Press Release

Stellus Capital Investment Corporation Reports Results for its Fourth Fiscal Quarter and Year Ended December 31, 2018

March 6, 2019 at 6:00 AM EST

HOUSTON, March 6, 2019 /PRNewswire/ -- Stellus Capital Investment Corporation (NYSE:SCM) ("Stellus" or "the Company") today announced financial results for its fourth fiscal quarter and year ended December 31, 2018.

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

	As of
Portfolio results	December 31, 2018
Total assets	$526.3
Investment portfolio, at fair value	$504.5
Net assets	$224.8
Weighted average yield on debt investments	10.9%
Net asset value per share	$14.09

	Year	Quarter
	ended	ended
	December 31, 2018	December 31, 2018
Portfolio activity

Total investments made, at par	$278.1	$75.9
Number of new investments	17	5
Repayments and sale of investments, including amortization	$147.6	$44.7
Number of portfolio companies at end of period	57	57

Operating results

Total investment income	$53.3	$15.2
Net investment income	$22.6	$7.8
Net investment income per share	$1.42	$0.49

Core net investment income⁽¹⁾	$22.7	$6.7
Core net investment income per share⁽¹⁾	$1.42	$0.42

Realized gains per share, net of tax provision	$0.33	$0.01
Distributions per share	$1.36	$0.34
Net increase in net assets from operations	$26.2	$2.4
Net increase in net assets from operations per share	$1.64	$0.14
Weighted average shares outstanding during the period	15,953,571	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.

"Upon completion of our sixth full year of operations, we are pleased to report that our shareholders have received dividends in excess of $112 million since inception. During 2018, we increased net asset value by $0.28 per share and recorded both core net investment income and regular net investment income of $1.42 per share as compared to dividends of $1.36 per share. Realized gains plus core net investment income were $1.75 per share. Approximately 27% of 2018 dividends paid were classified as long term capital gains on our shareholders' Form 1099. For the fourth quarter, core net investment income was $0.42 per share, substantially covering fourth quarter dividends of $0.34 per share," said Robert T. Ladd, the Company's Chief Executive Officer.

Portfolio and Investment Activity

We completed the fourth quarter of 2018 with a portfolio of $504.5 million (at fair value) invested in 57 companies. As of December 31, 2018, our portfolio included approximately 58% of first lien debt, 30% of second lien debt, 5% of unsecured debt and 7% 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 $8.9 million and our largest portfolio company investment was approximately $22.3 million, both at fair value. The weighted average yield on all of our debt investments as of December 31, 2018 was approximately 10.9%.

During the year ended December 31, 2018, we made $278.1 million of investments at par in seventeen new and twelve existing portfolio companies, and received $147.6 million from amortization and repayments of certain other investments.

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

Results of Operations

Investment income for the year ended December 31, 2018 and 2017 totaled $53.3 million and $39.6 million, respectively, most of which was interest income from portfolio investments.

Operating expenses for the year ended December 31, 2018 and 2017, totaled $30.6 million and $21.3 million, respectively. For the same respective periods, base management fees totaled $8.2 million and $6.3 million, income incentive fees totaled $5.5 million and $2.9 million, capital gains incentive fees totaled $0.1 million and $0, fees and expenses related to our borrowings totaled $12.3 million and $7.9 million (including interest and amortization of deferred financing costs), administrative expenses totaled $1.4 million and $1.2 million, and other expenses totaled $3.1 million and $3.0 million, respectively.

Net investment income was $22.6 million and $18.0 million, or $1.42 and $1.21 per common share based on weighted average common shares outstanding for the year ended December 31, 2018 and 2017 of 15,953,571 and 14,870,981, respectively.

The Company's investment portfolio had a net change in unrealized depreciation for the year ended December 31, 2018 and 2017, of ($1.6) million and ($0.02) million, respectively. For the year ended December 31, 2018 and 2017, the Company had realized gains of $5.3 million and $4.7 million, respectively, net of provision for taxes on realized gains of $0.3 million and $0, respectively.

