Stellus Capital Investment Corporation Reports Results for its second fiscal quarter ended June 30, 2018

PR Newswire

HOUSTON, Aug. 8, 2018

HOUSTON, Aug. 8, 2018 /PRNewswire/ -- Stellus Capital Investment Corporation SCM ("Stellus" or "the Company") today announced financial results for its second fiscal quarter ended June 30, 2018.

HIGHLIGHTS
($ in millions, except data relating to per share amounts and number of portfolio companies)

	As of
Portfolio results	June 30, 2018
Total assets	$524.8
Investment portfolio, at fair value	$499.7
Net assets	$224.4
Weighted average yield on debt investments	11.2%
Net asset value per share	$14.07

	Quarter	Quarter
	ended	ended
	June 30, 2018	June 30, 2017
Portfolio activity

Total investments made, at par	$97.0	$25.2
Number of new investments	5	3
Repayments and sale of investments, including amortization	$30.2	$40.7
Number of portfolio companies at
end of period	52	46

Operating results

Total investment income	$12.6	$10.4
Net investment income	$4.7	$4.9
Net investment income per share	$0.30	$0.32

Core net investment income⁽¹⁾	$5.2	$4.9
Core investment income per share⁽¹⁾	$0.33	$0.32

Realized Gains per share	$0.07	$-
Distributions per share	$0.34	$0.34
Net increase in net assets from operations	$7.6	$6.0
Net increase in net assets from operations per share	$0.48	$0.39
Weighted average shares outstanding during the period	15,953,810	15,347,814

(1)

Core net investment income, as presented, excludes the impact of capital gains incentive fees. The company believes presenting core net investment income and the related per share amount is a useful supplemental disclosure for analyzing its financial performance. However, core net investment income is a non-U.S. GAAP measure and should not be considered as a replacement for net investment income and other earnings measures presented in accordance with U.S. GAAP. A reconciliation of net investment income in accordance with U.S. GAAP to core net investment income is presented in the table below the financial statements.

"Continued portfolio growth brings our investment portfolio to approximately $500 million. Our shareholders have approved the regulatory leverage increase which allows 2:1 leverage. Our bank credit facility has been increased from $140 million to $180 million and has been amended to allow for leverage to grow the investment portfolio to approximately $600 million. Core EPS was $0.33 per share for Q2 and realized earnings (including gains) for the quarter were $0.36 per share," said Robert T. Ladd, Chief Executive Officer of Stellus Capital.

Portfolio and Investment Activity

We completed the second quarter of 2018 with a portfolio of $499.7 million (at fair value) invested in 52 companies. As of June 30, 2018, our portfolio included approximately 50% of first lien debt, 39% of second lien debt, 5% of unsecured debt and 6% of equity investments at fair value. Our debt portfolio consisted of 91% floating rate investments (subject to interest rate floors) and 9% fixed rate investments. The average size of our portfolio company investments was $9.6 million and our largest portfolio company investment was approximately $28.9 million, both at fair value. The weighted average yield on all of our debt investments as of June 30, 2018 was approximately 11.2%.

During the three months ended June 30, 2018, we made $97.0 million of investments in five new and four existing portfolio companies at par and received $30.2 million from amortization and repayments of certain other investments.

This compares to the portfolio as of June 30, 2017, which had a fair value of $337.4 million invested in 46 companies, comprised of 24% of first lien debt, 46% of second lien debt, 23% of unsecured debt and 7% of equity investments at fair value. The weighted average yield on all of our debt investments as of June 30, 2017 was approximately 11.3%. The debt portfolio consisted of 69% floating rate investments (subject to interest rate floors) and 31% fixed rate investments.

Results of Operations

Investment income for the three months ended June 30, 2018 and 2017 totaled $12.6 million and $10.4 million, respectively, most of which was interest income from portfolio investments.

Operating expenses for the three months ended June 30, 2018 and 2017, totaled $7.9 million and $5.5 million, respectively. For the same respective periods, base management fees totaled $2.0 million and $1.5 million, income incentive fees totaled $1.3 million and $1.2 million, capital gains incentive fees totaled $0.5 million and $0, fees and expenses related to our borrowings totaled $3.0 million and $1.8 million (including interest and amortization of deferred financing costs), administrative expenses totaled $0.3 million for both periods, and other expenses totaled $0.8 million and $0.7 million, respectively.

