net investment income

 

(0.81)

 

(0.62)

 

Accretive effect of stock offerings (issuing shares above net asset value per share)

0.07

Other(6)

 

0.02

 

 

Net asset value at end of period

$

13.67

$

14.32

Per share market value at end of period

$

14.07

$

11.13

Total return based on market value(2)

 

11.1

%  

 

(11.2)

%  

Weighted average shares outstanding for the period

 

20,509,995

 

19,530,509

Ratio/Supplemental Data:(1)

 

  

 

  

Net assets at end of period

$

308,325,028

$

279,866,118

Weighted average net assets

$

286,407,662

$

285,044,632

Annualized ratio of gross operating expenses to net assets(5)

 

22.00

%  

 

14.15

%  

Annualized ratio of interest expense and other fees to net assets

 

11.26

%  

 

7.37

%  

Annualized ratio of net investment income to net assets(5)

 

13.72

%  

 

8.27

%  

Portfolio turnover(3)

 

10.29

%  

 

7.09

%  

Notes payable

$

100,000,000

$

100,000,000

Credit Facility payable

$

171,455,223

$

203,592,986

SBA-guaranteed debentures

$

313,600,000

$

293,600,000

Asset coverage ratio(4)

 

2.14

x

1.92

x

(1)Based on weighted average shares of common stock outstanding for the period.
(2)Total return on market value is based on the change in market price per share since the end of the prior year and assumes enrollment in the Company’s DRIP. The total returns are not annualized.
(3)Portfolio turnover is calculated as the lesser of purchases or sales and repayments of investments divided by average portfolio balance and is not annualized.
(4)Asset coverage ratio is equal to total assets less all liabilities and indebtedness not represented by senior securities over the aggregate amount of the senior securities. SBA-guaranteed debentures are excluded from the numerator and denominator.
(5)These ratios include the impact of income tax provision on net unrealized appreciation in Taxable Subsidiaries of $144,113 and $21,157, respectively, which are not reflected in total operating expenses or net investment income. The impact of the tax provision on net unrealized appreciation to weighted average net assets for the six months ended June 30, 2023 and 2022 is 0.10% and 0.03%, respectively.
(6)Includes the impact of different share amounts as a result of calculating certain per share data based on weighted average shares outstanding during the period and certain per share data based on shares outstanding as of the period end.

NOTE 9 — CREDIT FACILITY

On October 11, 2017, the Company entered into a senior secured revolving credit agreement, as amended, dated as of October 10, 2017, that was amended and restated on December 21, 2021, February 28, 2022 and May 13, 2022, with Zions Bancorporation, N.A., dba Amegy Bank and various other lenders (the “Credit Facility”).

The Credit Facility provides for borrowings up to a maximum of $265,000,000 on a committed basis with an accordion feature that allows the Company to increase the aggregate commitments up to $280,000,000, subject to new or existing lenders agreeing to participate in the increase and other customary conditions.

50

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

Pursuant to the Third Amendment and Commitment Increase to Amended and Restated Senior Secured Revolving Credit Agreement, the Credit Facility will bear interest, subject to the Company’s election, on a per annum basis equal to (i) term SOFR plus 2.50% (or 2.75% during certain periods in which the Company’s asset coverage ratio is equal to or below 1.90 to 1.00) plus a SOFR credit spread adjustment (0.10% for one-month term SOFR and 0.15% for three-month term SOFR), with a 0.25% SOFR floor, or (ii) 1.50% (or 1.75% during certain periods in which the Company’s asset coverage ratio is equal to or below 1.90 to 1.00) plus an alternate base rate based on the highest of the prime rate (subject to a 3% floor), Federal Funds Rate plus 0.50% and one month term SOFR plus 1.00%. The Company pays unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility. Interest is payable monthly or quarterly in arrears. The commitment to fund the revolver expires on September 18, 2024, after which the Company may no longer borrow under the Credit Facility and must begin repaying principal equal to 1/12 of the aggregate amount outstanding under the Credit Facility each month. Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on September 18, 2025.

The Company’s obligations to the lenders are secured by a first priority security interest in its portfolio of securities and cash not held at the SBIC subsidiaries, but excluding short term investments. The Credit Facility contains certain covenants, including but not limited to: (i) maintaining a minimum liquidity test of at least $10,000,000, including cash, liquid investments and undrawn availability, (ii) maintaining an asset coverage ratio of at least 1.67 to 1.00, (iii) maintaining a minimum stockholder’s equity, and (iv) maintaining a minimum interest coverage ratio of at least 2.00 to 1.00. As of June 30, 2023 and December 31, 2022, the Company was in compliance with these covenants.

As of June 30, 2023 and December 31, 2022, $171,455,223 and $199,200,425, respectively, was outstanding under the Credit Facility. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value. The fair value of the Credit Facility is determined in accordance with 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. The Company has incurred costs of $3,967,284 in connection with the current Credit Facility, which are being amortized over the life of the facility. Additionally, $341,979 of costs from a prior credit facility will continue to be amortized over the life of the Credit Facility. As of June 30, 2023 and December 31, 2022, $1,225,902 and $1,515,144 of such prepaid loan structure fees and administration fees had yet to be amortized, respectively. These prepaid loan fees are presented on our Consolidated Statements of Assets and Liabilities as a deduction from the debt liability.

The following is a summary of the Credit Facility, net of prepaid loan structure fees:

    

June 30, 2023

December 31, 2022

Credit Facility payable

$

171,455,223

$

199,200,425

Prepaid loan structure fees

 

(1,225,902)

 

(1,515,144)

Credit Facility payable, net of prepaid loan structure fees

$

170,229,321

$

197,685,281

Interest is paid monthly or quarterly in arrears. The following table summarizes the interest expense and amortized loan fees on the Credit Facility for the three and six months ended June 30, 2023 and 2022:

    

For the three months ended

For the six months ended

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

Interest expense

$

3,870,571

$

1,805,978

$

7,566,047

$

3,223,712

Loan fee amortization

 

145,421

 

140,420

 

289,243

 

272,959

 

Total interest and financing expenses

$

4,015,992

$

1,946,398

$

7,855,290

$

3,496,671

Weighted average interest rate

 

7.8

%  

 

3.4

%  

 

7.6

%  

 

3.1

%  

Effective interest rate (including fee amortization)

 

8.1

%  

 

3.8

%  

 

7.9

%  

 

3.5

%  

Average debt outstanding

$

198,482,726

$

206,467,162

$

200,490,808

$

199,729,366

Cash paid for interest and unused fees

$

3,953,000

$

1,856,900

$

7,586,518

$

3,230,338

51

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

NOTE 10 — SBA-GUARANTEED DEBENTURES

Due to the SBIC subsidiaries’ status as licensed SBICs, the Company has 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 such term is defined by the SBA. As of both June 30, 2023 and December 31, 2022, the SBIC subsidiary had $75,000,000 in regulatory capital, as such term is defined by the SBA, and $150,000,000 of SBA-guaranteed debentures outstanding.

As of both June 30, 2023 and December 31, 2022, the SBIC II subsidiary had $87,500,000 both in regulatory capital, as such term is defined by the SBA, and $163,600,000 of SBA-guaranteed debentures outstanding, respectively.

On August 12, 2014, the Company obtained exemptive relief from the SEC to permit it to exclude the debt of the SBIC subsidiaries guaranteed by the SBA from its asset coverage test under the 1940 Act. The exemptive relief provides the Company with increased flexibility under the asset coverage test by permitting it to borrow up to $325,000,000 more than it would otherwise be able to absent the receipt of this exemptive relief.

On a stand-alone basis, the SBIC subsidiaries held $482,542,641 and $470,659,123 in assets at June 30, 2023 and December 31, 2022, respectively, which accounted for approximately 53.5% and 52.4% of the Company’s total consolidated assets, respectively.

Debentures guaranteed by the SBA have fixed interest rates that equal prevailing 10-year U.S. Treasury Note rates plus a market spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the debentures is not required to be paid before maturity, but may be pre-paid at any time with no prepayment penalty. SBA-guaranteed debentures drawn before October 1, 2019 incur upfront fees of 3.425%, which consists of a 1.00% commitment fee and a 2.425% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. SBA-guaranteed debentures drawn after October 1, 2019 incur upfront fees of 3.435%, which consists of a 1.00% commitment fee and a 2.435% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. Once pooled, which occurs in March and September of each applicable year, the SBA-guaranteed debentures bear interest at a fixed rate that is set to the current 10-year treasury rate plus a spread at each pooling date.