Net increase in net assets resulting from operations totaled $26.2 million and $22.6 million, or $1.64 and $1.52 per common share based on weighted average common shares outstanding for the year ended December 31, 2018 and 2017 of 15,953,571 and 14,870,981, respectively.

Liquidity and Capital Resources

As of December 31, 2018 and 2017, 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 December 31, 2018, our credit facility had an accordion feature which allowed for potential future expansion of the facility size to $195.0 million. As of December 31, 2018 and 2017, we had $99.6 million and $40.8 million in outstanding borrowings under the credit facility, respectively.

For the year ended December 31, 2018, our operating activities used cash of $102.4 million, primarily in connection with the purchase of portfolio investments, offset by sales and repayments of portfolio investments. For the same period, our financing activities provided cash of $94.8 million, primarily from proceeds from SBA-guaranteed debentures and net borrowings on our credit facility

For the year ended December 31, 2017, our operating activities provided cash of $18.9 million, primarily in connection with cash interest received and repayments of our investments, and our financing activities used cash of $2.9 million, primarily related to net repayments under our credit facility.

Distributions

During the three and twelve months ended December 31, 2018, we declared aggregate distributions of $0.34 and $1.36 per share ($5.4 million and $21.7 million, respectively). During the three and twelve months ended December 31, 2017, we declared aggregate distributions of $0.34 and $1.36 per share ($5.4 million and $20.3 million, respectively). Tax characteristics of all distributions were reported to stockholders on Form 1099-DIV. None of these dividends are expected to include a return of capital.

Recent Portfolio Activity

For the quarter ended December 31, 2018, we funded $75.9 million at par in five new and five existing portfolio companies and received $44.7 million in total proceeds from full payoffs, partial sales, and other amortizations. The new investment transactions and repayments that occurred during the quarter are summarized as follows:

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 $0.1 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 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.

On November 15, 2018, we invested $15.5 million in the first lien term loan and $2.0 million in the unfunded revolver of Nutritional Medicinals, LLC, a developer and distributor of branded feeding tube formulas for the enteral feeding market. Additionally, we invested $1.25 million in the equity of the company.

On November 30, 2018, we invested $10.0 million in the first lien term loan of APG Intermediate Sub 2 Corp., a provider of software and services to airline aviation markets. Additionally, we also invested $1.0 million in the equity of the company.

On December 7, 2018, we invested a total of $0.1 million in the equity of J.R. Watkins Holdings Inc., an existing portfolio company.

On December 17, 2018, we invested $2.5 million in the revolver of Furniture Factory Outlet, LLC, an existing portfolio company.

On December 21, 2018, we received full repayment on the second lien term loan of Hostway Corporation for total proceeds of $8.0 million, which included $1.2 million of previously reserved PIK.

On December 28, 2018, we invested $17.5 million in the first lien term loan of Jurassic Intermediate Holdings Corp., a producer and distributor of air-float kaolin and gel-grade attapulgite clays for customers in diversified end markets.

On December 31, 2018, we received full repayment on the first lien term loan of Energy Labs Inc. for total proceeds of $8.5 million, including a $0.1 million prepayment fee. We invested an additional $0.1 million in the equity of the company associated with a company acquisition.

Subsequent Events

On January 4, 2019, we received full repayment on the first lien term loan of EOS Fitness OPCO Holdings, LLC for total proceeds of $3.1 million. We also received a distribution related to our equity of $0.1 million.

On January 7, 2019 we received $0.3 million in full realization on the equity of OGS Holdings, Inc., resulting in a realized gain of $0.2 million.

On February 4, 2019, we invested $8.5 million in the first lien term loan of ASC Communications, LLC, an existing portfolio company.

On February 8, 2019, we invested $12.3 million in the first lien term loan of Exacta Land Surveyors LLC, a provider of land surveys and field management services used to facilitate the purchasing, selling, and development of residential real estate in the U.S. Additionally, we committed $1.5 million in the unfunded revolver, $4.0 million in the unfunded delayed draw term loan, and invested $1.0 million in the equity of the company.

