Press Release

Stellus Capital Investment Corporation Reports Results for Its First Fiscal Quarter Ended March 31, 2019

May 10, 2019 at 5:00 AM EDT

HOUSTON, May 10, 2019 /PRNewswire/ -- Stellus Capital Investment Corporation (NYSE: SCM) ("Stellus" or the "Company") today announced financial results for its first fiscal quarter ended March 31, 2019.

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

	As of
Portfolio results	March 31, 2019
Total assets	$545.2
Investment portfolio, at fair value	$517.4
Net assets	$267.8
Weighted average yield on debt investments	10.7%
Net asset value per share	$14.32

	Quarter	Quarter
	ended	ended
	March 31, 2019	March 31, 2018
Portfolio activity

Total investments made, at par	$29.0	$73.2
Number of new investments⁽¹⁾	1	4
Repayments and sale of investments, including amortization	$21.8	$15.6
Number of portfolio companies at end of period	55	52

Operating results

Total investment income	$13.8	$10.9
Net investment income	$4.3	$4.5
Net investment income per share	$0.27	$0.28

Core net investment income⁽²⁾	$5.5	$4.5
Core net investment income per share⁽²⁾	$0.34	$0.28

Realized Gains per share	$0.63	$0.08
Distributions per share	$0.34	$0.34
Net increase in net assets from operations	$10.1	$7.3
Net increase in net assets from operations per share	$0.62	$0.46
Weighted average shares outstanding during the period	16,351,032	15,952,841


(1)	For the three months endend March 31, 2019, we made investments in one new portfolio company and four existing portfolio companies. For the three months ended March 31, 2018, we made investments in four new portfolio companies and four existing portfolio companies.

(2)	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 are pleased to report a strong quarter where core net investment income covered our $0.34 per share dividend and we generated $10.2 million of realized gains. We completed a secondary offering resulting in approximately $38.5 million of net proceeds in the first quarter and an additional $2.8 million in the second quarter, that provides us with additional capacity to grow," said Robert T. Ladd, the Company's Chief Executive Officer.

Portfolio and Investment Activity

We completed the first quarter of 2019 with a portfolio of $517.4 million (at fair value) invested in 55 companies. As of March 31, 2019, our portfolio included approximately 61% of first lien debt, 28% of second lien debt, 5% of unsecured debt and 6% of equity investments at fair value. Our debt portfolio consisted of 91% floating rate investments (subject to interest rate floors) and 9% fixed rate investments. The average size of our portfolio company investments was $9.4 million and our largest portfolio company investment was approximately $22.6 million, both at fair value. The weighted average yield on all of our debt investments as of March 31, 2019 was approximately 10.7%.

During the three months ended March 31, 2019, we made $29.0 million of investments in one new and four existing portfolio companies at par and received $21.8 million from amortization and repayments of certain other investments.

This compares to the portfolio as of December 31, 2018, which had a fair value of $504.5 million invested in 57 companies, comprised of 58% of first lien debt, 30% of second lien debt, 5% of unsecured debt and 7% of equity investments at fair value. The weighted average yield on all of our debt investments as of December 31, 2018 was approximately 10.9%. The debt portfolio consisted of 91% floating rate investments (subject to interest rate floors) and 9% fixed rate investments.

Results of Operations

Investment income for the three months ended March 31, 2019 and 2018 totaled $13.8 million and $10.9 million, respectively, most of which was interest income from portfolio investments.

Operating expenses for the three months ended March 31, 2019 and 2018, totaled $9.5 million and $6.4 million, respectively. For the same respective periods, base management fees totaled $2.2 million and $1.7 million, income incentive fees totaled $1.4 million and $1.0 million, capital gains incentive fees totaled $1.2 million and $0, fees and expenses related to our borrowings totaled $3.7 million and $2.5 million (including interest and amortization of deferred financing costs), administrative expenses totaled $0.4 million for both periods, and other expenses totaled $0.6 million and $0.8 million, respectively.

Net investment income was $4.3 million and $4.5 million, or $0.27 and $0.28 per share of common stock, based on weighted average common stock outstanding for the three months ended March 31, 2019 and 2018 of 16,351,032 and 15,952,841, respectively.

