Stellus Capital Investment Corporation Reports Results for its first fiscal quarter ended March 31, 2018

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Stellus Capital Investment Corporation

May 08, 2018, 07:00 ET

HOUSTON, May 8, 2018 /PRNewswire/ -- Stellus Capital Investment Corporation (NYSE:SCM) ("Stellus" or "the Company") today announced financial results for its first fiscal quarter ended March 31, 2018.

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

	As of
Portfolio results	March 31, 2018
Total assets	$480.9
Investment portfolio, at fair value	$431.3
Net assets	$222.3
Weighted average yield on debt investments	11.1%
Net asset value per share	$13.93

	Quarter		Quarter
	ended		ended
	March 31, 2018		March 31, 2017
Portfolio activity

Total investments made, at par	$73.2		$23.2
Number of new investments	4		3
Repayments and sale of investments, including amortization	$15.6		$39.3
Number of portfolio companies at
end of period	52		46
Operating results

Total investment income	$10.9	$9.9
Net investment income	$4.5	$4.1
Net investment income per share	$0.28	$0.33
Realized Gains per share	$0.08	($0.06)
Distributions per share	$0.34	$0.34
Net increase in net assets from operations	$7.3	$6.0
Net increase in net assets from operations per share	$0.46	$0.48

"Realized gains and net investment income of $0.36 per share covered our dividends of $0.34 per share for the first quarter. Net asset value ("NAV") per share at March 31, 2018 increased to $13.93 from $13.81 at December 31, 2017," said Robert T. Ladd, Chief Executive Officer of Stellus Capital.

Portfolio and Investment Activity

We completed the first quarter of 2018 with a portfolio of $431.3 million (at fair value) invested in 52 companies. As of March 31, 2018, our portfolio included approximately 46% of first lien debt, 41% of second lien debt, 6% of unsecured debt and 6% of equity investments at fair value. Our debt portfolio consisted of 89% floating rate investments (subject to interest rate floors) and 11% fixed rate investments. The average size of our portfolio company investments was $8.3 million and our largest portfolio company investment was approximately $22.2 million, both at fair value. The weighted average yield on all of our debt investments as of March 31, 2018 was approximately 11.1%.

During the three months ended March 31, 2018, we made $73.2 million of investments in four new and four existing portfolio companies at par and received $15.6 million from amortization and repayments of certain other investments.

This compares to the portfolio as of December 31, 2017, which had a fair value of $371.8 million invested in 48 companies comprising 38% of first lien debt, 48% of second lien debt, 7% of unsecured debt and 7% of equity investments at fair value. The weighted average yield on all of our debt investments as of December 31, 2017 was approximately 10.8%. The debt portfolio consisted of and 87% floating rate investments (subject to interest rate floors) and 13% fixed rate investments.

Results of Operations

Investment income for the three months ended March 31, 2018 and 2017 totaled $10.9 million and $9.9 million, respectively, most of which was interest income from portfolio investments.

Operating expenses for the three months ended March 31, 2018 and 2017, totaled $6.4 million and $5.7 million, respectively. For the same respective periods, base management fees totaled $1.7 million and $1.6 million, incentive fees totaled $ 1.0 million for both periods, fees and expenses related to our borrowings totaled $2.5 million and $ 2.1 million (including interest and amortization of deferred financing costs), administrative expenses totaled $0.4 million and $0.3 million, and other expenses totaled $0.8 million and $0.7 million, respectively.

Net investment income was $4.5 million and $4.1 million, or $0.28 and $0.33 per common share based on weighted average common shares outstanding for the three months ended March 31, 2018 and 2017 of 15,952,841 and 12,479,957, respectively.

The Company's investment portfolio had a net change in unrealized appreciation for the three months ended March 31, 2018 and 2017, of $1.5 million and $2.6 million, respectively. For the three months ended March 31, 2018 and 2017, the Company had a realized gain of $1.3 million and a realized loss of $712.1 thousand, respectively.

Our net increase in net assets resulting from operations totaled $7.3 million and $6.0 million, or $0.46 and $0.48 per common share based on weighted average common shares outstanding for the three months ended March 31, 2018 and 2017 of 15,952,841 and 12,479,957, respectively.