The following table summarizes the SBIC subsidiaries’ aggregate SBA-guaranteed debentures outstanding as of June 30, 2023:

Issuance Date

    

Licensee

    

Maturity Date

    

Debenture Amount

    

Interest Rate

    

SBA Annual Charge

 

October 14, 2014

SBIC I

March 1, 2025

$

6,500,000

 

2.52

%  

0.36

%

October 17, 2014

SBIC I

March 1, 2025

 

6,500,000

 

2.52

%  

0.36

%

December 24, 2014

SBIC I

March 1, 2025

 

3,250,000

 

2.52

%  

0.36

%

June 29, 2015

SBIC I

September 1, 2025

 

9,750,000

 

2.83

%  

0.36

%

October 22, 2015

SBIC I

March 1, 2026

 

6,500,000

 

2.51

%  

0.36

%

October 22, 2015

SBIC I

March 1, 2026

 

1,500,000

 

2.51

%  

0.74

%

November 10, 2015

SBIC I

March 1, 2026

 

8,800,000

 

2.51

%  

0.74

%

November 18, 2015

SBIC I

March 1, 2026

 

1,500,000

 

2.51

%  

0.74

%

November 25, 2015

SBIC I

March 1, 2026

 

8,800,000

 

2.51

%  

0.74

%

December 16, 2015

SBIC I

March 1, 2026

 

2,200,000

 

2.51

%  

0.74

%

December 29, 2015

SBIC I

March 1, 2026

 

9,700,000

 

2.51

%  

0.74

%

November 28, 2017

SBIC I

March 1, 2028

 

25,000,000

 

3.19

%  

0.22

%

April 27, 2018

SBIC I

September 1, 2028

 

40,000,000

 

3.55

%  

0.22

%

July 30, 2018

SBIC I

September 1, 2028

 

17,500,000

 

3.55

%  

0.22

%

September 25, 2018

SBIC I

March 1, 2029

 

2,500,000

 

3.11

%  

0.22

%

Total SBIC I Subsidiary SBA-guaranteed Debentures

  

$

150,000,000

 

  

 

  

52

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

Issuance Date

    

Licensee

    

Maturity Date

    

Debenture Amount

    

Interest Rate

    

SBA Annual Charge

 

October 17, 2019

 

SBIC II

March 1, 2030

$

6,000,000

 

2.08

%  

0.09

%

November 15, 2019

 

SBIC II

March 1, 2030

 

5,000,000

 

2.08

%  

0.09

%

December 17, 2020

 

SBIC II

March 1, 2031

 

9,000,000

 

1.67

%  

0.09

%

December 17, 2020

 

SBIC II

March 1, 2031

 

6,500,000

 

1.67

%  

0.27

%

February 16, 2021

 

SBIC II

March 1, 2031

 

13,500,000

 

1.67

%  

0.27

%

February 26, 2021

 

SBIC II

March 1, 2031

 

10,000,000

 

1.67

%  

0.27

%

March 2, 2021

 

SBIC II

March 1, 2031

 

10,000,000

 

1.67

%  

0.27

%

April 21, 2021

 

SBIC II

September 1, 2031

 

10,000,000

 

1.30

%  

0.27

%

May 14, 2021

 

SBIC II

September 1, 2031

 

6,700,000

 

1.30

%  

0.27

%

May 28, 2021

 

SBIC II

September 1, 2031

 

7,300,000

 

1.30

%  

0.27

%

July 23, 2021

 

SBIC II

September 1, 2031

 

16,000,000

 

1.30

%  

0.27

%

February 25, 2022

SBIC II

March 1, 2032

10,000,000

2.94

%  

0.27

%

March 29, 2022

SBIC II

September 1, 2032

10,000,000

4.26

%  

0.27

%

April 1, 2022

SBIC II

September 1, 2032

6,670,000

4.26

%  

0.27

%

April 12, 2022

SBIC II

September 1, 2032

6,665,000

4.26

%  

0.27

%

April 21, 2022

SBIC II

September 1, 2032

6,665,000

4.26

%  

0.27

%

June 30, 2022

SBIC II

September 1, 2032

3,600,000

4.26

%  

0.27

%

July 28, 2022

SBIC II

September 1, 2032

6,400,000

4.26

%  

0.27

%

September 9, 2022

SBIC II

March 1, 2033

6,000,000

5.17

%  

0.27

%

November 9, 2022

SBIC II

March 1, 2033

7,600,000

5.17

%  

0.27

%

Total SBIC II Subsidiary SBA-guaranteed Debentures

  

$

163,600,000

 

  

 

  

Total SBA-guaranteed Debentures

  

$

313,600,000

 

 

  

As of June 30, 2023 and December 31, 2022, the SBA-guaranteed debentures would be deemed to be Level 3, as defined in Note 6.

As of both June 30, 2023 and December 31, 2022, the Company has incurred $10,871,160 in financing costs related to the SBA-guaranteed debentures since receiving its licenses, which were recorded as prepaid loan fees. As of June 30, 2023 and December 31, 2022, $5,080,447 and $5,704,805 of prepaid financing costs had yet to be amortized, respectively. These prepaid loan fees are presented on the Consolidated Statements of Assets and Liabilities as a deduction from the debt liability.

The following is a summary of the SBA-guaranteed debentures, net of prepaid loan fees:

June 30, 2023

December 31, 2022

SBA debentures payable

$

313,600,000

$

313,600,000

Prepaid loan fees

(5,080,447)

(5,704,805)

SBA Debentures, net of prepaid loan fees

$

308,519,553

$

307,895,195

53

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

The following table summarizes the interest expense and amortized fees on the SBA-guaranteed debentures for the three and six months ended June 30, 2023 and 2022:

    

For the three months ended

For the six months ended

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

Interest expense

$

2,443,009

$

1,941,979

$

4,843,727

$

3,666,260

Debenture fee amortization

 

306,850

 

305,877

 

624,358

 

589,020

 

Total interest and financing expenses

$

2,749,859

$

2,247,856

$

5,468,085

$

4,255,280

Weighted average interest rate

 

3.1

%  

 

2.7

%  

 

3.1

%  

 

2.7

%  

Effective interest rate (including fee amortization)

 

3.5

%  

 

3.1

%  

 

3.5

%  

 

3.2

%  

Average debt outstanding

$

313,600,000

$

287,769,066

$

313,600,000

$

271,088,315

Cash paid for interest

$

$

$

4,680,999

$

3,405,071

NOTE 11 — NOTES

On January 14, 2021, the Company issued $100,000,000 in aggregate principal amount of 4.875% fixed-rate notes due 2026 (the “2026 Notes”). The 2026 Notes will mature on March 30, 2026 and may be redeemed in whole or in part at any time or from time to time at our option on or after December 31, 2025, at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest on the 2026 Notes is payable semi-annually beginning June 30, 2022. As of both June 30, 2023 and December 31, 2022, the aggregate carrying amount of the 2026 Notes was approximately $100,000,000. The 2026 Notes are institutional, non-traded notes.

In connection with the issuance and maintenance of the 2026 Notes, the Company incurred $2,327,835 of fees which are being amortized over the term of the 2026 Notes. As of June 30, 2023 and December 31, 2022, $1,228,784 and $1,450,308 of prepaid financing costs had yet to be amortized, respectively. These financing costs are presented on the Consolidated Statements of Assets and Liabilities as a deduction from the debt liability.

The following table summarizes the interest expense and deferred financing costs on the 2026 Notes for the three and six months ended June 30, 2023 and 2022:

    

For the three months ended

 

For the six months ended

    

June 30, 2023

June 30, 2022

 

June 30, 2023

June 30, 2022

Interest expense

$

1,224,750

$

1,218,750

$

2,443,500

$

2,442,500

Deferred financing costs

 

111,374

 

111,374

 

221,524

 

221,524

Total interest and financing expenses

$

1,336,124

$

1,330,124

$

2,665,024

$

2,664,024

Weighted average interest rate

 

4.9

%

 

4.9

%

 

4.9

%

 

4.9

%

Effective interest rate (including fee amortization)

 

5.4

%

 

5.3

%

 

5.4

%

 

5.4

%

Average debt outstanding

$

100,000,000

$

100,000,000

$

100,000,000

$

100,000,000

Cash paid for interest

$

6,000

$

$

2,443,500

$

2,437,500

The following is a summary of the 2026 Notes Payable, net of deferred financing costs:

    

June 30, 2023

December 31, 2022

Notes payable

$

100,000,000

$

100,000,000

Deferred financing costs

 

(1,228,784)

 

(1,450,308)

Notes payable, net of deferred financing costs

$

98,771,216

$

98,549,692

The indenture and supplements thereto relating to the 2026 Notes contain certain covenants, including but not limited to (i) a requirement that the Company comply with the asset coverage requirements of the 1940 Act or any successor provisions, and (ii) a requirement to provide financial information to the holders of the notes and the trustee under the indenture if the Company should no longer be subject to the reporting requirements under the Exchange Act. As of June 30, 2023 and 2022, the Company was in compliance with these covenants.

54

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

NOTE 12 — SUBSEQUENT EVENTS

The Company’s management has evaluated subsequent events through the date of issuance of the financial statements included herein. There have been no subsequent events that require recognition or disclosure in these financial statements except for the following described below.

Investment Portfolio

The Company invested in the following portfolio companies subsequent to June 30, 2023:

Activity Type

  

Date

  

Company Name

  

Company Description

  

Investment Amount

  

Instrument Type

New Investment

July 7, 2023

Madison Logic, Inc.*

Provider of B2B account based marketing services

$

394,767

Equity

Add-On Investment

July 12, 2023

EH Real Estate Services, LLC*

Offers residential property brokerage, title & settlement, and property and casualty insurance brokerage services to home buyers and sellers

$

501,846

Senior Secured – First Lien

New Investment

July 31, 2023

EHI Buyer, Inc.