The capital gains incentive fee of $1.2 million for the three months ended March 31, 2019 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 March 31, 2019 would be $5.5 million, or $0.34 per share. There was no such fee accrued for the three months ended March 31, 2018.

The Company's investment portfolio had a net change in unrealized appreciation (depreciation) for the three months ended March 31, 2019 and 2018, of ($4.4) million and $1.5 million, respectively. For the three months ended March 31, 2019 and 2018, the Company had realized gains of $10.2 million and $1.3 million, respectively.

Net increase in net assets resulting from operations totaled $10.1 million and $7.3 million, or $0.62 and $0.46 per share of common stock based on weighted average common stock outstanding for the three months ended March 31, 2019 and 2018 of 16,351,032 and 15,952,841, respectively.

Liquidity and Capital Resources

As of March 31, 2019 and 2018, our credit facilities provided for borrowings in an aggregate amount up to $180.0 and $140.0 million, respectively, on a committed basis. As of March 31, 2019, our credit facility had an accordion feature which allowed for potential future expansion of the facility size to $195.0 million. As of March 31, 2019 and December 31, 2018, we had $76.1 million and $99.6 million in outstanding borrowings under the credit facility, respectively.

For the three months ended March 31, 2019, the Company issued 2,750,000 of additional shares of common stock in connection with a secondary offering. Gross proceeds resulting from the issuance totaled $39.7 million, and underwriting and other expenses related to the offering totaled $1.1 million. For the three months ended March 31, 2019, our operating activities used cash of $3.3 million primarily in connection with purchases and origination of portfolio investments, which was offset by repayments of our investments. For the same period, our financing activities provided cash of $9.6 million, due to the capital raise during the quarter, offset by repayments on our credit facility.

For the three months ended March 31, 2018, our operating activities used cash of $51.8 million, primarily in connection with the purchase and origination of portfolio investments, which was slightly offset by repayments of our investments, and our financing activities provided cash of $72.2 million, due to net borrowings under credit facility.

Distributions

During the three months ended March 31, 2019 and 2018, we declared aggregate distributions of $0.34 per share ($5.7 million and $5.4 million, respectively) for each quarter. Tax characteristics of all distributions will be reported to stockholders on Form 1099-DIV after the end of the calendar year. None of these dividends are expected to include a return of capital.

Recent Portfolio Activity

On 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, $1.5 million in the unfunded revolver, and $4.0 million in the unfunded delayed draw 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 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 an additional $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.

On March 7, 2019 we received $1.4 million in full realization on the equity of Resolute Industrial, LLC, resulting in a realized gain of $0.6 million.

On March 28, 2019 we received full repayment on the second lien term loan of Beneplace, LLC for total proceeds of $5 million.

On March 29, 2019 we received $9.4 million in full realization on the equity of MTC Parent, L.P., resulting in a realized gain of $9.4 million.

Events Subsequent to March 31, 2019

Exercise of Underwriter's Option

On April 11, 2019, we issued 202,149 shares of common stock through the underwriter's partial exercise of their option to purchase additional shares subsequent to our secondary offering. Gross proceeds totaled $2.9 million and underwriting and other expenses totaled $0.1 million. The Company used the net proceeds to pay off a portion of outstanding borrowings under the credit facility.

Portfolio Activity

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

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

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

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

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

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

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

Credit Facility

The outstanding balance under the credit facility as of May 6, 2019 was $56.8 million.

Dividend Declared

On April 11, 2019, the Company's board of directors declared a regular monthly dividend for each of April, May and June 2019 as follows:


Declared	Ex-Dividend Date	Record Date	Payment Date	Amount per Share
4/11/2019	4/29/2019	4/30/2019	5/15/2019	$	0.1133
4/11/2019	5/30/2019	5/31/2019	6/14/2019	$	0.1133
4/11/2019	6/27/2019	6/28/2019	7/15/2019	$	0.1133

Conference Call Information

Stellus Capital Investment Corporation will host a conference call to discuss these results on Friday, May 10, 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 855-719-5012 (domestic). Use passcode 8305783. Starting approximately twenty-four hours after the conclusion of the call, a replay will be available through Saturday, May 18, 2019 by dialing (888) 203-1112 and entering passcode 8305783. The replay will also be available on the company's website.