Liquidity and Capital Resources

As of March 31, 2018 and 2017, our credit facilities provided for borrowings in an aggregate amount up to $140.0 and $120.0 million, respectively, on a committed basis. As of March 31, 2018, our credit facility had an accordion feature which allowed for potential future expansion of the facility size to $195.0 million. As of March 31, 2018 and December 31, 2017, we had $118.3 million and $40.8 million in outstanding borrowings under the credit facility, respectively.

For the three months ended March 31, 2018, our operating activities used cash of $51.8 million primarily in connection with purchases and origination of portfolio investments, which was slightly offset by repayments of our investments. For the same period, our financing activities provided cash of $72.2 million, due to borrowings under our credit facility.

For the three months ended March 31, 2017, our operating activities provided cash of $20.1 million, primarily in connection with cash interest received and repayments of our investments, and our financing activities used cash of $17.8 million, primarily related to the repayments under our credit facility and distributions to stockholders.

Distributions

During the three months ended March 31, 2018 and 2017, we declared aggregate distributions of $0.34 per share ($5.4 million and $4.2 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 which occurred during the three months ended March 31, 2018 are summarized as follows:

On January 2, 2018, the Company invested $10.0 million in the second lien term loan of ICD Intermediate Holdco 2, LLC, a provider of technology that connects corporate treasury departments with money market funds. We also invested $0.5 million in the equity of the company.

On January 26, 2018, the Company made an additional investment of $7.1 million in the first lien term loan of BW DME Acquisition LLC, (StateServ Medical, LLC). We also invested an additional $0.9 million in equity of the company.

On January 30, 2018, the Company received a dividend of $1.4 million from MTC Parent, L.P. (Millennium Trust).

On January 31, 2018, the Company invested $11.0 million in the first lien term loan of Price for Profit, LLC, a provider of advisory services and specialized technology platform. We also committed to fund a $1.5 million revolver. Additionally, the Company invested $0.8 million in the equity of the company.

On January 31, 2018, the Company made an additional investment of $3.2 million in the first lien term loan of Energy Labs Inc.

On February 5, 2018, the Company invested $20.5 million in the first lien term loan of Fast Growing Trees, LLC, an online provider of hybrid trees and plants. We also committed to fund a $1.0 million revolver. Additionally, the Company invested $1.0 million in the equity of the company.

On February 6, 2018, the Company made an additional investment of $8.3 million in the first lien debt of Furniture Factory Holdings, LLC.

On March 20, 2018, the Company received a dividend of $0.9 million from Glori Energy Production, LLC..

On March 30, 2018, the Company invested $9.8 million in the first lien term loan of Kellyamerit Holdings, Inc. (Amerit Fleet), a nation-wide provider of fleet maintenance and repair services.

On March 30, 2018, the Company received a payoff of its $9.0 million term loan to Douglas Products and Packaging Company, LLC. The Company also received a dividend of $0.3 million on the equity of Fumigation Holdings, Inc. (Douglas).

Events Subsequent to March 31, 2018

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 2nd Lien term loan of Mobileum, Inc., an existing portfolio company.

On April 24, 2018, the Company received full repayment of the first lien term loan of Catapult Learning, LLC for total proceeds of $12.1 million.

On April 30, 2018, the Company received full repayment on the unsecured first lien term loan of Binder & Binder National Social Security Disability Advocates, LLC for total proceeds of $0.1 million.

On May 2, 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.

Credit Facility

The outstanding balance under the credit facility as of May 4, 2018 was $66.1 million.

SBA-guaranteed Debentures

On April 25, 2018, the Company drew $40.0 million of SBA-guaranteed debentures, bringing the total balance of SBA-guaranteed Debentures outstanding to $130.0 million as of May 4, 2018.

Legislative Changes

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% under certain circumstances.

On April 4, 2018, the board of directors (the "Board") of Stellus Capital Investment Corporation (the "Company"), including a "required majority" (as such term is defined in Section 57(o) of the Investment Company Act of 1940, as amended (the "1940 Act")) of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the asset coverage ratio test applicable to the Company will be decreased from 200% to 150%, effective April 4, 2019 unless approved earlier by a vote of the Company's stockholders. The Board also approved the submission of a proposal to approve 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.

