(Mark One) | ||
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2013
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(Exact Name of Registrant as Specified in Its Charter)
Maryland | 46-0937320 | |
(State or other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices) (Zip Code)
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer x | Smaller reporting company o | |
(do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x
The number of shares of the issuers Common Stock, $0.001 par value, outstanding as of August 7, 2013 was 12,066,019.
i
Item 1. | Financial Statements |
June 30, 2013 (Unaudited) |
December 31, 2012 |
|||||||
ASSETS |
||||||||
Non-controlled, non-affiliated investments, at fair value (amortized cost of $260,614,004 and $195,455,671, respectively) | $ | 262,185,828 | $ | 195,451,256 | ||||
Cash and cash equivalents | 10,982,998 | 62,131,686 | ||||||
Interest receivable | 4,110,605 | 2,573,831 | ||||||
Prepaid loan structure fees | 1,716,629 | 1,947,820 | ||||||
Prepaid expenses | 183,491 | 438,384 | ||||||
Total Assets | 279,179,551 | 262,542,977 | ||||||
LIABILITIES |
||||||||
Payable for investments purchased | | 4,750,000 | ||||||
Credit facility payable | 91,000,000 | 38,000,000 | ||||||
Short-term loan | 8,999,899 | 45,000,943 | ||||||
Base management fees payable | 1,041,199 | 527,034 | ||||||
Incentive fees payable | 1,250,375 | | ||||||
Accrued offering costs | | 147,123 | ||||||
Interest payable | 197,081 | 66,477 | ||||||
Directors' fees payable | 89,000 | 29,452 | ||||||
Other accrued expenses and liabilities | 495,440 | 175,993 | ||||||
Total Liabilities | 103,072,994 | 88,697,022 | ||||||
Net Assets | $ | 176,106,557 | $ | 173,845,955 | ||||
NET ASSETS |
||||||||
Common Stock, par value $0.001 per share (100,000,000 shares authorized, 12,066,019 and 12,035,023 shares issued and outstanding, respectively) | $ | 12,066 | $ | 12,035 | ||||
Paid-in capital | 175,154,696 | 174,714,838 | ||||||
Accumulated undistributed net realized gain | 1,002,917 | | ||||||
Distributions in excess of net investment income | (1,403,946 | ) | (874,986 | ) | ||||
Unrealized appreciation (depreciation) on investments and cash equivalents | 1,340,824 | (5,932 | ) | |||||
Net Assets | $ | 176,106,557 | $ | 173,845,955 | ||||
Total Liabilities and Net Assets | $ | 279,179,551 | $ | 262,542,977 | ||||
Net Asset Value Per Share | $ | 14.60 | $ | 14.45 |
See Notes to Unaudited Consolidated Financial Statements.
1
For the three months ended June 30, 2013 | For the period from inception (May 18, 2012) through June 30, 2012 |
For the six months ended June 30, 2013 | For the period from inception (May 18, 2012) through June 30, 2012 |
|||||||||||||
INVESTMENT INCOME |
||||||||||||||||
Interest income | $ | 6,710,905 | $ | | $ | 13,035,629 | $ | | ||||||||
Other Income | 630,322 | | 752,038 | | ||||||||||||
Total Investment Income | 7,341,227 | | 13,787,667 | | ||||||||||||
OPERATING EXPENSES |
||||||||||||||||
Management fees | $ | 1,041,199 | $ | | $ | 1,925,202 | $ | | ||||||||
Valuation fees | 113,710 | | 203,710 | | ||||||||||||
Administrative services expenses | 228,535 | | 399,576 | | ||||||||||||
Incentive fees | 867,096 | | 1,550,236 | | ||||||||||||
Professional fees | 107,516 | 126,628 | 223,462 | 126,628 | ||||||||||||
Directors' fees | 89,000 | | 178,000 | | ||||||||||||
Insurance expense | 118,268 | | 235,238 | | ||||||||||||
Interest expense and other fees | 718,219 | | 1,284,759 | | ||||||||||||
Other general and administrative expenses |
85,026 | | 127,444 | | ||||||||||||
Total Operating Expenses | $ | 3,368,569 | $ | 126,628 | $ | 6,127,627 | $ | 126,628 | ||||||||
Net Investment Income (Loss) | $ | 3,972,658 | $ | (126,628 | ) | $ | 7,660,040 | $ | (126,628 | ) | ||||||
Net Realized Gain on Investments and Cash Equivalents | $ | 99,995 | $ | | $ | 1,002,917 | $ | | ||||||||
Net Change in Unrealized Appreciation on Investments and Cash Equivalents | $ | 404,942 | $ | | $ | 1,346,756 | $ | | ||||||||
Net Increase (Decrease) in Net Assets Resulting from Operations | $ | 4,477,595 | $ | (126,628 | ) | $ | 10,009,713 | $ | (126,628 | ) | ||||||
Net Investment Income Per Share | $ | 0.33 | $ | | $ | 0.64 | $ | | ||||||||
Net Increase in Net Assets Resulting from Operations Per Share | $ | 0.37 | $ | | $ | 0.83 | $ | | ||||||||
Weighted Average Shares of Common Stock Outstanding | 12,050,618 | | 12,043,117 | |
See Notes to Unaudited Consolidated Financial Statements.
