Stellus Capital Investment Corporation Reports Results for its Second Fiscal Quarter Ended June 30, 2020

News provided by

Stellus Capital Investment Corporation

Jul 31, 2020, 06:00 ET

HOUSTON, July 31, 2020 /PRNewswire/ -- Stellus Capital Investment Corporation (NYSE: SCM) ("Stellus" or "the Company") today announced financial results for its second fiscal quarter ended June 30, 2020.

"The second quarter brought very positive results for the Company: net investment income of $0.28 per share exceeded distributions of $0.25 per share, net asset value increased by 15%, or $1.79 per share, and liquidity and access to funding exceeded $45 million. Given the stabilization of asset quality, capital base and liquidity, the Company is declaring a regular dividend of $0.25 per share for the third quarter," reported Robert T. Ladd, Chief Executive Officer of Stellus Capital Investment Corporation.

FINANCIAL HIGHLIGHTS
($ in millions, except data relating to per share amounts and shares outstanding)



	Q2-20		YTD-20
	Amount	Per Share	Amount	Per Share

Net investment income	$5.44	$0.28	$11.68	$0.60

Core net investment income⁽¹⁾	5.72	0.29	11.28	0.58

Net realized loss on investments	(3.89)	(0.20)	(2.60)	(0.13)

Total realized income⁽²⁾	1.54	0.08	9.08	0.47

Distributions	(4.87)	(0.25)	(11.49)	(0.59)

Net unrealized appreciation
(depreciation) on investments	38.33	1.96	(13.18)	(0.68)

Provision for taxes on unrealized gains
on investments in taxable subsidiaries	(0.06)	(0.00)	(0.03)	(0.00)

Net increase in net assets resulting
from operations	39.81	2.04	(4.13)	(0.21)

Weighted average shares outstanding	19,484,217		19,456,849

(1)

Core net investment income, as presented, excludes the impact of capital gains incentive fees and income taxes, the majority of which are excise taxes. 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.

(2)

Total realized income is the sum of net investment income and net realized gains on investments; both U.S GAAP measures.

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

	As of	As of
	June 30,	December 31,
	2020	2019
Investments at fair value	$640.7	$628.9
Total assets	$666.7	$648.5
Net assets	$260.0	$270.6
Shares outstanding	19,486,003	19,131,746
Net asset value per share	$13.34	$14.14


	Quarter Ended	Year Ended
	June 30,	June 30,
	2020	2020

New investments	$6.7	$68.2
Repayments of investments	(10.5)	(42.3)
Net activity	$(3.8)	$25.9

			As of	As of
			June 30,	December 31,
			2020	2019

Number of portfolio company investments			65	63
Number of debt investments			51	51

Weight average yield of debt and other income producing investments ⁽¹⁾
Cash			7.7%	8.7%
PIK			0.0%	0.0%
Fee amortization			0.4%	0.5%
Total			8.1%	9.2%

Weighted average yield on total investments ⁽²⁾
Cash			7.3%	8.3%
PIK			0.0%	0.0%
Fee amortization			0.4%	0.5%
Total			7.7%	8.8%

(1)

The dollar-weighted average annualized effective yield is computed using the effective interest rate for our debt investments and other income producing investments, including cash and PIK interest, as well as the accretion of deferred fees. The individual investment yields are then weighted by the respective cost of the investments (as of the date presented) in calculating the weighted average effective yield of the portfolio. The dollar-weighted average annualized yield on the Company's investments for a given period will generally be higher than what investors of our common stock would realize in a return over the same period because the dollar-weighted average annualized yield does not reflect the Company's expense or any sales load that may be paid by investors.

(2)

The dollar weighted average yield on total investments takes the same yields as calculated in the footnote above, but weights them to determine the weighted average effective yield as a percentage of the Company's total investments, including non-income producing loans and equity.

Results of Operations

Investment income for the three months ended June 30, 2020 and 2019 totaled $13.8 million and $14.2 million, respectively, most of which was interest income from portfolio investments.

