Stellus Capital Investment Corporation Reports Results for its second fiscal quarter ended June 30, 2019

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Stellus Capital Investment Corporation

Aug 09, 2019, 05:00 ET

HOUSTON, Aug. 9, 2019 /PRNewswire/ -- Stellus Capital Investment Corporation (NYSE:SCM) ("Stellus" or "the Company") today announced financial results for its second fiscal quarter ended June 30, 2019.

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

	As of
Portfolio results	June 30, 2019
Total assets	$553.2
Investment portfolio, at fair value	$531.1
Net assets	$270.1
Weighted average yield on debt investments	9.9%
Net asset value per share	$14.29

	Quarter	Quarter
	ended	ended
	June 30, 2019	June 30, 2018
Portfolio activity

Total investments made, at par	$50.4	$97.0
Number of new investments	4	5
Repayments and sale of investments, including amortization	$37.0	$30.2
Number of portfolio companies at end of period	57	52

Operating results

Total investment income	$14.2	$12.6
Net investment income	$5.4	$4.7
Net investment income per share	$0.29	$0.30

Core net investment income⁽¹⁾	$5.5	$5.2
Core net investment income per share⁽¹⁾	$0.29	$0.33

Realized Gains per share	$0.14	$0.07
Distributions per share	$0.34	$0.34
Net increase in net assets from operations	$6.0	$7.6
Net increase in net assets from operations per share	$0.32	$0.48
Weighted average shares outstanding during the period	18,883,745	15,953,810

(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.

"During the second quarter, we generated realized income of $8.1 million, including a $2.7 million gain, or $0.43 per share compared to our dividend of $0.34 per share. Core and GAAP net investment income were both $0.29 per share. Year to date we have generated realized income of $22.7 million, including gains of $12.9 million, or $1.29 per share compared to our distributions of $0.68 per share. Our portfolio, at fair value, increased $13.7 million to $531.1 million which included fundings of $50.4 million and repayments of $37 million," said Robert T. Ladd, Chief Executive Officer of Stellus Capital.

Portfolio and Investment Activity

We completed the second quarter of 2019 with a portfolio of $531.1 million (at fair value) invested in 57 companies. As of June 30, 2019, our portfolio included approximately 65% of first lien debt, 24% 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 $9.3 million and our largest portfolio company investment was approximately $22.6 million, both at fair value. The weighted average yield on all of our debt investments as of June 30, 2019 was approximately 9.9%.

During the three months ended June 30, 2019, we made $50.4 million of investments in four new and three existing portfolio companies at par and received $37.0 million from amortization and repayments of certain other investments.

This compares to the portfolio as of December 31, 2018, which had a fair value of $504.5 million invested in 57 companies, comprised of 58% of first lien debt, 30% of second lien debt, 5% 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, 2018 was approximately 10.9%. The debt portfolio consisted of and 91% floating rate investments (subject to interest rate floors) and 9% fixed rate investments.

Results of Operations

Investment income for the three months ended June 30, 2019 and 2018 totaled $14.2 million and $12.6 million, respectively, most of which was interest income from portfolio investments.

Operating expenses for the three months ended June 30, 2019 and 2018, totaled $8.8 million and $7.9 million, respectively. For the same respective periods, base management fees totaled $2.3 million and $2.0 million, income incentive fees totaled $1.4 million and $1.3 million, capital gains incentive fees totaled $0.1 million and $0.5 million, fees and expenses related to our borrowings totaled $3.4 million and $3.0 million (including interest and amortization of deferred financing costs), administrative expenses totaled $0.4 million and $0.3 million, income tax totaled $0.3 million and $0.0 million, and other expenses totaled $0.9 million and $0.8 million, respectively.

For the three months ended June 30, 2019 and 2018, net investment income was $5.4 million and $4.7 million, or $0.29 and $0.30 per common share based on weighted average common shares outstanding of 18,883,745 and 15,953,810, respectively.

During the second quarter we generated $2.7 million of realized gains, or $0.14 per share, resulting in total realized gains year to date of $12.9 million, or $0.73 per share.