Net investment income was $4.7 million and $4.9 million, or $0.30 and $0.32 per common share based on weighted average common shares outstanding for the three months ended June 30, 2018 and 2017 of 15,953,810 and 15,347,814, respectively.

The capital gains incentive fee of $0.5 million for the three months ended June 30, 2018 was accrued for U.S. GAAP purposes due to the increase in realized and unrealized gains over the quarter. There can be no assurance that unrealized appreciation or depreciation will be realized in the future. Accordingly, such fees, as calculated and accrued, would not necessarily be payable under the investment advisory agreement. Excluding this accrual, core net investment income for the three months ended June 30, 2018 would be $5.2 million, or $0.33 per share. There was no such capital gains incentive fee accrued for the three months ended June 30, 2017.

The Company's investment portfolio had a net change in unrealized appreciation for the three months ended June 30, 2018 and 2017, of $1.8 million and $1.1 million, respectively. For the three months ended June 30, 2018, the Company had realized gains of $1.1 million. There were no realized losses and a de minimis amount of realized gain for the three months ended June 30, 2017.

Net increase in net assets resulting from operations totaled $7.6 million and $6.0 million, or $0.48 and $0.39 per common share based on weighted average common shares outstanding for the three months ended June 30, 2018 and 2017 of 15,953,810 and 15,347,814, respectively.

Liquidity and Capital Resources

As of both June 30, 2018 and December 31, 2017, our credit facilities provided for borrowings in an aggregate amount up to $140.0 million, on a committed basis. As of June 30, 2018, our credit facility had an accordion feature which allowed for potential future expansion of the facility size to $195.0 million. As of June 30, 2018 and December 31, 2017, we had $119.3 million and $40.8 million in outstanding borrowings under the credit facility, respectively.

For the six months ended June 30, 2018, our operating activities used cash of $110.4 million primarily in connection with purchases and origination of portfolio investments, which was slightly offset by repayments of our portfolio investments. For the same period, our financing activities provided cash of $106.2 million, due to borrowings under our credit facility, as well as SBA-guaranteed debentures drawn during the period.

For the six months ended June 30, 2017, our operating activities provided cash of $40.9 million, primarily in connection with cash interest received and repayments of our investments, and our financing activities used cash of $43.1 million, primarily related to the repayments under our credit facility and distributions to stockholders, offset by an issuance of common stock.

Distributions

During the three months ended June 30, 2018 and 2017, we declared aggregate distributions of $0.34 per share ($5.4 million and $5.3 million, respectively) for each quarter. Tax characteristics of all distributions will be reported to stockholders on Form 1099-DIV after the end of the calendar year. None of these dividends are expected to include a return of capital.

Recent Portfolio Activity

New investment transactions and repayments that occurred during the three months ended June 30, 2018 are summarized as follows:

On April 2, 2018, the Company invested $7.9 million in the first lien term loan and $0.9 million in the unfunded revolver of BFC Solmetex LLC, a leading provider of filtration products in the U.S. and Canada. The Company also invested $1.2 million in a first lien term loan of Bonded Filter Co. LLC, a subsidiary of BFC Solmetex LLC.

On April 13, 2018, the Company invested $16.4 million in the first lien term loan and a $0.75 million in the unfunded revolver of DTE Enterprises, Inc., a provider of industrial powertrain repair and maintenance services for the oil & gas and mining sectors. We also invested $1.5 million in the equity of the company.

On April 13, 2018, the Company made an additional investment of $12.5 million in the second lien term loan of Mobileum, Inc., an existing portfolio company.

On April 24, 2018, the Company received a payoff of its $12.2 million term loan to Catapult Learning, LLC.

On April 30, 2018, the Company received a payoff of its $0.1 million term loan to Binder & Binder National Social Security Disability Advocates, LLC.

On May 1, 2018, the Company invested $4.5 million in the second lien term loan of General LED OPCO, LLC, a provider of LED lighting systems and modules.

On June 1, 2018, the Company made an additional investment of $0.3 million in the unsecured term loan of BW DME Holdings, LLC, an existing portfolio company.

On June 22, 2018, the Company made an additional investment of $2.3 million in the second lien term loan of Magdata Intermediate Holdings, LLC, an existing portfolio company.