Operating expenses for the three months ended June 30, 2020 and 2019, totaled $8.4 million and $8.8 million, respectively. For the same respective periods, base management fees totaled $2.7 million and $2.3 million, income incentive fees totaled $0.2 million and $1.4 million, capital gains incentive fees totaled $0.0 million and $0.1 million, fees and expenses related to our borrowings totaled $4.1 million and $3.4 million (including interest and amortization of deferred financing costs), administrative expenses totaled $0.4 million and $0.4 million, income tax totaled $0.3 million and $0.3 million, and other expenses totaled $0.7 million and $0.9 million, respectively.

For the three months ended June 30, 2020 and 2019, net investment income was $5.4 million and $5.4 million, or $0.28 and $0.29 per common share based on weighted average common shares outstanding of 19,484,217 and 18,883,745, respectively.

The Company's investment portfolio had a net change in unrealized appreciation (depreciation) for the three months ended June 30, 2020 and 2019, of $38.3 million and ($2.1) million, respectively. For the three months ended June 30, 2020 and 2019, the Company had realized gains (losses) of ($3.9) million and $2.7 million, respectively.

For the three months ended June 30, 2020 and 2019, net increase in net assets resulting from operations totaled $39.8 million and $6.0 million, or $2.04 per common share and $0.32 per common share, based on weighted average common shares outstanding of 19,484,217 and 18,883,745, respectively. The majority of the increase resulted from the $38.3 million of net unrealized appreciation for the three months ended June 30, 2020, which was primarily from the normalization of the primary index utilized in the valuation process in the second quarter to pre-COVID-19 pandemic levels, offset by approximately $1.1 million of additional company-specific unrealized depreciation during the three months ended June 30, 2020.

Liquidity and Capital Resources

As of June 30, 2020 and 2019, our credit facilities provided for borrowings in an aggregate amount up to $230.0 and $180.0 million, respectively, on a committed basis. As of June 30, 2020, our credit facility had an accordion feature which allowed for potential future expansion of the facility size up to $250.0 million. As of June 30, 2020 and December 31, 2019, we had $185.0 million and $161.6 million in outstanding borrowings under the credit facility, respectively. As of June 30, 2020 and December 31, 2019, we had approximately $45.0 million and $58.4 million, respectively, of unused borrowing capacity.

For the six months ended June 30, 2020, our operating activities used cash of $12.4 million primarily in connection with the origination of portfolio investments, which was slightly offset by repayments of our investments. For the same period, our financing activities provided cash of $19.5 million, due to net borrowings under our Credit Facility.

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

Distributions

During the three months ended June 30, 2020 and 2019, we declared aggregate distributions for each quarter of $0.25 and $0.34 per share, respectively ($4.9 million and $6.4 million, respectively) for each quarter. Tax characteristics of all distributions during the calendar year will be reported to stockholders on Form 1099-DIV after the end of the calendar year. None of these distributions is expected to include a return of capital.

Portfolio Activity During the Quarter

On April 1, 2020, we invested an additional $0.9 million in the revolver of Elliott Aviation, LLC, an existing portfolio company. Subsequent paydowns totaling $1.8 million were received by the Company throughout the quarter.

On April 1, 2020, we invested $1.3 million in the revolver of Sales Benchmark Index, LLC, an existing portfolio company. A subsequent paydown of $0.4 million was received by the Company on May 29, 2020.

On April 1, 2020, we invested an additional $0.9 million in the revolver of Lynx FBO Operating, LLC, an existing portfolio company. Subsequent paydowns totaling $1.9 million were received by the Company throughout the quarter.

On April 1, 2020, our investments in Furniture Factory Outlet, LLC and Furniture Factory Holdings, LLC were placed on non-accrual.

On April 2, 2020, our $1.6 million commitment in the delayed draw term loan of GS HVAM Intermediate, LLC expired.

On April 3, 2020, our existing second lien investment of $9.5 million in KidKraft was terminated in exchange for a $1.5 million last out term loan and $4.0 million of preferred equity.

On April 3, 2020, we invested $0.6 million in the revolver of Integrated Oncology Network, LLC, an existing portfolio company.

On April 10, 2020, we invested $0.7 million in the delayed draw term loan of Munch's Supply, LLC, an existing portfolio company.

On April 14, 2020, we invested $1.1 million in the revolver of Venbrook Buyer, LLC, an existing portfolio company, and on May 15, 2020, we invested an additional $1.1 million in the revolver.