2
For the six months ended June 30, 2013 (Unaudited) | For the Period from inception (May 18, 2012) through June 30, 2012 (Unaudited) |
|||||||
Increase in Net Assets Resulting from Operations |
||||||||
Net investment income (loss) | $ | 7,660,040 | $ | (126,628 | ) | |||
Net realized gain on investments and cash equivalents | 1,002,917 | | ||||||
Net change in unrealized appreciation on investments and cash equivalents | 1,346,756 | | ||||||
Net Increase (Decrease) in Net Assets Resulting from Operations | 10,009,713 | (126,628 | ) | |||||
Stockholder distributions |
||||||||
Distributions | (8,189,000 | ) | | |||||
Capital share transactions |
||||||||
Issuance of common stock | 439,889 | | ||||||
Net increase in net assets resulting from capital share transactions | 439,889 | | ||||||
Total increase (decrease) in net assets | 2,260,602 | (126,628 | ) | |||||
Net assets at beginning of period | 173,845,955 | | ||||||
Net assets at end of period | $ | 176,106,557 | $ | (126,628 | ) |
See Notes to Unaudited Consolidated Financial Statements.
3
For the six months ended June 30, 2013 (Unaudited) | For the Period from Inception (May 18, 2012) through June 30, 2012 (Unaudited) |
|||||||
Cash flows from operating activities |
||||||||
Net increase (decrease) in net assets resulting from operations | $ | 10,009,713 | $ | (126,628 | ) | |||
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: |
||||||||
Purchases of investments | (112,467,250 | ) | | |||||
Proceeds from sales and repayments of investments | 48,792,161 | | ||||||
Net change in unrealized appreciation on investments | (1,345,238 | ) | | |||||
Increase in investments due to PIK | (523,926 | ) | | |||||
Accretion of discount | (184,489 | ) | | |||||
Net realized gain on investments | (1,005,830 | ) | | |||||
Changes in other assets and liabilities |
||||||||
Increase in interest receivable | (1,536,774 | ) | | |||||
Decrease in prepaid expenses and fees | 486,084 | | ||||||
Decrease in payable for investments purchased | (4,750,000 | ) | | |||||
Increase in management fees payable | 514,165 | | ||||||
Increase in directors' fees payable | 59,548 | | ||||||
Increase in incentive fees payable | 1,250,375 | | ||||||
Increase in interest payable | 130,604 | | ||||||
Increase in other accrued expenses and liabilities | 319,447 | 126,628 | ||||||
Net cash (used in) provided by operating activities | $ | (60,251,410 | ) | $ | 126,628 | |||
Cash flows from financing activities |
||||||||
Offering costs paid | (147,123 | ) | | |||||
Stockholder distributions paid | (7,749,111 | ) | | |||||
Borrowings under credit facility | 53,000,000 | | ||||||
Borrowings under short-term loan | (36,001,044 | ) | | |||||
Net cash provided by financing activities | 9,102,722 | | ||||||
Net increase (decrease) in cash and cash equivalents | (51,148,688 | ) | | |||||
Cash and cash equivalents balance at beginning of period | 62,131,686 | | ||||||
Cash and cash equivalents balance at end of period | $ | 10,982,998 | | |||||
Non-cash items |
||||||||
Common stock issued in connection with dividend reinvestments | $ | 439,889 | $ | |
See Notes to Unaudited Consolidated Financial Statements.
