Stellus Capital Investment Corporation Reports Results for its third fiscal quarter ended September 30, 2019

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Stellus Capital Investment Corporation

Nov 07, 2019, 05:00 ET

HOUSTON, Nov. 7, 2019 /PRNewswire/ -- Stellus Capital Investment Corporation (NYSE:SCM) ("Stellus" or "the Company") today announced financial results for its third fiscal quarter ended September 30, 2019.

"We posted another strong quarter of earnings in which we generated realized income of $12 million, or $0.63 per share, as compared to our dividend of $0.34 per share. Core net investment income was $0.35 per share. Year to date we have generated realized income of $34.7 million, or $1.92 per share, as compared to our distributions of $1.02 per share. We also had an active quarter of originations in which our portfolio, at fair value, increased $55.3 million to $586.4 million, including fundings of $94.7 million and repayments of $43.0 million. Finally, in August we received a license to operate our second SBIC subsidiary, which provides long-term, cost effective capital for us to grow," said Robert T. Ladd, Chief Executive Officer of Stellus Capital.

FINANCIAL HIGHLIGHTS

	Q3-19		YTD-19
	Amount	Per Share	Amount	Per Share

Net investment income	$5.80	$0.31	$15.55	$0.86

Core net investment income ⁽¹⁾	6.68	0.35	18.06	1.00

Net realized gains on investments	6.20	0.33	19.14	1.06

Total realized income ⁽²⁾	12.00	0.64	34.69	1.92

Distributions	(6.43)	(0.34)	(18.59)	(1.02)

Net unrealized appreciation (depreciation) on investments	(3.53)	(0.19)	(10.05)	(0.56)

Provision for taxes on unrealized gains on investments in taxable subsidiaries	0.00	0.00	(0.04)	(0.00)

Net increase in net assets resulting from operations	8.47	0.45	24.61	1.36

Weighted average shares outstanding	18,905,959		18,056,271

(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
	9/30/2019	12/31/2018
Investments at fair value	$586.4	$504.5
Total assets	$612.8	$526.3
Net assets	$272.2	$224.8
Shares outstanding	18,905,959	15,953,810
Net asset value per share	$14.40	$14.09


	Q3-19	YTD-19

New investments	$94.7	$172.9
Repayments of investments	(43.0)	(101.5)
Net activity	$51.7	$71.4

			As of	As of
			9/30/2019	12/31/2018

Number of portfolio company investments			61	57
Number of debt investments			48	44

Weighted average yield of debt and other income producing investments (1)
Cash			8.9%	10.2%
PIK			0.0%	0.1%
Fee amortization			0.5%	0.6%
Total			9.4%	10.9%

Weighted average yield on total investments (2)
Cash			8.5%	9.7%
PIK			0.0%	0.1%
Fee amortization			0.5%	0.5%
Total			9.0%	10.3%

(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 September 30, 2019 and 2018 totaled $15.5 million and $14.5 million, respectively, most of which was interest income from portfolio investments.

Operating expenses for the three months ended September 30, 2019 and 2018, totaled $9.7 million and $8.9 million, respectively. For the same respective periods, base management fees totaled $2.5 million and $2.2 million, income incentive fees totaled $1.6 million and $1.6 million, capital gains incentive fees totaled $0.5 million and $0.7 million, fees and expenses related to our borrowings totaled $3.8 million and $3.4 million (including interest and amortization of deferred financing costs), administrative expenses totaled $0.4 million and $0.3 million, income tax totaled $0.4 million and $0.0 million, and other expenses totaled $0.5 million and $0.7 million, respectively.

For the three months ended September 30, 2019 and 2018, net investment income was $5.8 million and $5.6 million, or $0.31 and $0.35 per common share based on weighted average common shares outstanding of 18,905,959 and 15,953,810, respectively.