On April 24, 2020, our delayed draw term loan commitment of $4.4 million for Venbrook Buyer, LLC was amended such that the borrower would not be permitted to borrow the delayed draw term loan before July 15, 2020.

On April 28, 2020, our delayed draw term loan commitment of $4.0 million to Exacta Land Surveyors, LLC, was amended to allow us, as administrative agent, to have full discretion to fund the delayed draw term loan commitment.

On April 29, 2020, our $1.7 million commitment in the delayed draw term loan of BFC Solmetex, LLC was extinguished.

On May 27, 2020, we invested $0.1 million in the equity of USASF Blocker IV, LLC, an existing portfolio company.

On June 29, 2020, we invested $0.02 million in the equity of TFH Reliability Group, LLC, an existing portfolio company.

Events Subsequent to June 30, 2020

On July 17, 2020, we invested $7.1 million in the first lien term loan of Industry Dive, Inc., a provider of mobile and desktop-based newsletters containing industry-specific business analysis and news targeting executives. Additionally, we committed $0.1 million in the unfunded revolver, of which $0.04 million was funded on July 17, 2020.

On July 21, 2020 we received a paydown of $2.7 million on the revolver of GS HVAM Intermediate, LLC, an existing portfolio company.

Unfunded Commitments

As of July 30, 2020, we had unfunded commitments of $30.7 million, including unfunded delayed draw term loan commitments of $12.1 million.

Credit Facility

The outstanding balance under the Credit Facility as of July 30, 2020 was $182.0 million.

SBA-guaranteed Debentures

The total balance of SBA-guaranteed debentures outstanding as of July 30, 2020 was $161.0 million.

Distributions

The Company paid distributions of $0.25 for shareholders of record as of July 15, 2020 on July 31, 2020, as declared on June 30, 2020.

On July 29, 2020, the Company's board of directors declared a distribution of $0.25 per share on September 30, 2020, to shareholders of record on September 15, 2020.

Conference Call Information

Stellus Capital Investment Corporation will host a conference call to discuss these results on Friday, July 31, 2020 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 800-353-6461 (domestic). Use passcode 6250711. Starting approximately twenty-four hours after the conclusion of the call, a replay will be available through Saturday, August 8, 2020 by dialing (888) 203-1112 and entering passcode 6250711. The replay will also be available on the company's website.

About Stellus Capital Investment Corporation

The Company is an externally-managed, closed-end, non-diversified investment management company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended. The Company's investment objective is to maximize the total return to its stockholders in the form of current income and capital appreciation by investing primarily in private 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, with corresponding equity co-investments. The Company's investment activities are managed by its investment adviser, Stellus Capital Management. To learn more about Stellus Capital Investment Corporation, visit www.stelluscapital.com under the "Public Investors" tab.

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, including statements about COVID-19 and its impacts, such as significant market volatility and changes in base interest rates, 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.

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

			June 30,
			2020		December 31,
			(Unaudited)		2019
ASSETS
	Non-controlled, non-affiliated investments, at fair value
		(amortized cost of $667,649,307 and $642,707,824,
		respectively)	$	640,713,831	$	628,948,077
	Cash and cash equivalents			23,209,941		16,133,315
	Receivable for sales and repayments of investments			113,812		123,409
	Interest receivable			2,325,856		2,914,710
	Other receivables			25,495		25,495
	Prepaid expenses			266,843		368,221
		Total Assets	$	666,655,778	$	648,513,227
LIABILITIES
	Notes payable		$	48,139,950	$	47,974,202
	Credit facility payable			184,075,319		160,510,633
	SBA-guaranteed debentures			157,886,403		157,543,853
	Dividends payable			4,871,504		2,167,630
	Management fees payable			5,462,248		2,695,780
	Income incentive fees payable			1,660,862		1,618,509
	Capital gains incentive fees payable			—		880,913
	Interest payable			2,167,084		2,322,314
	Director fees payable			9,000		—
	Unearned revenue			646,000		559,768
	Administrative services payable			796,768		413,278
	Deferred tax liability			164,664		134,713
	Income tax payable			456,000		917,000
	Other accrued expenses and liabilities			366,668		203,461
		Total Liabilities	$	406,702,470	$	377,942,054
	Commitments and contingencies (Note 7)
		Net Assets	$	259,953,308	$	270,571,173
NET ASSETS
	Common stock, par value $0.001 per share (100,000,000 shares
		authorized; 19,486,003 and 19,131,746 issued and outstanding,
		respectively)	$	19,486	$	19,132
	Paid-in capital			277,116,729		272,117,091
	Accumulated undistributed deficit			(17,182,907)		(1,565,050)
		Net Assets	$	259,953,308	$	270,571,173
		Total Liabilities and Net Assets	$	666,655,778	$	648,513,227
		Net Asset Value Per Share	$	13.34	$	14.14