On June 25, 2018, the Company received a payoff of its $1.9 million term loan to Zemax, LLC and $1.3 million in full realization of its equity in Zemax Software Holdings, LLC., resulting in a realized gain of $1.0 million.

On June 27, 2018, the Company invested $20.9 million in the first lien term loan of Catapult Learning, Inc., a provider of K-12 outsourced educational services. We also committed to fund a $1.1 million delayed draw term loan.

On June 29, 2018, the Company invested $28.5 million in the first lien term loan of Good Source Solutions, Inc., a specialty food solutions provider to the corrections, education and other institutional foodservice markets.

On June 29, 2018, the Company received a payoff of its $1.9 million term loan to Good Source Solutions, Inc. and $0.2 million in full realization of its equity of Good Source Holdings, LLC.

On June 29, 2018, the Company received a payoff of its $5.1 million term loan to SPM Capital LLC.

Events Subsequent to June 30, 2018

On July 5, 2018 the Company received $4.0 million in full realization on the equity of MBS Holdings, Inc., resulting in a realized gain of $2.8 million.

On July 31, 2018, the Company received full repayment on the second lien term loan of Sitel Worldwide Corporation for total proceeds of $10.1 million, including a $0.1million prepayment fee.

On August 3, 2018, the Company invested $7.5 million in the first lien term loan and $0.9 million in the unfunded delayed draw term loan of Adams Publishing Group, LLC, a platform of multiple newspaper and publishing businesses across the United States.

Credit Facility

The outstanding balance under the credit facility as of August 6, 2018 was $91.3 million.

On August 2, 2018, the credit facility was amended to (1) increase the committed amount of the credit facility from $140.0 million to $180.0 million and (2) reduce the minimum asset coverage ratio from 200% to 175%. The amendment also provides for the credit facility to be priced at LIBOR plus 2.75% to the extent that asset coverage is below 190% at the end of any calendar quarter.

SBA-guaranteed Debentures

The total balance of SBA-guaranteed Debentures outstanding as of August 6, 2018 was $147.5 million.

Conference Call Information

Stellus Capital Investment Corporation will host a conference call to discuss these results on Wednesday, August 8, 2018 at 10:00 AM, Central Daylight Time. The conference call will be led by Robert T. Ladd, chief executive officer, and W. Todd Huskinson, chief financial officer, chief compliance officer, treasurer, and secretary.

For those wishing to participate by telephone, please dial 877-260-1479 (domestic). Use passcode 1065311. Starting approximately twenty-four hours after the conclusion of the call, a replay will be available through Thursday, August 16, 2018 by dialing (888) 203-1112 and entering passcode 1065311. The replay will also be available on the company's website.

PART I — FINANCIAL INFORMATION

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

			June 30,
			2018		December 31,
			(Unaudited)		2017
ASSETS
	Non-controlled, affiliated investments, at fair value
		(amortized cost of $135,518 and $1,052,185, respectively)	$	140,000	$	990,000
	Non-controlled, non-affiliated investments, at fair value
		(amortized cost of $492,872,019 and $367,401,021,
		respectively)		499,596,626		370,849,772
	Cash and cash equivalents			20,940,365		25,110,718
	Receivable for sales and repayments of investments			27,400		26,891
	Interest receivable			3,802,649		2,922,204
	Other receivables			37,647		—
	Prepaid expenses			215,752		361,270
		Total Assets	$	524,760,439	$	400,260,855
LIABILITIES
	Notes payable		$	47,473,804	$	47,306,488
	Credit facility payable			118,052,814		39,332,479
	SBA-guaranteed debentures			126,529,418		87,818,813
	Dividends payable			1,807,570		1,806,671
	Management fees payable			1,549,023		1,621,592
	Income incentive fees payable			1,525,320		371,647
	Capital gains incentive fees payable			522,019		—
	Interest payable			1,542,832		1,021,173
	Unearned revenue			212,110		139,304
	Administrative services payable			327,575		327,033
	Deferred tax liability			9,194		—
	Other accrued expenses and liabilities			765,305		268,413
		Total Liabilities	$	300,316,984	$	180,013,613
Commitments and contingencies (Note 7)
		Net Assets	$	224,443,455	$	220,247,242
NET ASSETS
	Common Stock, par value $0.001 per share (200,000,000 shares
		and 100,000,000 shares authorized; 15,953,810 and 15,945,879
		issued and outstanding, respectively)	$	15,954	$	15,946
	Paid-in capital			228,160,974		228,066,762
	Accumulated net realized loss from investments, net of
		cumulative dividends of $4,246,819 for both periods		(8,375,007)		(10,786,240)
	Distributions in excess of net investment income			(2,078,361)		(435,794)
	Net Unrealized appreciation on non-controlled, non-affiliated
		investments and cash equivalents, net of provision for
		taxes of $9,194 and $0, respectively		6,715,413		3,448,753
	Net Unrealized appreciation (depreciation) on non-controlled,
		affiliated investments		4,482		(62,185)
		Net Assets	$	224,443,455	$	220,247,242
		Total Liabilities and Net Assets	$	524,760,439	$	400,260,855
		Net Asset Value Per Share	$	14.07	$	13.81