The capital gains incentive fee of $0.5 million and $0.7 million for the three months ended September 30, 2019 and 2018, respectively, was accrued for GAAP purposes due to the increase in realized and unrealized gains over the quarters. 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. The income tax expense accrual of $0.4 million for the three months ended September 30, 2019 was accrued based on estimates of undistributed taxable income, which was generated largely from capital gains. There was no such accrual for the three months ended September 30, 2018. Core net investment income, which is a non-U.S GAAP measure that excludes these accruals, for the three months ended September 30, 2019 was $6.7 million, or $0.35 per share; and for the three months ended September 30, 2018, was $6.3 million, or $0.39 per share.

The Company's investment portfolio had a net change in unrealized appreciation (depreciation) for the three months ended September 30, 2019 and 2018, of ($3.5) million and $0.5 million, respectively. For the three months ended September 30, 2019 and 2018, the Company had realized gains of $6.2 million and $2.8 million, respectively.

For the three months ended September 30, 2019 and 2018, net increase in net assets resulting from operations totaled $8.5 million and $8.9 million, or $0.45 per common share and $0.56 per common share, based on weighted average common shares outstanding of 18,905,959 and 15,953,810, respectively.

Liquidity and Capital Resources

The credit facility was amended on September 13, 2019 to provide an additional $20.0 million of committed borrowings. The accordion was also increased by an additional $55.0 million allowing for potential future expansion of the facility size to $250.0 million. As of September 30, 2019 and 2018, our credit facility provided for borrowings in an aggregate amount up to $200.0 and $180.0 million, respectively, on a committed basis. As of September 30, 2019 and December 31, 2018, we had $136.1 million and $99.6 million in outstanding borrowings under the credit facility, respectively.

For the nine months ended September 30, 2019, our operating activities used cash of $53.5 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 $59.1 million, due to a secondary offering during the period, offset by repayments on our credit facility.

For the nine months ended September 30, 2018, our operating activities used cash of $79.2 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 $84.0 million, due to net borrowings under credit facility and proceeds from the issuance of SBA-guaranteed debentures.

Distributions

During the three months ended September 30, 2019 and 2018, we declared aggregate distributions for each quarter 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.

Portfolio Activity During the Quarter

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.

On August 13, 2019, we received full repayment on the second lien term loan of Mobileum, Inc. for total proceeds of $21.5 million.

On August 14, 2019, we invested $0.1 million in the equity of APG Holdings, LLC, an existing portfolio company.

On August 28, 2019, we invested $17.6 million in the first lien term loan of Café Valley, Inc., one of the largest independent wholesale bakeries in the U.S. serving the in-store bakery, Foodservice, Club, Mass, C-store and international channels. We also invested $0.9 million in the equity of the company.

On August 28, 2019, we invested $12.5 million in the first lien term loan of Invincible Boat Company LLC, a manufacturer and marketer of ultra-premium saltwater fishing boats targeting a high-net worth and ultra-high-net worth customer base. Additionally, we committed $1.4 million in the unfunded revolver, and we invested $1.0 million in the equity of the company.

On August 30, 2019, we invested $15.5 million in the first lien term loan of Naumann/Hobbs Material Handling Corporation II, Inc., a material handling (forklift) equipment dealer and aftermarket parts and services provider. Additionally, we committed $2.6 million in the unfunded revolver, and we invested $0.4 million in the equity of the company.

On September 11, 2019, we received full repayment on the first lien term loan A, the first lien term loan B, and the revolver of Refac Optical Group for total proceeds of $8.2 million, including $0.3 million in exit fees.

On September 30, 2019, we invested $13.8 million in the first lien term loan of Lynx FBO Operating, LLC, an operating company that provides aviation fuel to owners of corporate and private jet aircraft, fueling services for commercial airlines, aircraft ground support services, aircraft hangar rental, and office rental. Additionally, we committed $1.9 million in the unfunded revolver and invested $0.5 million in the equity of the company.

Events Subsequent to September 30, 2019

On October 1, 2019, we converted Wise Holding Corporation's first lien term loan into common equity of the restructured company and all existing mezzanine debt obligations were extinguished, and related claims were released as part of the restructuring.