The capital gains incentive fee of $0.1 million and $0.5 million for the three months ended June 30, 2019 and 2018, respectively, was accrued for GAAP purposes due to the increase in realized and unrealized gains over the quarters. 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, and may never be paid based upon the computation of incentive fees in subsequent periods. Excluding this accrual, net investment income for the three months ended June 30, 2019 would be $5.5 million, or $0.29 per share. For the three months ended June 30, 2018, net investment income would be $5.2 million, or $ 0.33 per share excluding this accrual.

The Company's investment portfolio had a net change in unrealized appreciation (depreciation) for the three months ended June 30, 2019 and 2018, of ($2.1) million and $1.8 million, respectively. For the three months ended June 30, 2019 and 2018, the Company had realized gains of $2.7 million and $1.1 million, respectively.

For the three months ended June 30, 2019 and 2018, net increase in net assets resulting from operations totaled $6.0 million and $7.6 million, or $0.32 per common share and $0.48 per common share, based on weighted average common shares outstanding of 18,883,745 and 15,953,810, respectively.

Liquidity and Capital Resources

As of June 30, 2019 and 2018, our credit facilities provided for borrowings in an aggregate amount up to $180.0 and $140.0 million, respectively, on a committed basis. As of June 30, 2019, 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, 2019 and December 31, 2018, we had $78.8 million and $99.6 million in outstanding borrowings under the credit facility, respectively.

For the six months ended June 30, 2019, our operating activities used cash of $7.9 million primarily in connection with purchases and origination of portfolio investments, which was offset by repayments of our investments. For the same period, our financing activities provided cash of $8.7 million, due to a secondary offering during the period, offset by repayments on our credit facility.

For the six months ended June 30, 2018, our operating activities used cash of $110.4 million, primarily in connection with the purchase and origination of portfolio investments, which was offset by repayments of our investments, and our financing activities provided cash of $106.2 million, due to net borrowings under credit facility and proceeds from the issuance of SBA-guaranteed debentures.

Distributions

During the three months ended June 30, 2019 and 2018, we declared aggregate distributions of $0.34 per share ($6.4 million and $5.4 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

On April 11, 2019, we invested $8.0 million in the first lien term loan of Munch's Supply LLC, a wholesale distributor of HVAC equipment, parts, and supplies primarily to dealers and contractors. Additionally, we committed $2.2 million in the unfunded delayed draw term loan, and we invested $0.5 million in the equity of the company.

On April 17, 2019, we received full repayment on the second lien term loan of U.S. Auto Sales, Inc. for total proceeds of $4.5 million.

On April 26, 2019, we invested $10.0 million in the first lien term loan of Whisps Brands, an importer of Italian cheese and a leading cheese manufacturer. Additionally, we invested $0.5 million in the equity of the company.

On April 30, 2019, we received full repayment on the second lien term loan of Livingston International, Inc. for total proceeds of $6.8 million.

On May 1, 2019, we invested $4.8 million in the first lien term loan of Exacta Land Surveyors, LLC, an existing portfolio company. Additionally, we invested $0.2 million in the equity of the company.

On May 2, 2019, we received full repayment on the second lien term loan of Magdata Intermediate Holdings, LLC for total proceeds of $15.1 million, including a $0.3 million prepayment fee.

On May 6, 2019, we invested $7.6 million in NS412, LLC, a provider of online curricula for health with a focus on weight loss. Additionally, we invested $0.8 million in the equity of the company.

On May 15, 2019, we invested $16.3 million in the first lien term loan of Data Centrum Communications, Inc., a provider of point-of-care patient engagement and marketing solutions for pharmaceutical companies. Additionally, we invested $1.0 million in the equity of the company.

On May 15, 2019, we received full repayment on the revolver of Furniture Factory Outlet, LLC, for total proceeds of $2.5 million.

Events Subsequent to June 30, 2019

On July 1, 2019, we invested $17.3 million in the first lien term loan of PCS Software, Inc., a provider of integrated transportation management software for the inland trucking industry. Additionally, we committed $3.8 million in the unfunded delayed draw term loan and $1.5 million in the unfunded revolver. We also invested $0.3 million in the equity of the company.