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

				For the		For the		For the		For the
				three		three		six		six
				months ended		months ended		months ended		months ended
				June 30,		June 30,		June 30,		June 30,
				2018		2017		2018		2017
INVESTMENT INCOME
	Interest income			$	12,214,766	$	9,642,531	$	22,945,514	$	19,118,783
	Other income				404,891		751,834		585,924		1,139,562
		Total Investment Income		$	12,619,657	$	10,394,365	$	23,531,438	$	20,258,345
OPERATING EXPENSES
	Management fees			$	2,049,023	$	1,523,010	$	3,797,919	$	3,087,538
	Valuation fees				20,307		23,305		154,717		189,394
	Administrative services expenses				308,163		310,860		659,392		619,958
	Income incentive fees				1,312,314		1,234,616		2,281,140		2,255,843
	Capital gains incentive fees				522,019		—		522,019		—
	Professional fees				224,121		219,487		693,259		447,164
	Directors' fees				79,000		79,000		171,000		171,000
	Insurance expense				86,649		110,466		172,346		219,718
	Interest expense and other fees				3,012,644		1,780,809		5,477,624		3,849,439
	Other general and administrative expenses				278,181		174,353		399,407		336,205
		Total Operating Expenses		$	7,892,421	$	5,455,906	$	14,328,823	$	11,176,259
		Net Investment Income		$	4,727,236	$	4,938,459	$	9,202,615	$	9,082,086
		Net Realized Gain (Loss) on Non-Controlled, Non-Affiliated
			Investments and Cash Equivalents	$	1,075,964	$	54	$	2,411,233	$	(711,997)
		Net Change in Unrealized Appreciation on Non-Controlled, Non-
			Affiliated Investments and Cash Equivalents	$	1,809,240	$	1,039,586	$	3,414,706	$	3,763,021
		Net Change in Unrealized Appreciation on Non-Controlled,
			Affiliated Investments and Cash Equivalents		-		66,667		(72,185)		(72,185)
		Benefit (provision) for taxes on unrealized gain on investments		$	(9,194)	$	-	$	(9,194)	$	8,593
		Net Increase in Net Assets Resulting from Operations		$	7,603,246	$	6,044,766	$	14,947,175	$	12,069,518
		Net Investment Income Per Share		$	0.30	$	0.32	$	0.58	$	0.65
		Net Increase in Net Assets from Operations Per Share		$	0.48	$	0.39	$	0.94	$	0.87
		Weighted Average Shares of Common Stock Outstanding			15,953,810		15,347,814		15,953,328		13,921,808
		Distributions Per Share		$	0.34	$	0.34	$	0.68	$	0.68

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (unaudited)

			For the		For the
			six		six
			months ended		months ended
			June 30,		June 30,
			2018		2017
Increase in Net Assets Resulting from Operations
	Net investment income		$	9,202,615	$	9,082,086
	Net realized gain/(loss) on investments and cash equivalents			2,411,233		(711,997)
	Net change in unrealized appreciation on investments and
		cash equivalents		3,342,521		3,690,836
	Benefit (provision) for taxes on unrealized appreciation on investments			(9,194)		8,593
Net Increase in Net Assets Resulting from Operations			$	14,947,175	$	12,069,518
Stockholder distributions
	Net investment income			(10,845,182)		(9,558,748)
Total Distributions			$	(10,845,182)	$	(9,558,748)
Capital share transactions
	Issuance of common stock		$	94,788	$	44,591,250
	Sales load			—		(1,296,625)
	Offering costs			—		(234,007)
	Partial Share Redemption			(568)		—
Net increase in net assets resulting from capital share transactions			$	94,220	$	43,060,618
Total increase in net assets			$	4,196,213	$	45,571,388
Net assets at beginning of period			$	220,247,242	$	170,881,785
Net assets at end of period (includes $2,078,361 and $912,456 of
	distributions in excess of net investment income, respectively)		$	224,443,455	$	216,453,173