On February 15, 2019, we received $0.05 million in full realization on the equity of Glori Energy Production, LLC.

On February 28, 2019, we invested $1.4 million in the first lien term loan of Convergence Technologies, Inc., an existing portfolio company. Additionally, we funded $5.4 million under the existing delayed draw term loan and an additional $0.1 million in the equity of the company.

Credit Facility

The outstanding balance under the credit facility as of March 4, 2019 was $112.8 million.

SBA-guaranteed Debentures

The total balance of SBA-guaranteed Debentures outstanding as of March 4, 2019 was $150.0 million.

Conference Call Information

Stellus Capital Investment Corporation will host a conference call to discuss these results on Wednesday, March 6, 2019 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 4047508. Starting approximately twenty-four hours after the conclusion of the call, a replay will be available through Thursday, March 14, 2019 by dialing (888) 203-1112 and entering passcode 4047508. 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
thuskinson@stelluscapital.com

PART I — FINANCIAL INFORMATION

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES


			December 31,		December 31,
			2018		2017
ASSETS
	Non-controlled, affiliated investments, at fair value (amortized cost of $52,185 and $1,052,185, respectively)		$	50,000	$	990,000
	Non-controlled, non-affiliated investments, at fair value (amortized cost of $502,691,464 and $367,401,021, respectively)			504,433,668		370,849,772
	Cash and cash equivalents			17,467,146		25,110,718
	Receivable for sales and repayments of investments			99,213		26,891
	Interest receivable			3,788,684		2,922,204
	Other receivables			85,246		—
	Deferred offering costs			18,673		—
	Prepaid expenses			344,621		361,270
		Total Assets	$	526,287,251	$	400,260,855
LIABILITIES
	Notes payable		$	47,641,797	$	47,306,488
	Credit facility payable			98,237,227		39,332,479
	SBA-guaranteed debentures			146,387,802		87,818,813
	Dividends payable			1,807,570		1,806,671
	Management fees payable			2,183,975		1,621,592
	Income incentive fees payable			1,936,538		371,647
	Capital gains incentive fees payable			81,038		—
	Interest payable			1,863,566		1,021,173
	Unearned revenue			410,593		139,304
	Administrative services payable			392,191		327,033
	Deferred tax liability			67,953		—
	Income tax payable			316,092		—
	Other accrued expenses and liabilities			115,902		268,413
		Total Liabilities	$	301,442,244	$	180,013,613
Commitments and contingencies (Note 7)
		Net Assets	$	224,845,007	$	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			228,160,491		228,066,762
	Accumulated net realized loss from investments, net of cumulative dividends of $9,519,362 and $4,246,819, respectively, and tax provision on realized gain of $267,975 and $0, respectively			(10,786,240)		(10,786,240)
	Accumulated undistributed net investment income			5,782,736		(435,794)
	Net unrealized appreciation on non-controlled, non-affiliated investments and cash equivalents, net of provision for taxes of $67,953 and $0, respectively (Note 13)			1,674,251		3,448,753
	Net unrealized depreciation on non-controlled, affiliated investments			(2,185)		(62,185)
		Net Assets	$	224,845,007	$	220,247,242
		Total Liabilities and Net Assets	$	526,287,251	$	400,260,855
		Net Asset Value Per Share	$	14.09	$	13.81