PART I — FINANCIAL INFORMATION

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

			March 31,
			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 $520,096,508 and $502,691,464, respectively)			517,411,814		504,433,668
	Cash and cash equivalents			23,843,646		17,467,146
	Receivable for sales and repayments of investments			212,822		99,213
	Interest receivable			3,317,929		3,788,684
	Other receivables			61,551		85,246
	Deferred offering costs			7,609		18,673
	Prepaid expenses			346,519		344,621
		Total Assets	$	545,201,890	$	526,287,251
LIABILITIES
	Notes payable		$	47,723,760	$	47,641,797
	Credit facility payable			74,861,034		98,237,227
	SBA-guaranteed debentures			146,536,821		146,387,802
	Dividends payable			2,119,145		1,807,570
	Management fees payable			972,645		2,183,975
	Income incentive fees payable			1,634,588		1,936,538
	Capital gains incentive fees payable			1,242,795		81,038
	Interest payable			866,559		1,863,566
	Unearned revenue			394,746		410,593
	Administrative services payable			442,132		392,191
	Deferred tax liability			80,554		67,953
	Income tax payable			51,034		316,092
	Other accrued expenses and liabilities			476,833		115,902
		Total Liabilities	$	277,402,646	$	301,442,244
Commitments and contingencies (Note 7)
		Net Assets	$	267,799,244	$	224,845,007
NET ASSETS
	Common stock, par value $0.001 per share (200,000,000 shares authorized; 18,703,810 and 15,953,810 issued and outstanding, respectively)		$	18,704	$	15,954
	Paid-in capital			266,703,785		228,160,491
	Distributable earnings			1,076,755		(3,331,438)
		Net Assets	$	267,799,244	$	224,845,007
		Total Liabilities and Net Assets	$	545,201,890	$	526,287,251
		Net Asset Value Per Share	$	14.32	$	14.09

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

			For the		For the
			three		three
			months ended		months ended
			March 31,		March 31,
			2019		2018
INVESTMENT INCOME
	Interest income		$	13,625,399	$	10,730,748
	Other income			209,530		181,033
		Total Investment Income	$	13,834,929	$	10,911,781
OPERATING EXPENSES
	Management fees		$	2,222,645	$	1,748,896
	Valuation fees			107,322		134,410
	Administrative services expenses			405,399		351,229
	Income incentive fees			1,373,854		968,826
	Capital gains incentive fees			1,161,757		—
	Professional fees			344,340		469,138
	Directors' fees			104,000		92,000
	Insurance expense			85,697		85,697
	Interest expense and other fees			3,674,787		2,464,980
	Income tax expense			12,744		—
	Other general and administrative expenses			8,725		121,226
		Total Operating Expenses	$	9,501,270	$	6,436,402
		Net Investment Income	$	4,333,659	$	4,475,379
		Net realized gain on non-controlled, non-affiliated investments and cash equivalents	$	10,246,098	$	1,335,269
		Net change in unrealized appreciation (depreciation) on non- controlled, non-affiliated investments and cash equivalents	$	(4,426,898)	$	1,466,614
		Net change in unrealized appreciation on non- controlled, affiliated investments and cash equivalents		2,185		66,667
		Provision for taxes on net unrealized gain on investments	$	(12,601)	$	-
		Net Increase in Net Assets Resulting from Operations	$	10,142,443	$	7,343,929
		Net Investment Income Per Share	$	0.27	$	0.28
		Net Increase in Net Assets Resulting from Operations Per Share	$	0.62	$	0.46
		Weighted Average Shares of Common Stock Outstanding		16,351,032		15,952,841
		Distributions Per Share	$	0.34	$	0.34

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (unaudited)

