Stellus Capital Investment Corporation Reports Results for its third fiscal quarter ended September 30, 2018

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Stellus Capital Investment Corporation

Nov 07, 2018, 06:00 ET

HOUSTON, Nov. 7, 2018 /PRNewswire/ -- Stellus Capital Investment Corporation (NYSE:SCM) ("Stellus" or "the Company") today announced financial results for its third fiscal quarter ended September 30, 2018.

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

	As of
Portfolio results	September 30, 2018
Total assets	$511.4
Investment portfolio, at fair value	$478.0
Net assets	$227.9
Weighted average yield on debt investments	11.0%
Net asset value per share	$14.29

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

Total investments made, at par	$31.9	$71.4
Number of new investments	3	4
Repayments and sale of investments, including amortization	$57.0	$53.4
Number of portfolio companies at
end of period	53	46

Operating results

Total investment income	$14.5	$10.0
Net investment income	$5.6	$4.5
Net investment income per share	$0.35	$0.29

Core net investment income⁽¹⁾	$6.3	$4.5
Core net investment income per share⁽¹⁾	$0.39	$0.29

Realized Gains per share	$0.17	$0.33
Distributions per share	$0.34	$0.34
Net increase in net assets from operations	$8.9	$5.6
Net increase in net assets from operations per share	$0.56	$0.36
Weighted average shares outstanding during the period	15,953,810	15,668,415

(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.

"We had a strong third quarter, generating core net investment income of $0.39 per share and a realized gain of $0.17 per share. In addition, net asset value increased $0.22 per share to $14.29," said Robert T. Ladd, Chief Executive Officer of Stellus Capital.

Portfolio and Investment Activity

We completed the third quarter of 2018 with a portfolio of $478.0 million (at fair value) invested in 53 companies. As of September 30, 2018, our portfolio included approximately 54% of first lien debt, 34% of second lien debt, 5% of unsecured debt and 7% of equity investments at fair value. Our debt portfolio consisted of 90% floating rate investments (subject to interest rate floors) and 10% fixed rate investments. The average size of our portfolio company investments was $9.0 million and our largest portfolio company investment was approximately $29.0 million, both at fair value. The weighted average yield on all of our debt investments as of September 30, 2018 was approximately 11.0%.

During the three months ended September 30, 2018, we made $31.9 million of investments in three new and three existing portfolio companies at par and received $57.0 million from amortization and repayments of certain other investments.

This compares to the portfolio as of September 30, 2017, which had a fair value of $355.3 million invested in 46 companies, comprised of 35% of first lien debt, 43% of second lien debt, 16% of unsecured debt and 6% of equity investments at fair value. The weighted average yield on all of our debt investments as of September 30, 2017 was approximately 11.0%. The debt portfolio consisted of and 77% floating rate investments (subject to interest rate floors) and 23% fixed rate investments.

Results of Operations

Investment income for the three months ended September 30, 2018 and 2017 totaled $14.5 million and $10.0 million, respectively, most of which was interest income from portfolio investments.

Operating expenses for the three months ended September 30, 2018 and 2017, totaled $8.9 million and $5.2 million, respectively. For the same respective periods, base management fees totaled $ 2.2 million and $ 1.5 million, income incentive fees totaled $ 1.6 million and $0.5 million, capital gains incentive fees totaled $0.7 million and $0, fees and expenses related to our borrowings totaled $ 3.4 million and $ 2.0 million (including interest and amortization of deferred financing costs), administrative expenses totaled $ 0.3 million for both periods, and other expenses totaled $0.7 million and $0.9 million, respectively.

Net investment income was $5.6 million and $4.5 million, or $0.35 and $0.29 per common share based on weighted average common shares outstanding for the three months ended September 30, 2018 and 2017 of 15,953,810 and 15,668,415, respectively.

The capital gains incentive fee of $0.7 million for the three months ended September 30, 2018 was accrued for 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, 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 September 30, 2018 would be $6.3 million, or $0.39 per share. There was no such fee for the three months ended September 30, 2017.

The Company's investment portfolio had a net change in unrealized appreciation (depreciation) for the three months ended September 30, 2018 and 2017, of $0.5 million and ($4.1) million, respectively. For the three months ended September 30, 2018 and 2017, the Company had realized gains of $2.8 million and $5.2 million, respectively.

Net increase in net assets resulting from operations totaled $8.9 million and $5.6 million, or $0.56 and $0.36 per common share based on weighted average common shares outstanding for the three months ended September 30, 2018 and 2017 of 15,953,810 and 15,668,415, respectively.