Provider of design, engineering, installation, and maintenance services for building management systems

$

6,111,343

Senior Secured – First Lien

$

3,055,671

Delayed Draw Term Loan Commitment

$

100,000

Revolver Commitment

$

617,801

Equity

New Investment

August 2, 2023

Compost 360 Acquisition, LLC

Organic waste recycler and producer of compost, mulch, and engineered soils

$

9,595,100

Senior Secured – First Lien

$

4,096,741

Delayed Draw Term Loan Commitment

$

100,000

Revolver Commitment

$

250,761

Equity

New Investment

August 3, 2023

Morgan Electrical Group Intermediate Holdings, Inc.

Provider of commercial electrical services

$

4,439,439

Senior Secured – First Lien

$

2,864,154

Delayed Draw Term Loan Commitment

$

100,000

Revolver Commitment

$

356,800

Equity

Add-On Investment

August 4, 2023

TradePending OpCo Aggregator, LLC*

Provider of vehicle trade-in and merchandising intelligence solutions for auto dealerships

$

2,473,227

Senior Secured – First Lien

$

687,007

Delayed Draw Term Loan Commitment

$

325,379

Equity

New Investment

August 7, 2023

The Hardenbergh Group, Inc.

Provider of temporary professional staffing of Medical Services Professionals, external peer review, consulting and physician leadership solutions

$

10,501,898

Senior Secured – First Lien

$

100,000

Revolver Commitment

$

434,504

Equity

New Investment

August 8, 2023

Green Intermediateco II, Inc.

Cyber-security focused value-added reseller and associated service provider

$

11,170,252

Senior Secured – First Lien

$

500,000

Delayed Draw Term Loan Commitment

$

271,401

Equity

* Existing portfolio company

The Company realized the following portfolio company subsequent to June 30, 2023:

Activity Type

  

Date

  

Company Name

  

Company Description

  

Proceeds Received

  

Instrument Type

Full Repayment

July 31, 2023

NuSource Financial, LLC*

Provider of technology integration and installation of Automated Teller Machines/Integrated Teller Machines, maintenance services, and security solutions

$10,984,910

Senior Secured – First Lien

* Existing portfolio company

Effective July 1, 2023, the ArborWorks Acquisition, LLC term loan and revolver were placed on non-accrual status.

Credit Facility

The outstanding balance under the Credit Facility as of August 9, 2023 was $187,200,000.

55

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(unaudited)

SBA-guaranteed Debentures

The total balance of SBA-guaranteed debentures outstanding as of August 9, 2023 was $322,720,000.

Dividends Declared

On July 14, 2023, the Board declared a regular monthly dividend for each of July 2023, August 2023, and September 2023 as follows:

Ex-Dividend

Record

Payment

Amount per

Declared

    

Date

    

Date

    

Date

    

Share

7/14/2023

7/28/2023

7/31/2023

8/15/2023

$

0.1333

7/14/2023

 

8/30/2023

8/31/2023

9/15/2023

$

0.1333

7/14/2023

 

9/28/2023

9/29/2023

10/13/2023

$

0.1333

56

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or Stellus Capital Investment Corporation’s (“we”, “us”, “our” and the “Company”) future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:

our future operating results;
our business prospects and the prospects of our portfolio companies;
the effect of investments that we expect to make;
our contractual arrangements and relationships with third parties;
actual and potential conflicts of interest with Stellus Capital Management, LLC (“Stellus Capital” or the “Advisor”);
the dependence of our future success on the general economy and its effect on the industries in which we invest;
the impact of interest rate volatility, including the decommissioning of London Interbank Offered Rate ("LIBOR") and rising interest rates, on our business and our portfolio companies;
the ability of our portfolio companies to achieve their objectives;
the use of borrowed money to finance a portion of our investments;
the adequacy of our financing sources and working capital;
the timing of cash flows, if any, from the operations of our portfolio companies;
the ability of Stellus Capital to locate suitable investments for us and to monitor and administer our investments;
the ability of Stellus Capital to attract and retain highly talented professionals;
our ability to maintain our qualification as a regulated investment company (“RIC”) and as a business development company (“BDC”); and
the effect of future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to BDC or RICs.

Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words.

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or U.S. Securities and Exchange Commission (“SEC”) rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

57

Overview

We were organized as a Maryland corporation on May 18, 2012, and formally commenced operations on November 7, 2012. Our investment objective is to maximize the total return to our stockholders in the form of current income and capital appreciation through debt and related equity investments in middle-market companies.

We are an externally managed, non-diversified, closed-end investment company that has elected to be regulated as a BDC under the Investment Company Act of 1940, as amended (the “1940 Act”). Our investment activities are managed by our investment adviser, Stellus Capital.

As a BDC, we are required to comply with certain regulatory requirements. For instance, as a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets. Qualifying assets include investments in “eligible portfolio companies.” (as defined in the 1940 Act). Under the relevant SEC rules, the term “eligible portfolio company” includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and certain public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal place of business in the United States.

We have elected, qualified, and intend to continue to qualify annually to be treated for tax purposes as a RIC under Subchapter M of the internal Revenue Code of 1986, as amended (the “Code”). To maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. As of June 30, 2023, we were in compliance with the RIC requirements. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any income we distribute to our stockholders.

On March 23, 2018, the Small Business Credit Availability Act (the “SBCAA”) was signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The SBCAA included changes to the 1940 Act to allow BDCs to decrease their asset coverage requirement to 150% from 200% subject to certain circumstances.

On April 4, 2018, the board of directors of the Company (the “Board”), including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. At our 2018 annual meeting of stockholders our stockholders also approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the asset coverage ratio applicable to us was decreased from 200% to 150%, effective June 29, 2018, which effectively increased the amount of leverage we may incur. As of June 30, 2023, our asset coverage ratio was 214%. 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.

58

Economic Developments

Economic activity has continued to accelerate across sectors and regions. Nonetheless, we have observed and continue to observe supply chain interruptions, labor resource shortages, commodity inflation, rising interest rates, bank impairments and failures, economic sanctions in response to international conflicts and instances of geopolitical, economic and financial market instability in the United States and abroad. One or more of these factors may contribute to increased market volatility and may have long- and short-term effects in the United States and worldwide financial markets.

Portfolio Composition and Investment Activity

Portfolio Composition

We originate and invest primarily in privately-held middle-market companies (typically those with $5.0 million to $50.0 million of EBITDA (earnings before interest, taxes, depreciation and amortization)) through first lien (including unitranche), second lien, and unsecured debt financing, often times with a corresponding equity investment.

As of June 30, 2023, we had $881.7 million (at fair value) invested in 93 portfolio companies. As of June 30, 2023, our portfolio included approximately 88% of first lien debt, 4% of second lien debt, 1% of unsecured debt and 7% of equity investments at fair value. The composition of our investments at cost and fair value as of June 30, 2023 was as follows:

    

Cost

    

Fair Value

Senior Secured – First Lien(1)

$

792,661,767

$

779,447,364

Senior Secured – Second Lien

 

70,064,404

33,918,725

Unsecured Debt

 

5,979,572

5,708,477

Equity

 

54,090,830

62,591,884

Total Investments

$

922,796,573

$

881,666,450

(1)Includes unitranche investments, which may combine characteristics of first lien senior secured, as well as second lien and/or subordinated loans. Our unitranche loans may expose us to certain risk associated with second lien and subordinated loans to the extent we invest in the “last-out” portion of the unitranche loans which account for 6.2% of our portfolio at fair value.

As of December 31, 2022, we had $844.7 million (at fair value) invested in 85 portfolio companies. As of December 31, 2022, our portfolio included approximately 87% of first lien debt, 5% of second lien debt, 1% of unsecured debt and 7% of equity investments at fair value. The composition of our investments at cost and fair value as of December 31, 2022 was as follows:

    

Cost

    

Fair Value

Senior Secured – First Lien(1)

$

750,527,999

$

735,555,508

Senior Secured – Second Lien

 

69,989,477

 

45,304,300

Unsecured Debt

 

5,657,964

 

4,823,898

Equity

 

49,647,737

 

59,049,932

Total Investments

$

875,823,177

$

844,733,638

(1)Includes unitranche investments, which may combine characteristics of first lien senior secured, as well as second lien and/or subordinated loans. Our unitranche loans may expose us to certain risk associated with second lien and subordinated loans to the extent we invest in the “last-out” portion of the unitranche loans which account for 3.1% of our portfolio at fair value.

Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms and conditions of the underlying loan agreements. As of June 30, 2023 and December 31, 2022, we had unfunded commitments of $21.2 million and $27.8 million, respectively, to provide debt financing to 55 and 52 portfolio companies, respectively. As of June 30, 2023, we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility (as defined below)) to fund such unfunded commitments should the need arise.