On July 17, 2019, we invested $16.7 million in the first lien term loan of Integrated Oncology Network, LLC, a provider of radiation oncology center management services. Additionally, we committed $2.8 million in the unfunded delayed draw term loan and $0.6 million in the unfunded revolver.

On July 23, 2019, we invested $0.1 million in the equity of J.R. Watkins Holding, Inc., an existing portfolio company.

Credit Facility

The outstanding balance under the credit facility as of August 7, 2019 was $103.1 million.

Corporate Governance

At our 2019 annual stockholders meeting on July 22, 2019, our stockholders approved a proposal authorizing us to sell shares of our common stock equal to up to 25% of our outstanding common stock at a price below the then current net asset value per share of our common stock in one or more offerings. This authorization will expire on the earlier of our 2020 annual stockholder meeting or July 22, 2020, the one year anniversary of our 2019 annual stockholders meeting. We will 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.

Dividend Declared

On July 3, 2019, the Company's board of directors declared a regular monthly dividend for each of July, August, and September 2019 as follows:

Declared	Ex-Dividend Date	Record Date	Payment Date	Amount per Share
7/3/2019	7/30/2019	7/31/2019	8/15/2019	$	0.1133
7/3/2019	8/29/2019	8/30/2019	9/13/2019	$	0.1133
7/3/2019	9/27/2019	9/30/2019	10/15/2019	$	0.1133

Conference Call Information

Stellus Capital Investment Corporation will host a conference call to discuss these results on Friday, August 9, 2019 at 10:00 AM, Central 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 888-254-3590 (domestic). Use passcode 7207121. Starting approximately twenty-four hours after the conclusion of the call, a replay will be available through Saturday, August 17, 2019 by dialing (888) 203-1112 and entering passcode 7207121. The replay will also be available on the company's website.

FORWARD-LOOKING STATEMENTS

Statements included herein may contain "forward-looking statements" which relate to future performance or financial condition. Statements other than statements of historical facts included in this press release may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of assumptions, risks and uncertainties, which change over time. Actual results may differ materially from those anticipated in any forward-looking statements as a result of a number of factors, including those described from time to time in filings by the Company with the Securities and Exchange Commission including the final prospectus that will be filed with the Securities and Exchange Commission. The Company undertakes no duty to update any forward-looking statement made herein. All forward-looking statements speak only as of the date of this press release.

PART I — FINANCIAL INFORMATION

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

			June 30,
			2019		December 31,
			(Unaudited)		2018
ASSETS

	Non-controlled, affiliated investments, at fair value (amortized cost of $0 and $52,185, respectively)		$	—	$	50,000
	Non-controlled, non-affiliated investments, at fair value (amortized cost of $535,894,646 and $502,691,464, respectively)			531,120,396		504,433,668
	Cash and cash equivalents			18,218,303		17,467,146
	Receivable for sales and repayments of investments			90,259		99,213
	Interest receivable			3,441,077		3,788,684
	Other receivables			25,495		85,246
	Deferred offering costs			56,510		18,673
	Prepaid expenses			222,115		344,621
		Total Assets	$	553,174,155	$	526,287,251
LIABILITIES
	Notes payable		$	47,806,634	$	47,641,797
	Credit facility payable			77,736,217		98,237,227
	SBA-guaranteed debentures			146,687,496		146,387,802
	Dividends payable			2,142,048		1,807,570
	Management fees payable			1,804,362		2,183,975
	Income incentive fees payable			1,618,170		1,936,538
	Capital gains incentive fees payable			1,358,651		81,038
	Interest payable			2,156,204		1,863,566
	Unearned revenue			327,944		410,593
	Administrative services payable			464,134		392,191
	Deferred tax liability			107,854		67,953
	Income tax payable			380,000		316,092
	Other accrued expenses and liabilities			458,778		115,902
		Total Liabilities	$	283,048,492	$	301,442,244
Commitments and contingencies (Note 7)
		Net Assets	$	270,125,663	$	224,845,007
NET ASSETS
	Common stock, par value $0.001 per share (200,000,000 shares authorized; 18,905,959 and 15,953,810 issued and outstanding, respectively)		$	18,906	$	15,954
	Paid-in capital			269,461,428		228,160,491
	Distributable earnings			645,329		(3,331,438)
		Net Assets	$	270,125,663	$	224,845,007
		Total Liabilities and Net Assets	$	553,174,155	$	526,287,251
		Net Asset Value Per Share	$	14.29	$	14.09