		For the		For the
		three		three
		months ended		months ended
		March 31,		March 31,
		2019		2018
Increase in Net Assets Resulting from Operations
	Net investment income	$	4,333,659	$	4,475,379
	Net realized gain on investments and cash equivalents		10,246,098		1,335,269
	Net change in unrealized appreciation (depreciation) on non-controlled, non-affiliated investments and cash equivalents		(4,426,898)		1,466,614
	Net change in unrealized appreciation on non-controlled, affiliated investments and cash equivalents		2,185		66,667
	Provision for taxes on unrealized appreciation on investments		(12,601)		—
Net Increase in Net Assets Resulting from Operations		$	10,142,443	$	7,343,929
Stockholder distributions		$	(5,734,250)	$	(5,422,500)
Capital Share Transactions
	Issuance of common stock	$	39,682,500	$	94,788
	Sales load		(935,000)		—
	Offering costs		(202,891)		—
	Partial share transactions		1,435		(327)
Net Increase in Net Assets Resulting From Capital Share Transactions		$	38,546,044	$	94,461
Total Increase in Net Assets		$	42,954,237	$	2,015,890
Net Assets at Beginning of Period		$	224,845,007	$	220,247,242
Net Assets at End of Period		$	267,799,244	$	222,263,132

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

			For the		For the
			three		three
			months ended		months ended
			March 31,		March 31,
			2019		2018
Cash flows from operating activities
Net Increase in net assets resulting from operations			$	10,142,443	$	7,343,929
	Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:
		Purchases of investments		(28,573,192)		(71,713,787)
		Proceeds from sales and repayments of investments		21,794,726		15,618,134
		Net change in unrealized depreciation (appreciation) on investments		4,424,713		(1,533,281)
		Increase in investments due to PIK		(41,841)		(152,006)
		Amortization of premium and accretion of discount, net		(400,064)		(343,739)
		Deferred tax provision		12,601		—
		Amortization of loan structure fees		123,807		66,223
		Amortization of deferred financing costs		81,963		83,196
		Amortization of loan fees on SBA-guaranteed debentures		149,019		100,668
		Net realized gain on investments		(10,246,098)		(1,335,269)
	Changes in other assets and liabilities
		Decrease (increase) in interest receivable		470,755		(864,856)
		Decrease (increase) in other receivable		23,695		(37,647)
		Decrease (increase) in prepaid expenses		(1,898)		63,084
		Increase in management fees payable		(1,211,330)		(46,226)
		Increase (decrease) in incentive fees payable		(301,950)		793,088
		Increase in capital gains incentive fees payable		1,161,757		—
		Increase in administrative services payable		49,941		34,694
		Decrease in interest payable		(997,007)		(337,193)
		Increase (decrease) in unearned revenue		(15,847)		36,685
		Decrease in income tax payable		(265,058)		—
		Increase in other accrued expenses and liabilities		360,932		385,087
Net Cash Used in Operating Activities			$	(3,257,933)	$	(51,839,216)
Cash flows from Financing Activities
		Proceeds from the issuance of common stock	$	39,682,500	$	—
		Sales load for common stock issued		(935,000)		—
		Offering costs paid for common stock		(191,827)		—
		Stockholder distributions paid		(5,422,675)		(5,327,712)
		Borrowings under Credit Facility		22,250,000		86,550,000
		Repayments of Credit Facility		(45,750,000)		(9,000,000)
		Partial share transactions		1,435		(327)
		Net Cash Provided by Financing Activities	$	9,634,433	$	72,221,961
		Net Increase in Cash and Cash Equivalents	$	6,376,500	$	20,382,745
		Cash and cash equivalents balance at beginning of period		17,467,146		25,110,718
		Cash and Cash Equivalents Balance at End of Period	$	23,843,646	$	45,493,463
		Supplemental and Non-Cash Activities
		Cash paid for interest expense	$	4,317,004	$	2,512,086
		Excise tax paid		280,000		27,717
		Shares issued pursuant to Dividend Reinvestment Plan		—		94,788
		Increase in Distribution Payable		311,575		899
		Decrease in deferred offering costs		(11,064)		—

Reconciliation of Core Net Investment Income
(Unaudited)

		Quarter	Quarter
		ended	ended
		March 31, 2019	March 31, 2018
Net investment income		$4,333,659	$4,475,379
	Capital gains incentive fee	$1,161,757	$-
Core net investment income⁽²⁾		$5,495,416	$4,475,379

Per share amounts:
Net investment income per share		$0.27	$0.28
Core net investment income per share⁽²⁾		$0.34	$0.28

(2)

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.

Contacts
Stellus Capital Investment Corporation
W. Todd Huskinson, (713) 292-5414
Chief Financial Officer
thuskinson@stelluscapital.com

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