59

The following is a summary of geographical concentration of our investment portfolio as of June 30, 2023:

% of Total

 

Cost

Fair Value

Investments

 

Texas

 

$

206,004,010

 

$

182,903,863

 

20.74

%

California

 

179,278,481

 

177,882,024

 

20.17

%

Florida

 

83,269,639

 

82,798,145

 

9.39

%

Pennsylvania

 

48,569,282

 

48,352,773

 

5.48

%

Arizona

 

44,823,978

 

46,868,463

 

5.32

%

Illinois

 

59,329,153

 

46,656,232

 

5.29

%

Ohio

 

33,676,009

 

36,978,837

 

4.19

%

Wisconsin

 

27,476,373

 

25,008,264

 

2.84

%

Washington

 

24,371,956

 

24,362,084

 

2.76

%

South Carolina

 

23,876,474

 

23,476,376

 

2.66

%

Colorado

 

20,046,931

 

19,410,156

 

2.20

%

Georgia

 

10,276,132

 

18,395,202

 

2.09

%

Maryland

 

16,742,023

 

16,640,662

 

1.89

%

Minnesota

 

16,740,672

 

16,605,656

 

1.88

%

District of Columbia

 

14,099,046

 

16,505,944

 

1.87

%

Indiana

 

14,369,701

 

14,585,360

 

1.65

%

Canada

 

12,679,688

 

12,698,047

 

1.44

%

New Jersey

 

11,169,394

 

11,600,921

 

1.32

%

Tennessee

 

11,419,666

 

11,507,745

 

1.31

%

North Carolina

 

10,410,606

 

11,156,286

 

1.27

%

Massachusetts

 

10,183,236

 

10,557,554

 

1.20

%

Missouri

 

9,100,052

 

9,743,747

 

1.11

%

Idaho

 

9,140,420

 

9,216,892

 

1.05

%

New York

 

5,074,532

 

5,174,244

 

0.59

%

United Kingdom

 

20,669,119

 

2,580,973

 

0.29

%

$

922,796,573

$

881,666,450

 

100.00

%

60

The following is a summary of geographical concentration of our investment portfolio as of December 31, 2022:

    

    

    

% of Total

 

Investments

 

Cost

Fair Value

at fair value

 

Texas

$

191,422,143

$

171,165,597

 

20.26

%

California

 

167,833,384

 

165,340,017

 

19.57

%

Florida

 

60,593,839

 

59,421,775

 

7.03

%

Illinois

 

64,421,998

 

53,218,615

 

6.30

%

Arizona

 

43,129,283

 

44,277,625

 

5.24

%

Pennsylvania

 

42,899,504

 

41,889,344

 

4.96

%

Ohio

 

34,223,452

 

37,333,236

 

4.42

%

Washington

 

28,978,375

 

28,480,471

 

3.37

%

New Jersey

 

25,395,054

 

25,140,343

 

2.98

%

Wisconsin

 

27,533,402

 

24,271,761

 

2.87

%

District of Columbia

 

17,236,556

 

21,124,347

 

2.50

%

Georgia

 

10,919,642

 

19,692,757

 

2.33

%

South Carolina

 

19,089,373

 

18,654,782

 

2.21

%

Maryland

 

16,824,077

 

16,576,554

 

1.96

%

Minnesota

16,972,086

15,952,072

 

1.89

%

United Kingdom

20,530,087

14,445,481

 

1.71

%

Colorado

 

15,204,934

 

14,295,470

 

1.69

%

Indiana

 

14,346,082

 

14,245,432

 

1.69

%

Canada

 

13,333,737

 

13,266,669

 

1.57

%

North Carolina

 

10,461,551

 

10,649,232

 

1.26

%

Massachusetts

10,215,356

10,527,659

 

1.25

%

Idaho

 

9,873,093

 

9,863,103

 

1.17

%

Missouri

 

9,142,111

 

9,656,287

 

1.14

%

New York

 

5,096,152

 

5,096,008

 

0.61

%

Michigan

 

147,906

 

149,001

 

0.02

%

$

875,823,177

$

844,733,638

 

100.00

%

61

The following is a summary of industry concentration of our investment portfolio as of June 30, 2023:

% of Total

 

Cost

Fair Value

Investments

 

Services: Business

$

226,995,642

$

238,878,500

 

27.08

%

Healthcare & Pharmaceuticals

91,205,161

93,077,808

 

10.55

%

Consumer Goods: Durable

59,270,223

54,567,910

 

6.19

%

Consumer Goods: Non-Durable

53,958,284

51,766,867

 

5.87

%

Beverage, Food, & Tobacco

42,884,147

43,786,560

 

4.97

%

Media: Advertising, Printing & Publishing

38,363,033

39,057,251

 

4.43

%

Capital Equipment

37,366,328

38,468,901

 

4.36

%

Software

37,337,635

38,288,078

 

4.34

%

Services: Consumer

50,281,462

32,320,593

 

3.67

%

Aerospace & Defense

48,298,034

27,295,618

 

3.10

%

Construction & Building

26,044,832

25,825,768

 

2.93

%

Environmental Industries

28,202,747

25,420,361

 

2.88

%

High Tech Industries

24,592,803

23,803,603

 

2.70

%

Media: Broadcasting & Subscription

17,629,649

20,591,975

 

2.34

%

Chemicals, Plastics, & Rubber

18,425,715

17,735,387

 

2.01

%

Transportation & Logistics

16,715,873

17,160,188

 

1.95

%

Metals & Mining

16,644,442

16,545,375

 

1.88

%

Retail

14,953,930

14,921,785

 

1.69

%

Containers, Packaging, & Glass

17,412,372

14,424,156

 

1.64

%

Automotive

11,126,155

11,250,000

 

1.28

%

Utilities: Oil & Gas

9,931,992

10,000,000

 

1.13

%

Education

10,288,745

9,402,698

 

1.07

%

Media: Diversified & Production

5,676,087

5,776,237

 

0.66

%

Finance

1,562,775

4,779,849

 

0.54

%

FIRE: Real Estate

16,438,619

4,202,469

 

0.48

%

Energy: Oil & Gas

1,189,888

1,487,383

 

0.17

%

Hotel, Gaming, & Leisure

831,130

 

0.09

%

Total

$

922,796,573

$

881,666,450

 

100.00

%

62

The following is a summary of industry concentration of our investment portfolio as of December 31, 2022:

    

    

    

% of Total

 

Investments

 

Cost

Fair Value

at fair value

 

Services: Business

$

207,234,534

$

218,866,572

 

25.91

%

Healthcare & Pharmaceuticals

 

86,469,854

 

88,103,319

 

10.43

%

Media: Advertising, Printing & Publishing

 

52,830,447

 

52,525,839

 

6.22

%

Consumer Goods: Non-Durable

 

54,683,102

 

51,280,593

 

6.07

%

Consumer Goods: Durable

 

45,601,928

 

44,529,176

 

5.27

%

Aerospace & Defense

 

48,137,394

 

39,526,086

 

4.68

%

Software

 

37,582,855

 

37,975,255

 

4.50

%

Capital Equipment

 

33,538,647

 

33,801,951

 

4.00

%

Beverage, Food, & Tobacco

 

34,000,918

 

32,755,054

 

3.88

%

Construction & Building

 

26,948,135

 

26,406,849

 

3.13

%

Environmental Industries

 

27,771,798

 

26,247,936

 

3.11

%

Services: Consumer

 

43,302,101

 

24,616,706

 

2.92

%

Media: Broadcasting & Subscription

 

18,615,052

 

21,445,307

 

2.54

%

Chemicals, Plastics, & Rubber

 

18,487,206

 

17,903,999

 

2.12

%

Transportation & Logistics

 

16,768,763

 

17,161,972

 

2.03

%

Metals & Mining

 

16,708,750

 

16,464,001

 

1.95

%

Containers, Packaging, & Glass

 

17,436,600

 

13,977,250

 

1.65

%

Retail

13,303,536

13,217,256

 

1.56

%

High Tech Industries

 

14,126,954

 

12,648,347

 

1.50

%

Automotive

 

11,252,581

 

11,342,751

 

1.34

%

Education

 

11,057,921

 

10,498,760

 

1.24

%

Utilities: Oil & Gas

 

9,921,469

 

9,800,000

 

1.16

%

Energy: Oil & Gas

7,314,230

7,355,074

 

0.87

%

FIRE: Real Estate

 

15,642,093

 

5,866,397

 

0.69

%

Media: Diversified & Production

 

5,517,409

 

5,534,710

 

0.66

%

Finance

 

1,568,900

 

4,082,579

 

0.48

%

Hotel, Gaming, & Leisure

 

 

799,899

 

0.09

%

$

875,823,177

$

844,733,638

 

100.00

%

At June 30, 2023, our average portfolio company investment at amortized cost and fair value was approximately $9.9 million and $9.5 million, respectively, and our largest portfolio company investment at amortized cost and fair value was $21.0 million and $19.0 million, respectively. At December 31, 2022, our average portfolio company investment at amortized cost and fair value was approximately $10.3 million and $9.9 million, respectively, and our largest portfolio company investment at amortized cost and fair value was approximately $21.3 million and $20.5 million, respectively.

At both June 30, 2023 and December 31, 2022, 97% of our debt investments bore interest based on floating rates (subject to interest rate floors) and 3% bore interest at fixed rates.