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,
			2019		2018		2019		2018
INVESTMENT INCOME
	Interest income		$	13,605,861	$	12,214,766	$	27,231,260	$	22,945,514
	Other income			564,394		404,891		773,924		585,924
		Total Investment Income	$	14,170,255	$	12,619,657	$	28,005,184	$	23,531,438
OPERATING EXPENSES
	Management fees		$	2,304,362	$	2,049,023	$	4,527,007	$	3,797,919
	Valuation fees			21,628		20,307		128,950		154,717
	Administrative services expenses			415,506		308,163		820,905		659,392
	Income incentive fees			1,382,814		1,312,314		2,756,668		2,281,140
	Capital gains incentive fees			115,856		522,019		1,277,613		522,019
	Professional fees			329,541		224,121		673,881		693,259
	Directors' fees			113,000		79,000		217,000		171,000
	Insurance expense			86,649		86,649		172,346		172,346
	Interest expense and other fees			3,359,270		3,012,644		7,034,057		5,477,624
	Income tax expense			342,384		—		355,128		—
	Other general and administrative expenses			283,845		278,181		292,570		399,407
		Total Operating Expenses	$	8,754,855	$	7,892,421	$	18,256,125	$	14,328,823
		Net Investment Income	$	5,415,400	$	4,727,236	$	9,749,059	$	9,202,615
		Net realized gain on non-controlled, non-affiliated investments	$	2,696,138	$	1,075,964	$	12,942,236	$	2,411,233
		Net change in unrealized appreciation (depreciation) on non-controlled, non-affiliated investments	$	(2,089,555)	$	1,809,240	$	(6,516,454)	$	3,414,706
		Net change in unrealized appreciation (depreciation) on non-controlled, affiliated investments		—		—		2,185		(72,185)
		Provision for taxes on net unrealized gain on investments	$	(27,300)	$	(9,194)	$	(39,901)	$	(9,194)
		Net Increase in Net Assets Resulting from Operations	$	5,994,683	$	7,603,246	$	16,137,125	$	14,947,175
		Net Investment Income Per Share	$	0.29	$	0.30	$	0.55	$	0.58
		Net Increase in Net Assets Resulting from Operations Per Share	$	0.32	$	0.48	$	0.92	$	0.94
		Weighted Average Shares of Common Stock Outstanding		18,883,745		15,953,810		17,624,385		15,953,328
		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		For the		For the
		three		three		six		six
		months ended		months ended		months ended		months ended
		June 30,		June 30,		June 30,		June 30,
		2019		2018		2019		2018
Increase in Net Assets Resulting from Operations
	Net investment income	$	5,415,400	$	4,727,236	$	9,749,059	$	9,202,615
	Net realized gain on investments		2,696,138		1,075,964		12,942,236		2,411,233
	Net change in unrealized appreciation (depreciation) on non-controlled, non-affiliated investments		(2,089,556)		1,809,240		(6,516,454)		3,414,706
	Net change in unrealized appreciation on non-controlled, affiliated investments		—		—		2,185		(72,185)
	Provision for taxes on unrealized appreciation on investments		(27,300)		(9,194)		(39,901)		(9,194)
Net Increase in Net Assets Resulting from Operations		$	5,994,682	$	7,603,246	$	16,137,125	$	14,947,175