On October 2, 2019, we received full repayment on the first lien term loan of Good Source Solutions, Inc. for total proceeds of $18.9 million, including a $0.4 million prepayment fee.

On October 18, 2019, we invested $13.3 million in the first lien term loan of GS HVAM Intermediate, LLC., previously Good Source Solutions, Inc., a marketer and distributor of food products to the corrections, education and other institutional foodservice markets. Additionally, we committed $1.6 million in the unfunded delayed draw term loan and $1.8 million in the unfunded revolver. We also invested $0.6 million in the equity of the company.

On October 18, 2019, we invested $17.5 million in the first lien term loan of Intuitive Health, LLC, an operator of freestanding urgent care/emergency room combination facilities.

On November 1, we invested $10.0 million in the first lien term loan of DRS Holdings III, Inc., a provider of a wide variety of products across the insole, custom fit orthotic and foot care category. Additionally, we committed to $0.9 million in the unfunded revolver.

On November 5, we invested $19.5 million in the second lien term loan of Bromford Industries Ltd, a supplier of complex, mission critical engine components, fabrications and assemblies for the global aerospace and power generation industries. We also invested $1.0 million in the equity of the company.

Credit Facility

The outstanding balance under the credit facility as of November 6, 2019 was $158.1 million.

SBA-guaranteed Debentures

On October 9, 2019, our Stellus SBIC II subsidiary was approved to draw its first $20.0 million of SBA-guaranteed debentures. On October 17, 2019, we drew $6.0 million of debentures, bringing the total consolidated balance of debentures outstanding to $156.0 million as of November 6, 2019.

Dividend Declared

On October 15, 2019, the Company's board of directors declared a regular monthly dividend for each of October, November and December 2019 as follows:

Declared	Ex-Dividend Date	Record Date	Payment Date	Amount per Share
10/15/2019	10/30/2019	10/31/2019	11/15/2019	$	0.1133
10/15/2019	11/27/2019	11/29/2019	12/13/2019	$	0.1133
10/15/2019	12/30/2019	12/31/2019	1/15/2020	$	0.1133

We anticipate that when the tax character of our dividends is reported in January 2020, all of the fourth quarter 2019 distributions will be classified as long term capital gains for our shareholders. The final determination of the tax attributes of our distributions is made annually as of the end of the year based on taxable income for the full year, therefore this information is an estimate only.

Conference Call Information

Stellus Capital Investment Corporation will host a conference call to discuss these results on Thursday, November 7, 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 800-367-2403 (domestic). Use passcode 6850369. Starting approximately twenty-four hours after the conclusion of the call, a replay will be available through Friday, November 15, 2019 by dialing (888) 203-1112 and entering passcode 6850369. 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.

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

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

			September 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 $594,720,716 and $502,691,464, respectively)			586,411,494		504,433,668
	Cash and cash equivalents			23,010,475		17,467,146
	Receivable for sales and repayments of investments			277,334		99,213
	Interest receivable			2,819,519		3,788,684
	Other receivables			25,495		85,246
	Deferred offering costs			210,810		18,673
	Prepaid expenses			87,356		344,621
		Total Assets	$	612,842,483	$	526,287,251
LIABILITIES
	Notes payable		$	47,890,418	$	47,641,797
	Credit facility payable			135,022,469		98,237,227
	SBA-guaranteed debentures			146,640,606		146,387,802
	Dividends payable			2,142,048		1,807,570
	Management fees payable			2,480,918		2,183,975
	Income incentive fees payable			1,802,343		1,936,538
	Capital gains incentive fees payable			1,892,570		81,038
	Interest payable			852,080		1,863,566
	Unearned revenue			512,750		410,593
	Administrative services payable			402,360		392,191
	Deferred tax liability			103,654		67,953
	Income tax payable			717,000		316,092
	Other accrued expenses and liabilities			215,700		115,902
		Total Liabilities	$	340,674,916	$	301,442,244
Commitments and contingencies (Note 7)
		Net Assets	$	272,167,567	$	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			269,461,191		228,160,491
	Accumulated undistributed earnings (deficit)			2,687,470		(3,331,438)
		Net Assets	$	272,167,567	$	224,845,007
		Total Liabilities and Net Assets	$	612,842,483	$	526,287,251
		Net Asset Value Per Share	$	14.40	$	14.09