The weighted average yield on all of our debt investments as of June 30, 2023 and December 31, 2022 was approximately 11.7% and 11.1%, respectively. The weighted average yield on all of our investments, including non-income producing equity positions, as of June 30, 2023 and December 31, 2022 was approximately 11.0% and 10.4%, respectively. The weighted average yield was computed using the effective interest rates for all of our debt investments, including accretion of original issue discount. The weighted average yield of our debt investments is not the same as a return on investment for our stockholders, but rather relates to a portion of our investment portfolio and is calculated before the payment of all of our subsidiaries’ fees and expenses.

As of June 30, 2023 and December 31, 2022, we had cash and cash equivalents of $14.9 million and $48.0 million, respectively.

63

Investment Activity

During the six months ended June 30, 2023, we made an aggregate of $87.7 million of investments in eleven new portfolio companies and thirteen existing portfolio companies. During the six months ended June 30, 2023, we received an aggregate of $44.3 million in proceeds from repayments of our investments.

Our level of investment activity can vary substantially from period to period depending on many factors, including the amount of debt and equity capital to middle-market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.

Asset Quality

In addition to various risk management and monitoring tools, Stellus Capital uses an investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in our portfolio. This investment rating system uses a five-level numeric scale. The following is a description of the conditions associated with each investment category:

Investment Category 1 is used for investments that are performing above expectations, and whose risks remain favorable compared to the expected risk at the time of the original investment.
Investment Category 2 is used for investments that are performing within expectations and whose risks remain neutral compared to the expected risk at the time of the original investment. All new loans are initially rated 2.
Investment Category 3 is used for investments that are performing below expectations and that require closer monitoring, but where no loss of return or principal is expected. Portfolio companies with a rating of 3 may be out of compliance with financial covenants.
Investment Category 4 is used for investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are often in work out. Investments with a rating of 4 are those for which some loss of return but no loss of principal is expected.
Investment Category 5 is used for investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are almost always in work out. Investments with a rating of 5 are those for which some loss of return and principal is expected.

    

As of June 30, 2023

As of December 31, 2022

(dollars in millions)

(dollars in millions)

    

    

Number of

    

    

    

Number of

% of Total

Portfolio

% of Total

Portfolio

Investment Category

Fair Value

Portfolio

Companies(1)

Fair Value

Portfolio

Companies

1

$

218.4

 

25

%  

24

$

146.6

 

17

%  

17

2

 

542.3

 

61

%  

51

 

553.2

 

66

%  

52

3

 

110.5

 

13

%  

13

 

120.7

 

14

%  

13

4

 

8.4

 

1

%  

2

 

18.3

 

2

%  

2

5

 

2.1

 

%  

5

 

5.9

 

1

%  

1

Total

$

881.7

 

100

%  

95

$

844.7

 

100

%  

85

(1)Two portfolio companies appear in two categories as of June 30, 2023.

Loans and Debt Securities on Non-Accrual Status

We will not accrue interest on loans and debt securities if we have reason to doubt our ability to collect such interest. As of June 30, 2023, we had loans to four portfolio companies that were on non-accrual status, which represented approximately 5.9% of our loan portfolio at cost and 1.3% at fair value. As of December 31, 2022, we had loans to three portfolio companies that were on non-accrual status, which represented approximately 5.2% of our loan portfolio at cost and 2.3% at fair value. As of June 30, 2023 and December 31, 2022, $8.7 million and $4.8 million of income from investments on non-accrual has not been accrued, respectively.

64

Results of Operations

An important measure of our financial performance is net increase (decrease) in net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income (loss) is the difference between our income from interest, dividends, fees and other investment income and our operating expenses including interest on borrowed funds. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio.

Comparison of the three and six months ended June 30, 2023 and 2022

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 primarily at floating rates. Interest on our debt securities is generally payable quarterly. Payments of principal on our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments may pay interest in-kind, or PIK interest. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect that the total dollar amount of interest and any dividend income that we earn will increase as the size of our investment portfolio increases. In addition, we may generate revenue in the form of prepayment fees, commitment, loan origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees.

The following shows the breakdown of investment income for the three and six months ended June 30, 2023 and 2022 (in millions).

For the three months ended

For the six months ended

    

June 30, 2023

    

June 30, 2022

June 30, 2023

June 30, 2022

Interest income(1)

$

24.3

$

15.3

$

46.9

$

30.0

PIK interest

1.1

0.3

1.9

0.7

Miscellaneous fees(1)

 

1.2

 

0.5

1.9

 

0.9

 

Total

$

26.6

$

16.1

$

50.7

$

31.6

(1)For the three and six months ended June 30, 2023 and 2022, we recognized $0.4 million and $0.7 million, respectively, of non-recurring income related to early repayments and amendments to specific loan positions. For the three and six months ended June 30, 2022, we recognized ($0.2) million and ($0.1) million, respectively, of non-recurring income related to early repayments, interest write-offs and amendments to specific loan positions.

The increase in interest income from the respective periods was due primarily to growth in the overall investment portfolio and rising interest rates.

Expenses

Our primary operating expenses include the payment of fees to Stellus Capital under the investment advisory agreement, our allocable portion of overhead expenses under the administration agreement and other operating costs described below. We bear all other out-of-pocket costs and expenses of our operations and transactions, which may include:

organization and offering costs;
valuing our assets and calculating our net asset value (including the cost and expenses of any independent valuation firm);
fees and expenses payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments;

65

interest payable on debt, if any, incurred to finance our investments and expenses related to unsuccessful portfolio acquisition efforts;
offerings of our commons stock and other securities;
base management and incentive fees;
administration fees and expenses, if any, payable under the administration agreement (including our allocable portion of Stellus Capital’s overhead in performing its obligations under the administration agreement, including rent and the allocable portion of the cost of our chief financial officer and chief compliance officer and their respective staffs);
transfer agent and custodial fees and expenses;
U.S. federal and state registration fees;
all costs of registration and listing our securities on any securities exchange;
U.S. federal, state and local taxes;
independent directors’ fees and expenses;
costs of preparing and filing reports or other documents required by the SEC or other regulators;
costs of any reports, proxy statements or other notices to stockholders, including printing costs;
costs and fees associated with any fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;
direct costs and expenses of administration and operation, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs;
proxy voting expenses; and
all other expenses incurred by us or Stellus Capital in connection with administering our business.

The following shows the breakdown of operating expenses for the three and six months ended June 30, 2023 and 2022 (in millions).

For the three months ended

For the six months ended

June 30, 2023

    

June 30, 2022

June 30, 2023

 

June 30, 2022

 

Operating Expenses

Management fees

$

3.9

$

3.7

   

$

7.6

$

7.2

Valuation fees

   

0.2

0.2

Administrative services expenses

 

0.5

0.5

   

1.0

0.9

Income incentive fees

 

2.6

   

4.7

Capital gains incentive fee reversal

 

(1.0)

   

(0.6)

(1.0)

Professional fees

 

0.2

0.2

   

0.6

0.5

Directors’ fees

 

0.1

0.1

   

0.2

0.2

Insurance expense

 

0.1

0.1

   

0.2

0.3

Interest expense and other fees

 

8.1

5.5

   

16.0

10.4

Income tax expense

 

0.4

0.4

   

0.8

0.7

Other general and administrative expenses

 

0.3

0.4

   

0.5

0.5

Total Operating Expenses

$

16.2

$

9.9

$

31.2

$

19.9

66

The increase in operating expenses for the three and six months ended June 30, 2023 as compared to the three and six months ended June 30, 2022 was due to (1) higher interest expense as a result of higher outstanding balances on our SBA-guaranteed debentures, as well as rising interest rates, (2) higher management fees due to a larger investment portfolio and (3) higher incentive fees due to portfolio performance, offset by the capital gains incentive fee reversal.

Net Investment Income

For the three months ended June 30, 2023, net investment income was $10.4 million, or $0.49 per common share (based on 21,231,979 weighted average shares outstanding for the three months ended June 30, 2023).

For the three months ended June 30, 2022, net investment income was $6.1 million, or $0.32 per common share (based on 19,543,117 weighted average shares outstanding for the three months ended June 30, 2022).

For the six months ended June 30, 2023, net investment income was $19.5 million, or $0.95 per common share (based on 20,509,995 weighted average shares outstanding for the six months ended June 30, 2023).

For the six months ended June 30, 2022, net investment income was $11.7 million, or $0.60 per common share (based on 19,530,509 weighted average shares outstanding for the six months ended June 30, 2022).

The increase in net investment income over the respective periods was due to higher investment income as a result of a larger investment portfolio, and rising interest rates, offset by the increase in expenses as explained in the “Expenses” section above.

Net Realized Gains and Losses

We measure realized gains or losses by the difference between the net proceeds from the repayment, sale or other disposition and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized.

Proceeds from repayments of investments and amortization of certain other investments for the three months ended June 30, 2023 totaled $38.4 million and net realized losses totaled $(0.3) million.

Proceeds from repayments of investments and amortization of certain other investments for the three months ended June 30, 2022 totaled $48.2 million and net realized losses totaled ($0.4) million.

Proceeds from repayments of investments and amortization of certain other investments for the six months ended June 30, 2023 totaled $44.3 million and net realized losses totaled $(0.3) million.