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,
				2020		2019		2020		2019
INVESTMENT INCOME
	Interest income			$	13,635,480	$	13,605,861	$	28,485,068	$	27,231,260
	Other income				205,798		564,394		617,255		773,924
		Total Investment Income		$	13,841,278	$	14,170,255	$	29,102,323	$	28,005,184
OPERATING EXPENSES
	Management fees			$	2,743,195	$	2,304,362	$	5,462,249	$	4,527,007
	Valuation fees				19,001		21,628		128,834		128,950
	Administrative services expenses				436,594		415,506		903,529		820,905
	Income incentive fees				168,749		1,382,814		1,508,386		2,756,668
	Capital gains incentive (reversal) fees				-		115,856		(880,913)		1,277,613
	Professional fees				150,514		329,541		537,228		673,881
	Directors' fees				110,566		113,000		242,816		217,000
	Insurance expense				93,071		86,649		186,142		172,346
	Interest expense and other fees				4,092,594		3,359,270		8,384,798		7,034,057
	Income tax expense				289,000		342,384		485,795		355,128
	Other general and administrative expenses				302,379		283,845		468,382		292,570
		Total Operating Expenses		$	8,405,663	$	8,754,855	$	17,427,246	$	18,256,125
		Net Investment Income		$	5,435,615	$	5,415,400	$	11,675,077	$	9,749,059
		Net realized (loss) gain on non-controlled, non-affiliated
			investments	$	(3,893,249)	$	2,696,138	$	(2,596,456)	$	12,942,236
		Net change in unrealized appreciation (depreciation)
			on non-controlled, non-affiliated investments	$	38,329,217	$	(2,089,555)	$	(13,175,729)	$	(6,514,269)
		Provision for taxes on net unrealized gain
			on investments	$	(58,909)	$	(27,300)	$	(29,950)	$	(39,901)
		Net Increase (Decrease) in Net Assets
			Resulting from Operations	$	39,812,674	$	5,994,683	$	(4,127,058)	$	16,137,125
		Net Investment Income Per Share		$	0.28	$	0.29	$	0.60	$	0.55
		Net Increase (Decrease) in Net Assets Resulting
			from Operations Per Share	$	2.04	$	0.32	$	(0.21)	$	0.92
		Weighted Average Shares of Common Stock Outstanding			19,484,217		18,883,745		19,456,849		17,624,385
		Distributions Per Share		$	0.25	$	0.34	$	0.59	$	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,
			2020		2019		2020		2019
Increase (Decrease) in Net Assets Resulting from
	Operations
	Net investment income		$	5,435,615	$	5,415,400	$	11,675,077	$	9,749,059
	Net realized (loss) gain on non-controlled,
		non-affiliated investments		(3,893,249)		2,696,138		(2,596,456)		12,942,236
	Net change in unrealized appreciation (depreciation) on
		non-controlled, non-affiliated investments		38,329,217		(2,089,556)		(13,175,729)		(6,514,269)
	Provision for taxes on unrealized appreciation
		on investments		(58,909)		(27,300)		(29,950)		(39,901)
Net Increase (Decrease) in Net Assets Resulting
	from Operations		$	39,812,674	$	5,994,682	$	(4,127,058)	$	16,137,125
Stockholder Distributions From:
	Net investment income		$	(4,871,501)	$	(6,426,108)	$	(11,490,798)	$	(12,160,358)
	Total Distributions		$	(4,871,501)	$	(6,426,108)	$	(11,490,798)	$	(12,160,358)
	Capital Share Transactions
	Issuance of common stock		$	93,470	$	2,917,010	$	5,023,937	$	42,599,510
	Sales load			—		(68,731)		(5,681)		(1,003,731)
	Offering costs			—		(90,181)		(18,169)		(293,072)
	Partial share transactions			—		(253)		(96)		1,182
Net Increase in Net Assets Resulting From
	Capital Share Transactions		$	93,470	$	2,757,845	$	4,999,991	$	41,303,888
Total Increase (Decrease) in Net Assets			$	35,034,643	$	2,326,419	$	(10,617,865)	$	45,280,655
Net Assets at Beginning of Period			$	224,918,665	$	267,799,244	$	270,571,173	$	224,845,007
Net Assets at End of Period			$	259,953,308	$	270,125,663	$	259,953,308	$	270,125,663