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

			For the three months ended September 30, 2019		For the three months ended September 30, 2018		For the nine months ended September 30, 2019		For the nine months ended September 30, 2018
INVESTMENT INCOME
	Interest income		$	15,134,874	$	13,859,431	$	42,366,134	$	36,804,945
	Other income			380,353		628,192		1,154,277		1,214,116
		Total Investment Income	$	15,515,227	$	14,487,623	$	43,520,411	$	38,019,061
OPERATING EXPENSES
	Management fees		$	2,480,918	$	2,172,948	$	7,007,925	$	5,970,867
	Valuation fees			109,296		132,325		238,246		287,042
	Administrative services expenses			425,849		348,901		1,246,754		1,008,293
	Income incentive fees			1,583,145		1,565,301		4,339,813		3,846,441
	Capital gains incentive fees			533,920		651,231		1,811,533		1,173,250
	Professional fees			166,802		289,125		840,683		982,384
	Directors' fees			83,000		73,000		300,000		244,000
	Insurance expense			87,601		87,601		259,947		259,947
	Interest expense and other fees			3,774,316		3,440,115		10,808,373		8,917,739
	Income tax expense			350,549		—		705,677		—
	Other general and administrative expenses			121,172		117,102		413,742		516,509
		Total Operating Expenses	$	9,716,568	$	8,877,649	$	27,972,693	$	23,206,472
		Net Investment Income	$	5,798,659	$	5,609,974	$	15,547,718	$	14,812,589
		Net realized gain on non-controlled, non-affiliated investments	$	6,200,367	$	2,771,817	$	19,142,603	$	5,183,050
		Net change in unrealized appreciation (depreciation) on non-controlled, non-affiliated investments	$	(3,534,972)	$	529,552	$	(10,051,426)	$	3,805,406
		Net change in unrealized appreciation (depreciation) on non-controlled, affiliated investments		—		(1,667)		2,185		65,000
		Benefit (provision) for taxes on net unrealized gain on investments	$	4,200	$	(25,159)	$	(35,701)	$	(34,353)
		Net Increase in Net Assets Resulting from Operations	$	8,468,254	$	8,884,517	$	24,605,379	$	23,831,692
		Net Investment Income Per Share	$	0.31	$	0.35	$	0.86	$	0.93
		Net Increase in Net Assets Resulting from Operations Per Share	$	0.45	$	0.56	$	1.36	$	1.49
		Weighted Average Shares of Common Stock Outstanding		18,905,959		15,953,810		18,056,271		15,953,491
		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		For the		For the
		three		three		nine		nine
		months ended		months ended		months ended		months ended
		September 30,		September 30,		September 30,		September 30,
		2019		2018		2019		2018
Increase in Net Assets Resulting from Operations
	Net investment income	$	5,798,659	$	5,609,974	$	15,547,718	$	14,812,589
	Net realized gain on investments		6,200,367		2,771,817		19,142,603		5,183,050
	Net change in unrealized appreciation (depreciation) on non-controlled, non-affiliated investments		(3,534,972)		462,885		(10,051,426)		3,805,406
	Net change in unrealized appreciation on non-controlled, affiliated investments		—		65,000		2,185		65,000
	Benefit (provision) for taxes on unrealized appreciation on investments		4,200		(25,159)		(35,701)		(34,353)
Net Increase in Net Assets Resulting from Operations		$	8,468,254	$	8,884,517	$	24,605,379	$	23,831,692