Proceeds from repayments of investments and amortization of certain other investments for the six months ended June 30, 2022 totaled $58.2 million and net realized gains totaled $3.1 million.

Net Change in Unrealized Appreciation (Depreciation) of Investments

Net change in unrealized appreciation (depreciation) primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded appreciation or depreciation when gains or losses are realized.

Net change in unrealized depreciation on investments and cash equivalents for the three months ended June 30, 2023 and 2022 totaled ($6.3) million and ($4.3) million, respectively.

Net change in unrealized depreciation on investments and cash equivalents for the six months ended June 30, 2023 and 2022 totaled ($10.5) million and ($8.0) million, respectively.

The change in unrealized depreciation over the respective periods was due to company-specific investment write-downs, offset by company-specific write-ups.

67

Provision for Taxes on Unrealized Appreciation on Investments

We have direct wholly owned subsidiaries that have elected to be taxable entities (the “Taxable Subsidiaries”). The Taxable Subsidiaries permit us to hold equity investments in portfolio companies which are “pass through” entities for U.S. federal income tax purposes and continue to comply with the “source income” requirements contained in RIC tax provisions of the Code. The Taxable Subsidiaries are not consolidated with us for U.S. federal income tax purposes and may generate U.S. federal income tax expense, benefit, and the related tax assets and liabilities, as a result of their ownership of certain portfolio investments. The U.S. federal income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in our consolidated financial statements. For the three months ended June 30, 2023 and 2022, we recognized a provision for income tax on unrealized investments of $65.4 thousand and $35.8 thousand for the Taxable Subsidiaries, respectively. For the six months ended June 30, 2023 and 2022, we recognized a provision for income tax on unrealized investments of $144.1 thousand and $181.8 thousand for the Taxable Subsidiaries, respectively. As of June 30, 2023 and December 31, 2022, there was $140.7 thousand and $61.9 thousand of deferred tax liabilities on the Consolidated Statements of Assets and Liabilities, respectively.

Net Increase in Net Assets Resulting from Operations

For the three months ended June 30, 2023, net increase in net assets resulting from operations totaled $3.7 million, or $0.17 per common share (based on 21,231,979 weighted average shares outstanding for the three months ended June 30, 2023).

For the three months ended June 30, 2022, net increase in net assets resulting from operations totaled $1.3 million, or $0.07 per common share (based on 19,543,117 weighted average shares outstanding for the three months ended June 30, 2022).

For the six months ended June 30, 2023, net increase in net assets resulting from operations totaled $8.4 million, or $0.41 per common share (based on 20,509,995 weighted average shares outstanding for the six months ended June 30, 2023).

For the six months ended June 30, 2022, net increase in net assets resulting from operations totaled $6.6 million, or $0.34 per common share (based on 19,530,509 weighted average shares outstanding for the six months ended June 30, 2022).

The net increase in net assets between the respective periods was due to higher net investment income, offset by unrealized depreciation recognized in the current year.

Financial condition, liquidity and capital resources

Cash Flows from Operating and Financing Activities

Our operating activities used net cash of $32.0 million for the six months ended June 30, 2023, primarily in connection with the purchase of portfolio investments, offset by sales and repayments of portfolio investments. Our financing activities for the six months ended June 30, 2023 used cash of $1.2 million primarily from stockholder distributions and net paydowns on our Credit Facility, offset by proceeds from the issuance of common stock.

Our operating activities used net cash of $76.9 million for the six months ended June 30, 2022, primarily in connection with the purchase of portfolio investments, offset by sales and repayments of portfolio investments. Our financing activities for the six months ended June 30, 2022 provided cash of $59.2 million primarily from proceeds from SBA-guaranteed debentures and net borrowings on our Credit Facility.

Liquidity and Capital Resources

Our liquidity and capital resources are derived from the Credit Facility, 2026 Notes, SBA-guaranteed debentures and cash flows from operations, including investment sales and repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies and other operating expenses we incur, as well as the payment of dividends to the holders of our common stock. We used, and expect to continue to use, these capital resources as well as proceeds from turnover within our portfolio and from public and private offerings of securities to finance our investment activities.

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

68

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 2023 annual stockholders meeting, authorizes us to sell up to 25% of our outstanding common shares at a price equal to or below the then current net asset value per share in one or more offerings. This authorization will expire on the earlier of June 22, 2024, the one-year anniversary of our 2023 annual stockholders meeting or the date of our 2024 annual stockholder meeting. We would need similar future approval from our stockholders to issue shares below the then current net asset value per share any time after the expiration of the current approval. In addition, we intend to distribute between 90% and 100% of our taxable income to our stockholders in order to satisfy the requirements applicable to RICs under Subchapter M of the Code. Consequently, we may not have the funds or the ability to fund new investments, to make additional investments in our portfolio companies, to fund our unfunded commitments to portfolio companies or to repay borrowings. In addition, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.

Also, as a BDC, we generally are required to meet an asset coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, over the aggregate amount of the senior securities, which include all of our borrowings and any outstanding preferred stock, of at least 150% effective June 29, 2018 (at least 200% prior to June 29, 2018). This requirement limits the amount that we may borrow. We have received exemptive relief from the SEC to permit us to exclude the debt of the Stellus Capital SBIC, LP (the “SBIC subsidiary”) and Stellus Capital SBIC II, LP (the “SBIC II subsidiary”) (collectively, the “SBIC subsidiaries”) guaranteed by the U.S. Small Business Administration (“SBA”) from the definition of senior securities in the asset coverage test under the 1940 Act. We were in compliance with the asset coverage ratios at all times. As of June 30, 2023 and December 31, 2022, our asset coverage ratio was 214% and 192%, respectively. The amount of leverage that we employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing, such as the maturity, covenant package and rate structure of the proposed borrowings, our ability to raise funds through the issuance of shares of our common stock and the risks of such borrowings within the context of our investment outlook. Ultimately, we only intend to use leverage if the expected returns from borrowing to make investments will exceed the cost of such borrowing. As of June 30, 2023 and December 31, 2022, we had cash and cash equivalents of $14.9 million and $48.0 million, respectively.

Credit Facility

On October 11, 2017, the Company entered into a senior secured revolving credit agreement, as amended, dated as of October 10, 2017, that was amended and restated on December 21, 2021, February 28, 2022 and May 13, 2022, with Zions Bancorporation, N.A., dba Amegy Bank and various other lenders (the “Credit Facility”).

The Credit Facility, as amended and restated, provides for borrowings up to a maximum of $265.0 million on a committed basis with an accordion feature that allows us to increase the aggregate commitments up to $280.0 million, subject to new or existing lenders agreeing to participate in the increase and other customary conditions.

Pursuant to the Third Amendment and Commitment Increase to Amended and Restated Senior Secured Revolving Credit Agreement the Credit Facility will bear interest, subject to the Company’s election, on a per annum basis equal to (i) term SOFR plus 2.50% (or 2.75% during certain periods in which the Company’s asset coverage ratio is equal to or below 1.90 to 1.00) plus a SOFR credit spread adjustment (0.10% for one-month term SOFR and 0.15% for three-month term SOFR), with a 0.25% SOFR floor, or (ii) 1.50% (or 1.75% during certain periods in which the Company’s asset coverage ratio is equal to or below 1.90 to 1.00) plus an alternate base rate based on the highest of the prime rate (subject to a 3% floor), Federal Funds Rate plus 0.50% and one month term SOFR plus 1.00%. The Company pays unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility. Interest is payable monthly or quarterly in arrears. The commitment to fund the revolver expires on September 18, 2024, after which the Company may no longer borrow under the Credit Facility and must begin repaying principal equal to 1/12 of the aggregate amount outstanding under the Credit Facility each month. Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on September 18, 2025.

Our obligations to the lenders are secured by a first priority security interest in our portfolio of securities and cash not held at the SBIC subsidiaries, but excluding short term investments. The Credit Facility contains certain covenants, including but not limited to: (i) maintaining a minimum liquidity test of at least $10.0 million, including cash, liquid investments and undrawn availability, (ii) maintaining an asset coverage ratio of at least 1.67 to 1.0, and (iii) maintaining a minimum stockholder’s equity, and (iv) maintaining a minimum interest coverage ratio of at least 2.00 to 1.00. As of June 30, 2023, we were in compliance with these covenants.

69

As of June 30, 2023 and December 31, 2022, $171.5 million and $199.2 million, respectively, was outstanding under the Credit Facility. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value. The fair values of the Credit Facility is determined in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Credit Facility is estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. We incurred costs of $4.0 million in connection with the current Credit Facility, which are being amortized over the life of the facility. Additionally, $0.3 million of costs from a prior credit facility will continue to be amortized over the remaining life of the Credit Facility. As of June 30, 2023 and December 31, 2022, $1.2 million and $1.5 million of such prepaid loan structure fees and administration fees had yet to be amortized, respectively. These prepaid loan fees are presented on the Consolidated Statements of Assets and Liabilities as a deduction from the debt liability.