Decrease in Net Assets from Stockholder Distributions		$	(6,426,108)	$	(5,422,682)	$	(12,160,358)	$	(10,845,182)
Capital Share Transactions
	Issuance of common stock	$	2,917,010	$	—	$	42,599,510	$	94,788
	Sales load		(68,731)		—		(1,003,731)		—
	Offering costs		(90,181)		—		(293,072)		—
	Partial share transactions		(254)		(241)		1,181		(568)
Net Increase in Net Assets Resulting From
	Capital Share Transactions	$	2,757,844	$	(241)	$	41,303,888	$	94,220
Total Increase in Net Assets		$	2,326,419	$	2,180,323	$	45,280,656	$	4,196,213
Net Assets at Beginning of Period		$	267,799,244	$	222,263,132	$	224,845,007	$	220,247,242
Net Assets at End of Period		$	270,125,663	$	224,443,455	$	270,125,663	$	224,443,455


STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

			For the		For the
			six		six
			months ended		months ended
			June 30,		June 30,
			2019		2018
Cash flows from operating activities
Net Increase in net assets resulting from operations			$	16,137,125	$	14,947,175
	Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:
		Purchases of investments		(78,149,872)		(166,916,853)
		Proceeds from sales and repayments of investments		58,832,731		45,807,477
		Net change in unrealized depreciation (appreciation) on investments		6,514,269		(3,342,521)
		Increase in investments due to PIK		(65,356)		(297,965)
		Amortization of premium and accretion of discount, net		(817,309)		(736,268)
		Deferred tax provision		39,901		9,194
		Amortization of loan structure fees		248,990		170,335
		Amortization of deferred financing costs		164,837		167,316
		Amortization of loan fees on SBA-guaranteed debentures		299,694		280,605
		Net realized gain on investments		(12,942,236)		(2,411,233)
	Changes in other assets and liabilities
		Decrease (increase) in interest receivable		347,607		(880,444)
		Decrease (increase) in other receivable		59,751		(37,647)
		Decrease in prepaid expenses		122,506		145,518
		Decrease in management fees payable		(379,613)		(72,569)
		Increase (decrease) in incentive fees payable		(318,368)		1,153,673
		Increase in capital gains incentive fees payable		1,277,613		522,019
		Increase in administrative services payable		71,943		541
		Increase in interest payable		292,638		521,659
		Increase (decrease) in unearned revenue		(82,649)		72,806
		Increase in income tax payable		63,908		—
		Increase in other accrued expenses and liabilities		342,876		496,892
Net Cash Used in Operating Activities			$	(7,939,014)	$	(110,400,290)
Cash flows from Financing Activities
		Proceeds from the issuance of common stock	$	42,599,510	$	—
		Sales load for common stock issued		(1,003,731)		—
		Offering costs paid for common stock		(330,909)		—
		Stockholder distributions paid		(11,825,880)		(10,749,495)
		Proceeds from SBA Debentures		—		40,000,000
		Financing costs paid on SBA Debentures		—		(1,570,000)
		Borrowings under Credit Facility		78,750,000		175,300,000
		Repayments of Credit Facility		(99,500,000)		(96,750,000)
		Partial share transactions		1,181		(568)
Net Cash Provided by Financing Activities			$	8,690,171	$	106,229,937
Net Increase (Decrease) in Cash and Cash Equivalents			$	751,157	$	(4,170,353)
		Cash and cash equivalents balance at beginning of period		17,467,146		25,110,718
Cash and Cash Equivalents Balance at End of Period			$	18,218,303	$	20,940,365
Supplemental and Non-Cash Activities
		Cash paid for interest expense	$	6,027,898	$	4,297,709
		Excise tax paid		280,000		27,717
		Shares issued pursuant to Dividend Reinvestment Plan		—		94,788
		Increase in distribution payable		334,478		899
		Increase in deferred offering costs		37,837		—

Reconciliation of Core Net Investment Income
(Unaudited)

		Quarter	Quarter
		ended	ended
		June 30, 2019	June 30, 2018
Net investment income		$5,415,400	$4,727,236
	Capital gains incentive fee	$115,856	$522,019
Core net investment income⁽¹⁾		$5,531,256	$5,249,255

Per share amounts:
Net investment income per share		$0.29	$0.30
Core net investment income per share⁽¹⁾		$0.29	$0.33