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

			For the		For the
			six		six
			months ended		months ended
			June 30,		June 30,
			2020		2019
Cash flows from operating activities
Net (decrease) increase in net assets resulting from operations			$	(4,127,058)	$	16,137,125
	Adjustments to reconcile net (decrease) increase in net assets
		from operations to net cash used in operating activities:
		Purchases of investments		(68,247,468)		(78,149,872)
		Proceeds from sales and repayments of investments		42,341,340		58,832,731
		Net change in unrealized depreciation on investments		13,175,729		6,514,269
		Increase in investments due to PIK		(552,245)		(65,356)
		Amortization of premium and accretion of discount, net		(1,069,969)		(817,309)
		Deferred tax provision		29,951		39,901
		Amortization of loan structure fees		318,039		248,990
		Amortization of deferred financing costs		165,748		164,837
		Amortization of loan fees on SBA-guaranteed debentures		342,550		299,694
		Net realized loss (gain) on investments		2,596,456		(12,942,236)
	Changes in other assets and liabilities
		Decrease in interest receivable		588,854		347,607
		Decrease in other receivable		—		59,751
		Decrease in prepaid expenses		101,378		122,506
		Increase (decrease) in management fees payable		2,766,468		(379,613)
		Increase (decrease) in incentive fees payable		42,353		(318,368)
		(Decrease) increase in capital gains incentive fees payable		(880,913)		1,277,613
		Increase in administrative services payable		383,490		71,943
		(Decrease) increase in interest payable		(155,230)		292,638
		Increase in director fees payable		9,000		—
		Increase (decrease) in unearned revenue		86,232		(82,649)
		(Decrease) increase in income tax payable		(461,000)		63,908
		Increase in other accrued expenses and liabilities		163,207		342,876
Net Cash Used in Operating Activities			$	(12,383,088)	$	(7,939,014)
Cash flows from Financing Activities
		Proceeds from the issuance of common stock	$	4,794,994	$	42,599,510
		Sales load for common stock issued		(5,681)		(1,003,731)
		Offering costs paid for common stock		(18,169)		(330,909)
		Stockholder distributions paid		(8,557,981)		(11,825,880)
		Borrowings under Credit Facility		86,450,000		78,750,000
		Repayments of Credit Facility		(63,000,000)		(99,500,000)
		Financing costs paid on Credit facility		(203,353)		—
		Partial share transactions		(96)		1,181
Net Cash Provided by Financing Activities			$	19,459,714	$	8,690,171
Net Increase in Cash and Cash Equivalents			$	7,076,626	$	751,157
		Cash and cash equivalents balance at beginning of period		16,133,315		17,467,146
Cash and Cash Equivalents Balance at End of Period			$	23,209,941	$	18,218,303
Supplemental and Non-Cash Activities
		Cash paid for interest expense	$	7,713,693	$	6,027,898
		Excise tax paid		940,000		280,000
		Shares issued pursuant to Dividend Reinvestment Plan		228,943		—
		Increase in dividends payable		2,703,874		334,478
		Increase in deferred offering costs		—		37,837

Reconciliation of Core Net Investment Income
(Unaudited)

		Quarter	Quarter
		ended	ended
		June 30, 2020	June 30, 2019
Net investment income		$5,435,615	$5,415,400
	Capital gains incentive fee	$-	$115,856
	Income tax expense	$289,000	$342,384
Core net investment income		$5,724,615	$5,873,640

Per share amounts:
Net investment income per share		$0.28	$0.29
Core net investment income per share		$0.29	$0.31