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

			For the		For the		For the
			year		year		year
			ended		ended		ended
			December 31,		December 31,		December 31,
			2018		2017		2016
INVESTMENT INCOME
	Interest income		$	51,463,033	$	38,071,449	$	38,176,617
	Other income			1,803,305		1,576,744		1,313,580
		Total Investment Income	$	53,266,338	$	39,648,193	$	39,490,197
OPERATING EXPENSES
	Management fees		$	8,154,842	$	6,255,911	$	6,281,863
	Valuation fees			307,838		336,300		397,330
	Administrative services expenses			1,390,375		1,245,727		1,045,648
	Income incentive fees			5,529,376		2,911,392		4,275,436
	Capital gains incentive fees			81,038		—		—
	Professional fees			1,189,071		1,274,066		712,524
	Directors' fees			317,000		331,000		324,000
	Insurance expense			348,500		429,897		471,427
	Interest expense and other fees			12,338,755		7,855,211		7,992,185
	Income tax expense			275,106		—		—
	Deferred offering costs			—		—		261,761
	Other general and administrative expenses			697,900		621,204		415,822
		Total Operating Expenses	$	30,629,801	$	21,260,708	$	22,177,996
		Loss on extinguishment of debt		—		416,725		—
		Net Investment Income	$	22,636,537	$	17,970,760	$	17,312,201
		Net realized gain (loss) on non-controlled, non-affiliated investments and cash equivalents	$	5,540,518	$	4,655,976	$	(13,089,671)
		Tax provision on realized gain on investments		(267,975)		—		—
		Net change in unrealized appreciation (depreciation) on non-controlled, non-affiliated investments and cash equivalents	$	(1,706,549)	$	40,113	$	18,603,401
		Net change in unrealized appreciation (depreciation) on non-controlled, affiliated investments and cash equivalents		60,000		(62,185)		-
		Benefit (provision) for taxes on net unrealized gain (loss) on investments	$	(67,953)	$	8,593	$	373,131
		Net Increase in Net Assets Resulting from Operations	$	26,194,578	$	22,613,257	$	23,199,062
		Net Investment Income Per Share	$	1.42	$	1.21	$	1.39
		Net Increase in Net Assets Resulting from Operations Per Share	$	1.64	$	1.52	$	1.86
		Weighted Average Shares of Common Stock Outstanding		15,953,571		14,870,981		12,479,959
		Distributions Per Share	$	1.36	$	1.36	$	1.36

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

		For the year		For the year		For the year
		ended		ended		ended
		December 31,		December 31,		December 31,
		2018		2017		2016
Increase in Net Assets Resulting from Operations
Net investment income		$	22,636,537	$	17,970,760	$	17,312,201
Net realized gain (loss) on investments and cash equivalents			5,540,518		4,655,976		(13,089,671)
Tax provision on realized gain on investments			(267,975)		—		—
Net change in unrealized appreciation (depreciation) on non-controlled, non-affiliated investments and cash equivalents			(1,706,549)		40,113		18,603,401
Net change in unrealized appreciation (depreciation) on non-controlled, affiliated investments and cash equivalents			60,000		(62,185)		—
Benefit (provision) for taxes on unrealized appreciation on investments			(67,953)		8,593		373,131
Net Increase in Net Assets Resulting from Operations		$	26,194,578	$	22,613,257	$	23,199,062
Stockholder distributions from:
	Net investment income		(16,418,007)		(17,970,760)		(16,968,350)
	Net realized capital gains		(5,272,543)		(2,352,545)		—
Total Distributions		$	(21,690,550)	$	(20,323,305)	$	(16,968,350)
Capital Share Transactions
	Issuance of common stock	$	94,788	$	48,741,549	$	—
	Sales load		—		(1,358,880)		—
	Offering costs		—		(307,022)		—
	Partial share redemption		(1,051)		(142)		(31)
Net Increase (Decrease) in Net Assets Resulting From
	Capital Share Transactions	$	93,737	$	47,075,505	$	(31)
Total Increase in Net Assets		$	4,597,765	$	49,365,457	$	6,230,681
	Net Assets at Beginning of Period	$	220,247,242	$	170,881,785	$	164,651,104
Net Assets at End of Period (Includes $5,782,736, $(435,794) and $(435,794) of Accumulated Undistributed Net Investment Income (Loss), Respectively)		$	224,845,007	$	220,247,242	$	170,881,785