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

		For the		For the
		six		six
		months ended		months ended
		June 30,		June 30,
		2018		2017
		(Unaudited)		(Unaudited)
Cash flows from operating activities
Net Increase in net assets resulting from operations		$	14,947,175		12,069,518
	Adjustments to reconcile net increase in net assets resulting from
	operations to net cash provided by (used in) operating activities:
	Purchases of investments		(166,916,853)		(47,994,614)
	Proceeds from sales and repayments of investments		45,807,477		79,950,227
	Net change in unrealized appreciation on investments		(3,342,521)		(3,690,836)
	Increase in investments due to PIK		(297,965)		(145,445)
	Amortization of premium and accretion of discount, net		(736,268)		(575,750)
	Deferred tax provision (benefit)		9,194		(8,593)
	Amortization of loan structure fees		170,335		247,181
	Amortization of deferred financing costs		167,316		88,856
	Amortization of loan fees on SBA-guaranteed debentures		280,605		161,313
	Net realized loss (gain) on investments		(2,411,233)		711,997
	Changes in other assets and liabilities
	Decrease (increase) in interest receivable		(880,444)		593,912
	Increase in other receivable		(37,647)		(7,595)
	Decrease in prepaid expenses		145,518		153,503
	Decrease in management fees payable		(72,569)		(585,284)
	Increase in incentive fees payable		1,153,673		70,343
	Increase in capital gains incentive fees payable		522,019		—
	Increase in administrative services payable		541		43,682
	Increase (decrease) in interest payable		521,659		(85,667)
	Increase in unearned revenue		72,806		2,333
	Increase (decrease) in other accrued expenses and liabilities		496,892		(100,088)
	Net cash provided by (used in) operating activities	$	(110,400,290)	$	40,898,993
Cash flows from financing activities
	Proceeds from the issuance of common stock	$	—	$	44,591,250
	Sales load for common stock issued		—		(1,296,625)
	Offering costs paid for common stock issued		—		(234,007)
	Stockholder distributions paid		(10,749,495)		(9,200,437)
	Proceeds from SBA Debentures		40,000,000		—
	Financing costs paid on SBA Debentures		(1,570,000)		—
	Borrowings under credit facility		175,300,000		18,000,000
	Repayments of credit facility		(96,750,000)		(95,000,000)
	Partial Share Redemption		(568)		—
	Net cash provided by (used in) financing activities	$	106,229,937	$	(43,139,819)
	Net decrease in cash and cash equivalents	$	(4,170,353)	$	(2,240,826)
	Cash and cash equivalents balance at beginning of period		25,110,718		9,194,129
	Cash and cash equivalents balance at end of period	$	20,940,365	$	6,953,303
Supplemental and non-cash financing activities
	Interest expense paid	$	4,297,709	$	3,432,756
	Excise tax paid		27,717		37,648
	Shares issued pursuant to Dividend Reinvestment Plan		94,788		—
	Conversion from debt to equity		—		864,101
	Increase in Distribution Payable		899		358,311

Reconciliation of Core Net Investment Income
(Unaudited)

		Quarter	Quarter
		ended	ended
		June 30, 2018	June 30, 2017
Net investment income		$4,727,236	$4,938,459
	Capital gains incentive fee	$522,019	$-
Core net investment income⁽¹⁾		$5,249,255	$4,938,459

Per share amounts:
Net investment income per share		$0.30	$0.32
Core net investment income per share⁽¹⁾		$0.33	$0.32

(1)

Contacts

Stellus Capital Investment Corporation

W. Todd Huskinson, (713) 292-5414

Chief Financial Officer

thuskinson@stelluscapital.com

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SOURCE Stellus Capital Investment Corporation

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Stellus Capital Investment Corporation Reports Results for its second fiscal quarter ended June 30, 2018

Stellus Capital Investment Corporation Reports Results for its second fiscal quarter ended June 30, 2018

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