Liquidity and Capital Resources

As of September 30, 2018 and 2017, our credit facilities provided for borrowings in an aggregate amount up to $180.0 and $120.0 million, respectively, on a committed basis. As of September 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 September 30, 2018 and December 31, 2017, we had $83.3 million and $36.0 million in outstanding borrowings under the credit facility, respectively.

For the nine months ended September 30, 2018, our operating activities used cash of $79.2 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 $84.0 million, due to borrowings under our credit facility, as well as SBA-guaranteed debentures drawn during the period.

For the nine months ended September 30, 2017, our operating activities provided cash of $29.0 million, primarily in connection with cash interest received and repayments of our investments, and our financing activities used cash of $26.5 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 September 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

On July 5, 2018 we 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, we 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, we 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.

On August 8, 2018, we invested $11.4 million in the first lien term loan and $2.0 million in the unfunded revolver of Advanced Barrier Extrusions, a manufacturer of high barrier forming web films. Additionally, we invested $0.3 million in the common equity of the company.

On August 8, 2018, we invested $7.0 million in the first lien term loan and $5.4 million in the unfunded delayed draw term loan of Convergence Technologies, Inc., a reseller of value-added technology. Additionally, we also invested $0.4 million in the common equity of the company.

On August 16, 2018, we received full repayment on the second lien term loan of Resolute Industrial, LLC for total proceeds of $17.3 million, including a $0.2 million prepayment fee.

On August 27, 2018, we made an additional investment of $0.3 million in the first lien delayed draw term loan of Wise Holding Corporation, an existing portfolio company.

On September 25 2018, we received full payoff of our $21.4 million second lien term loan to Empirix, Inc.

On September 26, 2018, we made additional investments of $3.9 million in the first lien term loan, $0.6 million in the unfunded revolver and $1.7 million in the unfunded delayed draw term loan of BFC Solmetex LLC, an existing portfolio company.

Events Subsequent to September 30, 2018

On October 1, 2018, we received full repayment on the second lien term loan of Roberts-Gordon, LLC for total proceeds of $7.2 million, including a $0.03 million prepayment fee. We also received a distribution related to our equity of $0.9 million which resulted in a realized gain of $0.4 million.

On October 1, 2018, we invested $10.0 million in the second lien term loan of NGS US Finco, LLC, a manufacturer of rotary meters, pipeline distribution repair/upgrade products, electric actuators and chemical pumps to natural gas utilities and energy/industrial distributors.

On October 2, 2018, we invested $3.3 million in the first lien term loan of TechInsights, Inc., an existing portfolio company.

On October 18, 2018, we invested $10.7 million in the first lien term loan and $3.7 million in the unfunded delayed draw term loan of Premiere Digital Services, Inc., a provider of digital media services to the entertainment industry. Additionally, we invested $0.5 million in the equity of the company.

On October 23, 2018, we had a partial sell down of the first lien term loan of Good Source Solutions, Inc. for $9.9 million.

On October 31, 2018, we received full repayment on the second lien term loan of Keais Records Service, LLC for total proceeds of $7.9 million, including a $0.1 million prepayment fee.

Credit Facility

The outstanding balance under the credit facility as of November 5, 2018 was $62.1 million.

SBA-guaranteed Debentures

The total balance of SBA-guaranteed Debentures outstanding as of November 5, 2018 was $150.0 million.

Conference Call Information

Stellus Capital Investment Corporation will host a conference call to discuss these results on Wednesday, November 7, 2018 at 10:00 AM, Central Standard 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 9137982. Starting approximately twenty-four hours after the conclusion of the call, a replay will be available through Thursday, November 15, 2018 by dialing (888) 203-1112 and entering passcode 9137982. 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