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS


		For the year		For the year		For the year
		ended		ended		ended
		December 31,		December 31,		December 31,
		2018		2017		2016
Cash flows from operating activities
Net Increase in net assets resulting from operations		$	26,194,578	$	22,613,257	$	23,199,062
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:
	Purchases of investments		(272,927,459)		(172,171,246)		(65,661,034)
	Proceeds from sales and repayments of investments		147,528,448		172,260,541		55,949,177
	Net change in unrealized depreciation (appreciation) on investments		1,646,549		22,072		(18,603,401)
	Increase in investments due to PIK		(1,869,905)		(499,595)		(243,766)
	Amortization of premium and accretion of discount, net		(1,553,333)		(1,196,566)		(1,128,511)
	Deferred tax provision (benefit)		67,953		(8,593)		(373,130)
	Amortization of loan structure fees		456,151		455,893		523,835
	Amortization of deferred financing costs		335,309		251,826		326,190
	Amortization of loan fees on SBA-guaranteed debentures		623,989		333,027		184,783
	Net realized (gain) loss on investments		(5,540,518)		(4,655,976)		13,089,341
	Loss on extinguishment of debt		-		416,725		-
	Deferred offering costs		-		-		261,761
Changes in other assets and liabilities
	Decrease (increase) in interest receivable		(866,480)		1,679,538		118,289
	Decrease (increase) in other receivable		(85,246)		748		6,936
	Decrease in prepaid expenses		16,649		94,949		19,230
	Increase in management fees payable		562,383		13,297		89,516
	Increase (decrease) in incentive fees payable		1,564,891		(981,624)		745,315
	Increase in capital gains incentive fees payable		81,038		-		-
	Increase (decrease) in administrative services payable		65,158		54,522		(125,288)
	Increase in interest payable		842,393		47,361		403,623
	Increase (decrease) in unearned revenue		271,289		119,349		(16,922)
	Increase in income tax payable		316,092		-		-
	Increase (decrease) in other accrued expenses and liabilities		(152,511)		1,022		71,714
Net Cash Provided by (Used in) Operating Activities		$	(102,422,582)	$	18,850,527	$	8,836,720
Cash flows from financing activities
	Proceeds from the issuance of common stock	$	-	$	48,741,549	$	-
	Sales load for common stock issued		-		(1,358,880)		-
	Offering costs paid for common stock		(18,673)		(307,022)		-
	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		(21,594,863)		(19,930,616)		(16,968,350)
	Proceeds from SBA Debentures		60,000,000		25,000,000		-
	Financing costs paid on SBA Debentures		(2,055,000)		(856,250)		-
	Borrowings under Credit Facility		246,300,000		194,250,000		56,500,000
	Repayments of Credit Facility		(187,500,000)		(269,500,000)		(50,000,000)
	Financing costs paid on Credit facility		(351,403)		(1,158,616)		(50,000)
	Partial Share Redemption		(1,051)		(142)		(31)
Net Cash Provided by (Used in) Financing Activities		$	94,779,010	$	(2,933,938)	$	(10,518,381)
Net Increase (Decrease) in Cash and Cash Equivalents		$	(7,643,572)	$	15,916,589	$	(1,681,661)
	Cash and cash equivalents balance at beginning of period		25,110,718		9,194,129		10,875,790
Cash and Cash Equivalents Balance at End of Period		$	17,467,146	$	25,110,718	$	9,194,129
Supplemental and Non-Cash Activities
	Cash paid for interest expense	$	10,075,913	$	6,762,104	$	6,548,754
	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		392,689		-

Reconciliation of Core Net Investment Income
(Unaudited)

			Year		Quarter
			ended		ended
			December 31,		December 31,
			2018		2018
Net investment income		$	22,636,537	$	7,823,948
	Capital gains incentive fee		81,038		(1,092,212)
Core net investment income⁽¹⁾⁽²⁾		$	22,717,575	$	6,731,736

Per share amounts:
Net investment income per share		$	1.42	$	0.49
Core net investment income per share⁽¹⁾⁽²⁾		$	1.42	$	0.42


(2)	There were no capital gains incentive fees during the years ended December 31, 2017 and 2016.

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