Interest is paid quarterly in arrears. The following table summarizes the interest expense and amortized loan fees on the Credit Facility for the three and six months ended June 30, 2023 and 2022 (dollars in millions):

For the three months ended

For the six months ended

June 30, 2023

 

June 30, 2022

June 30, 2023

June 30, 2022

Interest expense

$

3.9

$

1.8

$

7.6

$

3.2

Loan fee amortization

 

0.1

 

0.1

 

0.3

 

0.3

 

Total interest and financing expenses

$

4.0

$

1.9

$

7.9

$

3.5

Weighted average interest rate

 

7.8

%  

 

3.4

%  

 

7.6

%  

 

3.1

%  

Effective interest rate (including fee amortization)

 

8.1

%  

 

3.8

%  

 

7.9

%  

 

3.5

%  

Average debt outstanding

$

198.5

$

206.5

$

200.5

$

199.7

Cash paid for interest and unused fees

$

4.0

$

1.9

$

7.6

$

3.2

SBA-Guaranteed Debentures

Due to the SBIC subsidiaries’ status as Small Business Investment Companies (“SBICs”), we have, we have the ability to issue debentures guaranteed by the SBA at favorable interest rates (“SBA-guaranteed debentures”). Under the regulations applicable to SBIC funds, a single licensee can have outstanding SBA-guaranteed debentures, subject to a regulatory leverage limit, up to two times the amount of regulatory capital. As of both June 30, 2023 and December 31, 2022, 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 both June 30, 2023 and December 31, 2022, the SBIC II subsidiary had $87.5 million in regulatory capital and $163.6 million of SBA-guaranteed debentures outstanding.

On August 12, 2014, we obtained exemptive relief from the SEC to permit us to exclude the debt of the SBIC subsidiaries guaranteed by the SBA from our 150% asset coverage test under the 1940 Act. The exemptive relief provides us with increased flexibility under the 150% asset coverage test by permitting us to borrow up to $325.0 million more than we would otherwise be able to absent the receipt of this exemptive relief.

On a stand-alone basis, the SBIC subsidiaries held $482.5 million and $470.7 million in assets at June 30, 2023 and December 31, 2022, respectively, which accounted for approximately 53.5% and 52.4% of our total consolidated assets, respectively.

SBA-guaranteed debentures have fixed interest rates that equal prevailing 10-year U.S. Treasury Note rates plus a market spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the debentures is not required to be paid before maturity but may be pre-paid at any time with no prepayment penalty. SBA-guaranteed debentures drawn before October 1, 2019 incur upfront fees of 3.425%, which consists of a 1.00% commitment fee and a 2.425% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. SBA-guaranteed debentures drawn after October 1, 2019 incur upfront fees of 3.435%, which consists of a 1.00% commitment fee and a 2.435% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. Once pooled, which occurs in March and September of each applicable year, the SBA-guaranteed debentures bear interest at a fixed rate that is set to the current 10-year treasury rate plus a spread at each pooling date.

The fair values of the SBA-guaranteed debentures are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the SBA-guaranteed debentures is estimated based upon market interest rates for our own

70

borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. At June 30, 2023 and December 31, 2022, the SBA-guaranteed debentures would be deemed to be Level 3, as defined in Note 6.

As of June 30, 2023, we have incurred $10.9 million in financing costs related to the SBA-guaranteed debentures since the SBIC subsidiaries received their licenses, which were recorded as prepaid loan fees. As of June 30, 2023 and December 31, 2022, $5.1 and $5.7 million of prepaid financing costs had yet to be amortized, respectively. These prepaid loan fees are presented on the Consolidated Statements of Assets and Liabilities as a deduction from the debt liability.

The following table summarizes the interest expense and amortized fees on the SBA-guaranteed debentures for the three and six months ended June 30, 2023 and 2022 (dollars in millions):

For the three months ended

For the six months ended

June 30, 2023

 

June 30, 2022

June 30, 2023

June 30, 2022

Interest expense

$

2.4

$

1.9

$

4.8

$

3.7

Debenture fee amortization

 

0.3

 

0.3

 

0.7

 

0.6

 

Total interest and financing expenses

$

2.7

$

2.2

$

5.5

$

4.3

Weighted average interest rate

 

3.1

%  

 

2.7

%  

 

3.1

%  

 

2.7

%  

Effective interest rate (including fee amortization)

 

3.5

%  

 

3.1

%  

 

3.5

%  

 

3.2

%  

Average debt outstanding

$

313.6

$

287.8

$

313.6

$

271.1

Cash paid for interest

$

$

$

4.7

$

3.4

Notes Offering

On January 14, 2021, we issued $100.0 million in aggregate principal amount of 4.875% fixed-rate notes due 2026 (the “2026 Notes”). The 2026 Notes will mature on March 30, 2026 and may be redeemed in whole or in part at any time or from time to time at our option on or after December 31, 2025 at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest is payable semi-annually beginning June 30, 2022.

As of both June 30, 2023 and December 31, 2022, the aggregate carrying amount of the 2026 Notes were approximately $100.0 million. The 2026 Notes are institutional, non-traded notes.

In connection with the issuance of the 2026 Notes, we have incurred $2.3 million of fees which are being amortized over the term of the 2026 Notes, of which $1.2 million and $1.5 million remains to be amortized as of June 30, 2023 and December 31, 2022, respectively. These financing costs are presented on the Consolidated Statements of Assets and Liabilities as a deduction from the debt liability.

The following table summarizes the interest expense and deferred financing costs on the 2026 Notes for the three and six months ended June 30, 2023 and 2022 (dollars in millions):

    

For the three months ended

    

For the six months ended

    

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

Interest expense

$

1.2

$

1.2

$

2.5

$

2.5

Deferred financing costs

 

0.1

 

0.1

 

0.2

 

0.2

 

Total interest and financing expenses

$

1.3

$

1.3

$

2.7

$

2.7

Weighted average interest rate

 

4.9

%  

 

4.9

%  

 

4.9

%  

 

4.9

%  

Effective interest rate (including fee amortization)

 

5.4

%  

 

5.3

%  

 

5.4

%  

 

5.4

%  

Average debt outstanding

$

100.0

$

100.0

$

100.0

$

100.0

Cash paid for interest

$

$

$

2.4

$

2.4

Off-Balance Sheet Arrangements

We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of June 30, 2023, our only off-balance sheet arrangements consisted of $20.5 million of unfunded commitments to provide debt financing and $0.7 million in unfunded equity commitments to 55 existing portfolio companies. As of December 31, 2022, our only off-balance sheet arrangements consisted of $27.5 million of unfunded commitments to provide debt financing to 52 existing portfolio companies and $0.3 million in unfunded equity commitments to one existing portfolio company. As of

71

June 30, 2023, we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded commitments should the need arise.

Regulated Investment Company Status and Dividends

We have elected, have qualified, and intend to qualify annually to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code. So long as we maintain our qualification as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders as dividends on a timely basis.

Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Distributions declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.

To qualify for RIC tax treatment, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). If we maintain our qualification as a RIC, we must also satisfy certain distribution requirements each calendar year in order to avoid a federal excise tax on our undistributed earnings of a RIC. As of December 31, 2022, we had $28.6 million of undistributed taxable income that will be carried forward toward distributions paid during the year ending December 31, 2023.

We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, the covenants contained in the Credit Facility may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement. In addition, we may retain for investment some or all of our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividends for that fiscal year, a portion of those dividend distributions may be deemed a return of capital to our stockholders.

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a business development company under the 1940 Act and due to provisions in Credit Facility. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.

In accordance with certain applicable U.S. Treasury regulations and private letter rulings issued by the Internal Revenue Service (the “IRS”), a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash.

If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our stock in accordance with these U.S. Treasury regulations or private letter rulings. However, we continue to monitor the Company’s liquidity position and the overall economy and will continue to assess whether it would be in our and our shareholders best interest to take advantage of the IRS rulings.

Recent Accounting Pronouncements

See Note 1 to the consolidated financial statements contained herein for a description of recent accounting pronouncements, if any, including the expected dates of adoption and the anticipated impact on the financial statements.

72

Critical Accounting Policies

See Note 1 to the consolidated financial statements contained herein for a description of critical accounting policies.

Subsequent Events

The Company’s management has evaluated subsequent events through the date of issuance of the financial statements included herein. There have been no subsequent events that require recognition or disclosure in these financial statements except for the following described below.

Investment Portfolio

The Company invested in the following portfolio companies subsequent to June 30, 2023:

Activity Type

  

Date

  

Company Name

  

Company Description

  

Investment Amount

  

Instrument Type

New Investment

July 7, 2023

Madison Logic, Inc.*

Provider of B2B account based marketing services

$

394,767

Equity

Add-On Investment

July 12, 2023

EH Real Estate Services, LLC*

Offers residential property brokerage, title & settlement, and property and casualty insurance brokerage services to home buyers and sellers

$

501,846

Senior Secured – First Lien

New Investment

July 31, 2023

EHI Buyer, Inc.

Provider of design, engineering, installation, and maintenance services for building management systems

$

6,111,343

Senior Secured – First Lien

$

3,055,671

Delayed Draw Term Loan Commitment

$

100,000

Revolver Commitment

$

617,801

Equity

New Investment

August 2, 2023

Compost 360 Acquisition, LLC

Organic waste recycler and producer of compost, mulch, and engineered soils

$

9,595,100

Senior Secured – First Lien

$

4,096,741

Delayed Draw Term Loan Commitment

$

100,000

Revolver Commitment

$

250,761

Equity

New Investment

August 3, 2023

Morgan Electrical Group Intermediate Holdings, Inc.