			September 30,
			2018		December 31,
			(Unaudited)		2017
ASSETS
	Non-controlled, affiliated investments, at fair value
		(amortized cost of $52,184 and $1,052,185, respectively)	$	55,000	$	990,000
	Non-controlled, non-affiliated investments, at fair value
		(amortized cost of $470,695,036 and $367,401,021,
		respectively)		477,949,195		370,849,772
	Cash and cash equivalents			29,882,423		25,110,718
	Receivable for sales and repayments of investments			81,683		26,891
	Interest receivable			3,110,008		2,922,204
	Other receivables			135,246		—
	Deferred offering costs			17,898		—
	Prepaid expenses			125,970		361,270
		Total Assets	$	511,357,423	$	400,260,855
LIABILITIES
	Notes payable		$	47,558,013	$	47,306,488
	Credit facility payable			81,901,962		39,332,479
	SBA-guaranteed debentures			146,235,472		87,818,813
	Dividends payable			1,807,570		1,806,671
	Management fees payable			1,422,948		1,621,592
	Income incentive fees payable			1,795,933		371,647
	Capital gains incentive fees payable			1,173,250		—
	Interest payable			679,293		1,021,173
	Unearned revenue			304,061		139,304
	Administrative services payable			385,417		327,033
	Deferred tax liability			34,353		—
	Other accrued expenses and liabilities			154,067		268,413
		Total Liabilities	$	283,452,339	$	180,013,613
		Commitments and contingencies (Note 7)
Net Assets			$	227,905,084	$	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			228,160,772		228,066,762
	Accumulated net realized loss from investments, net of
		cumulative dividends of $4,246,819 for both periods		(5,603,190)		(10,786,240)
	Distributions in excess of net investment income			(1,891,073)		(435,794)
	Net Unrealized appreciation on non-controlled, non-affiliated
		investments and cash equivalents, net of provision for
		taxes of $34,353 and $0, respectively		7,219,806		3,448,753
	Net Unrealized appreciation (depreciation) on non-controlled,
		affiliated investments		2,815		(62,185)
		Net Assets	$	227,905,084	$	220,247,242
		Total Liabilities and Net Assets	$	511,357,423	$	400,260,855
		Net Asset Value Per Share	$	14.29	$	13.81

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

				For the		For the		For the		For the
				three		three		nine		nine
				months ended		months ended		months ended		months ended
				September 30,		September 30,		September 30,		September 30,
				2018		2017		2018		2017
INVESTMENT INCOME
	Interest income			$	13,859,431	$	9,728,749	$	36,804,945	$	28,847,532
	Other income				628,192		249,596		1,214,116		1,389,158
		Total Investment Income		$	14,487,623	$	9,978,345	$	38,019,061	$	30,236,690
OPERATING EXPENSES
	Management fees			$	2,172,948	$	1,546,781	$	5,970,867	$	4,634,318
	Valuation fees				132,325		137,445		287,042		326,839
	Administrative services expenses				348,901		313,256		1,008,293		933,214
	Income incentive fees				1,565,301		462,743		3,846,441		2,718,586
	Capital gains incentive fees				651,231		—		1,173,250		—
	Professional fees				289,125		356,654		982,384		803,818
	Directors' fees				73,000		83,000		244,000		254,000
	Insurance expense				87,601		111,680		259,947		331,398
	Interest expense and other fees				3,440,115		2,042,608		8,917,739		5,892,047
	Other general and administrative expenses				117,102		145,494		516,509		481,700
		Total Operating Expenses		$	8,877,649	$	5,199,661	$	23,206,472	$	16,375,920
		Loss on extinguishment of debt			—		302,732		—		302,732
		Net Investment Income		$	5,609,974	$	4,475,952	$	14,812,589	$	13,558,038
		Net Realized Gain on Non-Controlled, Non-Affiliated
			Investments and Cash Equivalents	$	2,771,817	$	5,211,960	$	5,183,050	$	4,499,963
		Net Change in Unrealized Appreciation (Depreciation) on Non-
			Controlled, Non-Affiliated Investments and Cash Equivalents	$	529,552	$	(4,011,314)	$	3,805,406	$	(248,293)
		Net Change in Unrealized Appreciation (Depreciation) on Non-
			Controlled, Affiliated Investments and Cash Equivalents		(1,667)		(40,000)		65,000		(112,185)
		Benefit (provision) for Taxes on Net Unrealized Gain (Loss) on Investments		$	(25,159)	$	-	$	(34,353)	$	8,593
		Net Increase in Net Assets Resulting from Operations		$	8,884,517	$	5,636,598	$	23,831,692	$	17,706,116
		Net Investment Income Per Share		$	0.35	$	0.29	$	0.93	$	0.93
		Net Increase in Net Assets Resulting from Operations Per Share		$	0.56	$	0.36	$	1.49	$	1.22
		Weighted Average Shares of Common Stock Outstanding			15,953,810		15,668,415		15,953,491		14,510,408
		Distributions Per Share		$	0.34	$	0.34	$	1.02	$	1.02

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (unaudited)