Decrease in Net Assets from Stockholder Distributions		$	(6,426,113)	$	(5,422,686)	$	(18,586,471)	$	(16,267,868)
Capital Share Transactions
	Issuance of common stock	$	—	$	—	$	42,599,510	$	94,788
	Sales load		—		—		(1,003,731)		—
	Offering costs		—		—		(293,072)		—
	Partial share transactions		(237)		(202)		945		(770)
Net Increase (Decrease) in Net Assets Resulting From Capital Share Transactions		$	(237)	$	(202)	$	41,303,652	$	94,018
Total Increase in Net Assets		$	2,041,904	$	3,461,629	$	47,322,560	$	7,657,842
Net Assets at Beginning of Period		$	270,125,663	$	224,443,455	$	224,845,007	$	220,247,242
Net Assets at End of Period		$	272,167,567	$	227,905,084	$	272,167,567	$	227,905,084

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

			For the		For the
			nine		nine
			months ended		months ended
			September 30,		September 30,
			2019		2018
Cash flows from operating activities
Net Increase in net assets resulting from operations			$	24,605,379	$	23,831,692
	Adjustments to reconcile net increase in net assets resulting from
		operations to net cash used in operating activities:
		Purchases of investments		(172,852,479)		(198,335,218)
		Proceeds from sales and repayments of investments		101,491,694		102,813,575
		Net change in unrealized depreciation (appreciation) on investments		10,049,241		(3,870,406)
		Increase in investments due to PIK		(378,119)		(491,628)
		Amortization of premium and accretion of discount, net		(1,273,680)		(1,152,487)
		Deferred tax provision		35,701		34,353
		Amortization of loan structure fees		377,741		329,483
		Amortization of deferred financing costs		248,621		251,525
		Amortization of loan fees on SBA-guaranteed debentures		452,804		471,658
		Net realized gain on investments		(19,142,603)		(5,183,050)
	Changes in other assets and liabilities
		Decrease (increase) in interest receivable		969,165		(187,804)
		Decrease (increase) in other receivable		59,751		(135,246)
		Decrease in prepaid expenses		257,265		235,300
		Increase (decrease) in management fees payable		296,943		(198,644)
		Increase (decrease) in incentive fees payable		(134,195)		1,424,286
		Increase in capital gains incentive fees payable		1,811,532		1,173,250
		Increase in administrative services payable		10,169		58,384
		Decrease in interest payable		(1,011,486)		(341,880)
		Increase in unearned revenue		102,157		164,757
		Increase in income tax payable		400,908		—
		Increase (decrease) in other accrued expenses and liabilities		99,798		(114,346)
Net Cash Used in Operating Activities			$	(53,523,693)	$	(79,222,446)
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		(485,209)		(17,898)
		Stockholder distributions paid		(18,251,993)		(16,172,181)
		Proceeds from SBA Debentures		—		60,000,000
		Financing costs paid on SBA Debentures		(200,000)		(2,055,000)
		Borrowings under Credit Facility		173,000,000		188,300,000
		Repayments of Credit Facility		(136,500,000)		(145,750,000)
		Financing costs paid on Credit Facility		(92,500)		(310,000)
		Partial share transactions		945		(770)
Net Cash Provided by Financing Activities			$	59,067,022	$	83,994,151
		Net Increase in Cash and Cash Equivalents	$	5,543,329	$	4,771,705
Cash and cash equivalents balance at beginning of period				17,467,146		25,110,718
Cash and Cash Equivalents Balance at End of Period			$	23,010,475	$	29,882,423
		Supplemental and Non-Cash Activities
		Cash paid for interest expense	$	10,735,379	$	8,201,952
		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		192,137		—

Reconciliation of Core Net Investment Income
(Unaudited)

		Quarter	Quarter
		ended	ended
		September 30, 2019	September 30, 2018
Net investment income		$ 5,798,659	$ 5,609,974
	Capital gains incentive fee	533,920	651,231
	Income tax expense	350,549	-
Core net investment income⁽¹⁾		$ 6,683,128	$ 6,261,205

Per share amounts:
Net investment income per share		$0.31	$0.35
Core net investment income per share⁽¹⁾		$0.35	$0.39