Provider of commercial electrical services

$

4,439,439

Senior Secured – First Lien

$

2,864,154

Delayed Draw Term Loan Commitment

$

100,000

Revolver Commitment

$

356,800

Equity

Add-On Investment

August 4, 2023

TradePending OpCo Aggregator, LLC*

Provider of vehicle trade-in and merchandising intelligence solutions for auto dealerships

$

2,473,227

Senior Secured – First Lien

$

687,007

Delayed Draw Term Loan Commitment

$

325,379

Equity

New Investment

August 7, 2023

The Hardenbergh Group, Inc.

Provider of temporary professional staffing of Medical Services Professionals, external peer review, consulting and physician leadership solutions

$

10,501,898

Senior Secured – First Lien

$

100,000

Revolver Commitment

$

434,504

Equity

New Investment

August 8, 2023

Green Intermediateco II, Inc.

Cyber-security focused value-added reseller and associated service provider

$

11,170,252

Senior Secured – First Lien

$

500,000

Delayed Draw Term Loan Commitment

$

271,401

Equity

* Existing portfolio company

The Company realized the following portfolio company subsequent to June 30, 2023:

Activity Type

  

Date

  

Company Name

  

Company Description

  

Proceeds Received

  

Instrument Type

Full Repayment

July 31, 2023

NuSource Financial, LLC*

Provider of technology integration and installation of Automated Teller Machines/Integrated Teller Machines, maintenance services, and security solutions

$10,984,910

Senior Secured – First Lien

* Existing portfolio company

Effective July 1, 2023, the ArborWorks Acquisition, LLC term loan and revolver were placed on non-accrual status.

Credit Facility

The outstanding balance under the Credit Facility as of August 9, 2023 was $187.2 million.

73

SBA-guaranteed Debentures

The total balance of SBA-guaranteed debentures outstanding as of August 9, 2023 was $322.7 million.

Dividend Declared

On July 14, 2023, the Board declared a regular monthly dividend for each of July 2023, August 2023, and September 2023 as follows:

Ex-Dividend

Record

Payment

Amount per

Declared

    

Date

    

Date

    

Date

    

Share

7/14/2023

7/28/2023

7/31/2023

8/15/2023

$

0.1333

7/14/2023

 

8/30/2023

8/31/2023

9/15/2023

$

0.1333

7/14/2023

 

9/28/2023

9/29/2023

10/13/2023

$

0.1333

Item 3.Quantitative and Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. In connection with the COVID-19 pandemic, the U.S. Federal Reserve (the "Federal Reserve") and other central banks had reduced certain interest rates. However, in March 2022, the Federal Reserve raised interest rates for the first time since December 2018, and subsequently raised interest rates several times, most recently in July 2023, bringing the target for the federal funds rate to 5.25% - 5.50%, the highest since January 2001. As of both June 30, 2023 and December 31, 2022, 97% of the loans in our portfolio bore interest at floating rates. These floating rate loans typically bear interest in reference to LIBOR and SOFR, which are indexed to 30-day or 90-day LIBOR and SOFR rates, subject to an interest rate floor. As of June 30, 2023 and December 31, 2022, the weighted average interest rate floor on our floating rate loans was 1.16% and 1.07%, respectively.

On July 1, 2023, the publication of all LIBOR settings as representative rates has ceased. As of June 30, 2023, we have facilitated an orderly transition of our investments to SOFR. Any remaining USD LIBOR-based investments will transition subsequent to June 30, 2023 or the next contract reset date.

Assuming that the Consolidated Statements of Assets and Liabilities as of June 30, 2023 were to remain constant and no actions were taken to alter the existing interest rate sensitivity, the following table shows the annual impact on net income of changes in interest rates:

($ in millions)

    

Interest

    

Interest

    

Net Interest

Change in Basis Points(2)

Income

Expense(3)

Income(1)

Up 200 basis points

$

16.1

$

(3.4)

$

12.7

Up 150 basis points

 

12.1

(2.6)

 

9.5

Up 100 basis points

 

8.1

(1.7)

 

6.4

Up 50 basis points

4.0

(0.9)

 

3.1

Down 50 basis points

(4.0)

0.9

(3.1)

Down 100 basis points

(8.1)

1.7

(6.4)

Down 150 basis points

(12.1)

2.6

(9.5)

Down 200 basis points

(16.1)

3.4

(12.7)

(1)Excludes the impact of incentive fees based on pre-incentive fee net investment income. See Note 2 for more information on the incentive fee.
(2)At June 30, 2023, the three month LIBOR rate was 555 basis points and the three month SOFR rate was 527 basis points. This table assumes floating rates would not fall below zero.
(3)Includes the impact of the 25 bps LIBOR floor in place on the Credit Facility.

Although we believe that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet and other business developments that could affect net increase in net assets resulting from operations. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate. We may hedge against interest rate fluctuations by using standard hedging instruments such as

74

futures, options and forward contacts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. For the three and six months ended June 30, 2023 and 2022, we did not engage in hedging activities.

Item 4.Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures

The Company’s management, under the supervision and with the participation of various members of management, including its Chief Executive Officer and its Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report.

(b)

Changes in Internal Control Over Financial Reporting

The Company’s management did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2023 that has materially affected, or is reasonable likely to materially affect, the Company’s internal control over financial reporting.

75

PART II — OTHER INFORMATION

Item 1.Legal Proceedings

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us or our subsidiaries. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

Item 1A.Risk Factors

Investing in our securities involves a number of significant risks. In addition to the other information set forth in this quarterly report on Form 10-Q, including the risk factors set forth below, you should carefully consider the risk factors discussed in “Item 1A. Risk Factors” of Annual Report on Form 10-K filed with the SEC on February 28, 2023, all of which could materially affect our business, financial condition and/or results of operations. Although the risks described below and in our other SEC filings referenced above represent the principal risks associated with an investment in us, they are not the only risks we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, might materially and adversely affect our business, financial condition and/or results of operations.

Other than as described below, during the six months ended June 30, 2023, there have been no material changes to the risk factors discussed in our SEC filings referenced above.

We may be subject to risk related to bank impairments or failure either directly or through our portfolio companies, which, in turn, could indirectly impact our performance and results of operations.

In March 2023, the U.S. Federal Deposit Insurance Corporation (“FDIC”) took control of Silicon Valley Bank and Signature Bank, and in May 2023, the FDIC took control of First Republic Bank due to liquidity concerns. The impairment or failure of one or more banks with whom any of our portfolio companies transact may inhibit the ability of our portfolio companies to access depository accounts, including cash and cash equivalents, as well as investment accounts, which, in turn, may indirectly impact our performance and results of operations. In the event of a bank impairment or failure, affected portfolio companies may default on their debt obligations to us, resulting in impacts to our performance. In the event of such a failure of a banking institution where one or more of our portfolio companies holds depository accounts, access to such accounts could be restricted and FDIC protection may not be available for balances in excess of amounts insured by the FDIC. In such instances, our affected portfolio companies would not recover such excess, uninsured amounts, and they may not be able to cure any defaults. Additionally, unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing our investments and harm business, financial condition, operating results and prospects. We closely monitor activity in the banking sector as it relates to any of our borrowers and continually assess any potential indirect impact to us as a result of the same.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

No shares were issued under the distribution reinvestment program during either of the six months ended June 30, 2023 and 2022.

Item 3.Defaults Upon Senior Securities

Not applicable.

Item 4.Mine Safety Disclosures

Not applicable.

76

Item 5.Other Information

Rule 10b5-1 Trading Plans

During the fiscal quarter ended June 30, 2023, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”

Item 6.Exhibits.

The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits filed with the SEC:

Exhibit
Number

    

Description

 3.1

Articles of Amendment and Restatement (Incorporated by reference to Exhibit (a)(1) to the Registrant’s Registration Statement on Form N-2 (File No. 333-184195), filed on October 23, 2012).

 3.2

Bylaws (Incorporated by reference to Exhibit (b)(1) to the Registrant’s Registration Statement on Form N-2 (File No. 333-184195), filed on October 23, 2012).

 4.1

Form of Stock Certificate (Incorporated by reference to Exhibit (d) to the Registrant’s Registration Statement on Form N-2 (File No. 333-184195), filed on October 23, 2012).

31.1

Chief Executive Officer Certification pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2

Chief Financial Officer Certification pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1

Chief Executive Officer Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2

Chief Financial Officer Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

101.INS*

XBRL Instance Document — the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH*

Inline XBRL Taxonomy Extension Schema Document

101.CAL*

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File — The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

*

Filed herewith

77

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: August 9, 2023

STELLUS CAPITAL INVESTMENT CORPORATION

By:

/s/ Robert T. Ladd

Name:

Robert T. Ladd

Title:

Chief Executive Officer and President

By:

/s/ W. Todd Huskinson

Name:

W. Todd Huskinson

Title:

Chief Financial Officer

78