			For the		For the
			nine		nine
			months ended		months ended
			September 30,		September 30,
			2018		2017
Increase in Net Assets Resulting from Operations
	Net investment income		$	14,812,589	$	13,558,038
	Net realized gain on investments and cash equivalents			5,183,050		4,499,963
	Net change in unrealized appreciation (depreciation) on non-controlled,
		non-affiliated investments and cash equivalents		3,805,406		(248,293)
	Net change in unrealized appreciation (depreciation) on non-controlled,
		affiliated investments and cash equivalents		65,000		(112,185)
	Benefit (provision) for taxes on unrealized appreciation on investments			(34,353)		8,593
Net Increase in Net Assets Resulting from Operations			$	23,831,692	$	17,706,116
Stockholder distributions
	Net investment income			(16,267,868)		(14,903,394)
Total Distributions			$	(16,267,868)	$	(14,903,394)
Capital share transactions
	Issuance of common stock		$	94,788	$	47,491,626
	Sales load			—		(1,340,131)
	Offering costs			—		(299,960)
	Partial Share Redemption			(770)		—
Net increase in net assets resulting from capital share transactions			$	94,018	$	45,851,535
Total increase in net assets			$	7,657,842	$	48,654,257
Net assets at beginning of period			$	220,247,242	$	170,881,785
Net assets at end of period (includes $1,891,073 and $1,781,150 of
	distributions in excess of net investment income, respectively)		$	227,905,084	$	219,536,042

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

			For the		For the
			nine		nine
			months ended		months ended
			September 30,		September 30,
			2018		2017
			(Unaudited)		(Unaudited)
Cash flows from operating activities
Net Increase in net assets resulting from operations			$	23,831,692		17,706,116
	Adjustments to reconcile net increase in net assets resulting from
		operations to net cash provided by (used in) operating activities:
		Purchases of investments		(198,335,218)		(117,683,094)
		Proceeds from sales and repayments of investments		102,813,575		133,380,057
		Net change in unrealized depreciation (appreciation) on investments		(3,870,406)		360,478
		Increase in investments due to PIK		(491,628)		(347,482)
		Amortization of premium and accretion of discount, net		(1,152,487)		(881,710)
		Deferred tax provision (benefit)		34,353		(8,593)
		Amortization of loan structure fees		329,483		372,820
		Amortization of deferred financing costs		251,525		165,763
		Amortization of loan fees on SBA-guaranteed debentures		471,658		243,306
		Net realized gain on investments		(5,183,050)		(4,499,963)
		Loss on extinguishment of debt		—		302,732
	Changes in other assets and liabilities
		Decrease (increase) in interest receivable		(187,804)		457,744
		Increase in other receivable		(135,246)		(3,058)
		Decrease in prepaid expenses		235,300		318,054
		Decrease in management fees payable		(198,644)		(61,514)
		Increase (decrease) in incentive fees payable		1,424,286		(733,654)
		Increase in capital gains incentive fees payable		1,173,250		—
		Increase in directors' fees payable		—		83,000
		Increase in administrative services payable		58,384		41,084
		Decrease in interest payable		(341,880)		(278,895)
		Increase in unearned revenue		164,757		108,139
		Decrease in other accrued expenses and liabilities		(114,346)		(37,706)
	Net cash provided by (used in) operating activities		$	(79,222,446)	$	29,003,624
Cash flows from financing activities
		Proceeds from the issuance of common stock	$	—	$	47,491,626
		Sales load for common stock issued		—		(1,340,131)
		Offering costs paid for common stock issued		(17,898)		(299,961)
		Proceeds from notes issued		—		48,875,000
		Financing costs paid for Notes issued		—		(1,688,961)
		Repayments on Notes issued		—		(25,000,000)
		Stockholder distributions paid		(16,172,181)		(14,521,068)
		Proceeds from SBA Debentures		60,000,000		—
		Financing costs paid on SBA Debentures		(2,055,000)		—
		Borrowings under Credit Facility		188,300,000		116,000,000
		Repayments of Credit Facility		(145,750,000)		(196,000,000)
		Financing costs paid on Credit facility		(310,000)		(47,453)
		Partial Share Redemption		(770)		—
	Net cash provided by (used in) financing activities		$	83,994,151	$	(26,530,948)
	Net increase in cash and cash equivalents		$	4,771,705	$	2,472,676
	Cash and cash equivalents balance at beginning of period			25,110,718		9,194,129
	Cash and cash equivalents balance at end of period		$	29,882,423	$	11,666,805
Supplemental and non-cash financing activities
	Interest expense paid		$	8,201,952	$	5,384,053
	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		382,326

Reconciliation of Core Net Investment Income
(Unaudited)

		Quarter	Quarter
		ended	ended
		September 30, 2018	September 30, 2017
Net investment income		$5,609,974	$4,475,952
	Capital gains incentive fee	$651,231	$-
Core net investment income⁽¹⁾		$6,261,205	$4,475,952

Per share amounts:
Net investment income per share		$0.35	$0.29
Core net investment income per share⁽¹⁾		$0.39	$0.29