Dividend Declared

On April 16, 2018, the Company's board of directors declared a regular monthly dividend for each of April, May and June 2018 as follows:

Declared	Ex-Dividend Date	Record Date	Payment Date	Amount per Share
4/16/18	4/27/18	4/30/18	5/15/18	$0.1133
4/16/18	5/30/18	5/31/18	6/15/18	$0.1133
4/16/18	6/28/18	6/29/18	7/13/18	$0.1133

Conference Call Information

Stellus Capital Investment Corporation will host a conference call to discuss these results on Tuesday, May 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 800-263-0877 (domestic). Use passcode 3214469. Starting approximately twenty-four hours after the conclusion of the call, a replay will be available through Wednesday, May 16, 2018 by dialing (888) 203-1112 and entering passcode 3214469. The replay will also be available on the company's website.

Contacts
Stellus Capital Investment Corporation
W. Todd Huskinson, (713) 292-5414
Chief Financial Officer
[email protected]

PART I — FINANCIAL INFORMATION

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

			March 31,
			2018		December 31,
			(unaudited)		2017
ASSETS
	Non-controlled, affiliated investments, at fair value (amortized cost of $135,519 and $1,052,185, respectively)
			$	140,000	$	990,000
	Non-controlled, non-affiliated investments, at fair value (amortized cost of $426,244,352 and $367,401,021, respectively)
				431,159,720		370,849,772
	Cash and cash equivalents			45,494,363		25,110,718
	Receivable for sales and repayments of investments			26,891		26,891
	Interest receivable			3,787,060		2,922,204
	Other receivables			37,647		—
	Prepaid expenses			298,186		361,270
		Total Assets	$	480,943,867	$	400,260,855

LIABILITIES
	Notes payable		$	47,389,684	$	47,306,488
	Credit facility payable			116,948,703		39,332,479
	SBA-guaranteed debentures			87,919,481		87,818,813
	Dividends payable			1,807,570		1,806,671
	Management fees payable			1,575,366		1,621,592
	Incentive fees payable			1,164,735		371,647
	Interest payable			683,980		1,021,173
	Unearned revenue			175,989		139,304
	Administrative services payable			361,727		327,033
	Other accrued expenses and liabilities			653,500		268,413
		Total Liabilities	$	258,680,735	$	180,013,613
	Commitments and contingencies
		Net Assets	$	222,263,132	$	220,247,242
NET ASSETS
	Common Stock, par value $0.001 per share (200,000,000 and 100,000,000 shares authorized; 15,953,810 and 15,945,879 shares issued and outstanding, respectively)		$	15,954	$	15,946
	Paid-in capital			228,161,215		228,066,762
	Accumulated net realized loss from investments, net of cumulative dividends of $4,246,819 for both periods			(9,450,971)		(10,786,240)
	Distributions in excess of net investment income			(1,382,915)		(435,794)
	Net Unrealized appreciation on investments and cash equivalents, net of provision for taxes of $0 for both periods
				4,919,849		3,386,568
Net Assets			$	222,263,132	$	220,247,242
		Total Liabilities and Net Assets	$	480,943,867	$	400,260,855
		Net Asset Value Per Share	$	13.93	$	13.81

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

			For the		For the
			three months		three months
			ended		ended
			March 31,		March 31,
			2018		2017
INVESTMENT INCOME
	Interest income		$	10,730,748	$	9,476,252
	Other income			181,033		387,728
		Total Investment Income	$	10,911,781	$	9,863,980
OPERATING EXPENSES
	Management fees		$	1,748,896	$	1,564,528
	Valuation fees			134,410		166,089
	Administrative services expenses			351,229		309,098
	Incentive fees			968,826		1,021,227
	Professional fees			469,138		227,677
	Directors' fees			92,000		92,000
	Insurance expense			85,697		109,252
	Interest expense and other fees			2,464,980		2,068,630
	Other general and administrative expenses			121,226		161,852
		Total Operating Expenses	$	6,436,402	$	5,720,353
	Net Investment Income		$	4,475,379	$	4,143,627
	Net Realized Gain (Loss) on Investments and Cash Equivalents		$	1,335,269	$	(712,051)
	Net Change in Unrealized Appreciation on Investments and Cash Equivalents
			$	1,533,281	$	2,584,583
	Benefit for taxes on unrealized gain on investments		$	—	$	8,593
	Net Increase in Net Assets Resulting from Operations		$	7,343,929	$	6,024,752
	Net Investment Income Per Share		$	0.28	$	0.33
	Net Increase in Net Assets Resulting from Operations Per Share		$	0.46	$	0.48
	Weighted Average Shares of Common Stock Outstanding			15,952,841		12,479,957
	Distributions Per Share		$	0.34	$	0.34

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (unaudited)

			For the three months ended March 31, 2018		For the three months ended March 31, 2017




Increase in Net Assets Resulting from Operations
	Net investment income		$	4,475,379	$	4,143,627
	Net realized gain/(loss) on investments and cash equivalents			1,335,269		(712,051)
	Net change in unrealized appreciation on investments and cash equivalents
				1,533,281		2,584,583
	Benefit for taxes on unrealized appreciation on investments			—		8,593
		Net Increase in Net Assets Resulting from Operations	$	7,343,929	$	6,024,752

Stockholder distributions from
	Net investment income			(5,422,500)		(4,241,903)
		Total Distributions	$	(5,422,500)	$	(4,241,903)

Capital share transactions
	Issuance of common stock			94,788		—
	Partial Share Redemption			(327)		—
		Net increase in net assets resulting from capital share transactions	$	94,461	$	—
Total increase in net assets			$	2,015,890	$	1,782,849
Net assets at beginning of period			$	220,247,242	$	170,881,785
Net assets at end of period (includes $1,382,915 and $435,794 of distributions in excess of net investment income, respectively)			$	222,263,132	$	172,664,634

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

			For the		For the
			three months		three months
			ended		ended
			March 31, 2018		March 31, 2017
Cash flows from operating activities
Net Increase in net assets resulting from operations			$	7,343,929	$	6,024,752
	Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:

		Purchases of investments		(71,713,787)		(23,151,902)
		Proceeds from sales and repayments of investments		15,618,134		39,279,309
		Net change in unrealized appreciation on investments		(1,533,281)		(2,584,583)
		Deferred tax benefit		—		(8,593)
		Increase in investments due to PIK		(152,006)		(82,119)
		Amortization of premium and accretion of discount, net		(343,739)		(267,611)
		Amortization of loan structure fees		66,224		122,908
		Amortization of deferred financing costs		83,196		46,669
		Amortization of loan fees on SBA-guaranteed debentures		100,668		80,211
		Net realized loss (gain) on investments		(1,335,269)		712,051
	Changes in other assets and liabilities
		Decrease (increase) in interest receivable		(864,856)		329,975
		Increase in other receivable		(37,647)		(7,294)
		Decrease (increase) in prepaid expenses		63,084		(62)
		Decrease in management fees payable		(46,226)		(43,767)
		Increase (decrease) in incentive fees payable		793,088		(129,650)
		Increase in administrative services payable		34,694		31,358
		Decrease in interest payable		(337,193)		(550,338)
		Increase (decrease) in unearned revenue		36,685		(1,786)
		Increase in dividend payable		899		—
		Increase in other accrued expenses and liabilities		385,087		318,964
Net cash provided by (used in) operating activities			$	(51,838,316)	$	20,118,492
Cash flows from financing activities
		Offering costs paid for common stock issued		—		(81,813)
		Stockholder distributions paid		(5,327,712)		(4,241,903)
		Borrowings under credit facility		86,550,000		9,000,000
		Repayments of credit facility		(9,000,000)		(22,500,000)
		Partial Share Redemption		(327)		—
Net cash provided by (used in) financing activities			$	72,221,961	$	(17,823,716)
Net increase in cash and cash equivalents			$	20,383,645	$	2,294,776
Cash and cash equivalents balance at beginning of period				25,110,718		9,194,129
Cash and cash equivalents balance at end of period			$	45,494,363	$	11,488,905
Supplemental and non-cash financing activities
		Interest expense paid		2,512,086		2,369,181
		Excise tax paid		27,717		37,648
		Shares issued pursuant to Dividend Reinvestment Plan		94,788		—
		Conversion from debt to equity		—		864,101