4
Investments | Headquarters/Industry | Principal Amount/Shares | Amortized Cost |
Fair Value(1) |
% of Net Assets | |||||||||||||||
Non-controlled, non-affiliated investments |
||||||||||||||||||||
Aderant North America, Inc. Term Loan-Second Lien, L + 8.75%, LIBOR floor 1.25%, due 6/20/2019 |
Atlanta, GA/ Software |
$ | 1,500,000 | $ | 1,478,798 | $ | 1,545,000 | 0.88 | % | |||||||||||
Ascend Learning, Inc. Term Loan-Second Lien, Euro + 10.00%, Euro floor 1.50%, due 12/6/2017 |
Burlington, MA/ Software |
$ | 10,000,000 | 10,000,000 | 10,081,300 | 5.72 | % | |||||||||||||
Atkins Nutritional Holdings II, Inc. Term Loan-Second Lien, L + 8.50%, LIBOR floor 1.25%, due 4/3/2019 |
Denver, CO/ Beverage, Food, & Tobacco |
$ | 17,000,000 | 16,669,216 | 17,212,500 | 9.77 | % | |||||||||||||
ATX Networks Corp. Term Loan-Unsecured, 12.00% cash, 2.00% PIK, due 5/12/2016(2)(3) |
West Ajax, Ontario/ High Tech Industries |
$ | 20,989,080 | 20,989,080 | 20,989,080 | 11.92 | % | |||||||||||||
Baja Broadband, LLC Term Loan-Second Lien, L + 11.00%, LIBOR floor 1.50%, due 12/20/2017 |
Fort Mill, SC/ Media: Broadcasting & Subscription |
$ | 15,000,000 | 15,000,000 | 15,231,000 | 8.65 | % | |||||||||||||
Binder and Binder Term Loan-Unsecured, 13.00% cash, 2.00% PIK, due 2/27/2016(2) |
Hauppauge, New York/ Services: Business |
$ | 13,000,000 | 13,000,000 | 13,000,000 | 7.38 | % | |||||||||||||
Blackhawk Mining, LLC Term Loan-First Lien, 12.50%, due 10/9/2016 |
Lexington, KY/ Metals & Mining |
$ | 5,000,000 | 4,577,420 | 4,577,420 | 2.60 | % | |||||||||||||
Common Shares, Class B(4) | 36 shares | 214,286 | 214,286 | 0.12 | % | |||||||||||||||
Total | 4,791,706 | 4,791,706 | 2.72 | % | ||||||||||||||||
Colford Capital Holdings, LLC(5) Term Loan-Senior Secured, 12.25%, due 5/31/2018(3) |
New York, NY/ Finance |
$ | 12,500,000 | 12,222,365 | 12,222,365 | 6.94 | % | |||||||||||||
ConvergeOne Holdings Corp. Term Loan-First Lien, L + 8.00%, LIBOR floor 1.25%, due 5/8/2019 |
Eagan, MN/ Telecommunications |
$ | 13,000,000 | 12,808,345 | 12,805,000 | 7.27 | % | |||||||||||||
Eating Recovery Center, LLC Mezzanine Term Loan-Unsecured, 12.00% cash, 1.00% PIK, due 6/28/18(2) |
Denver, CO/ Healthcare & Pharmaceuticals |
$ | 18,400,000 | 18,053,319 | 17,704,480 | 10.05 | % | |||||||||||||
Common Shares, Series A(4) | 86,667 shares | 1,500,000 | 1,500,000 | 0.85 | % | |||||||||||||||
Total | 19,553,319 | 19,204,480 | 10.90 | % | ||||||||||||||||
Grupo HIMA San Pablo, Inc. Term Loan-First Lien, L + 7.00%, LIBOR floor 1.50%, due 1/31/18 |
San Juan, PR/ Healthcare & Pharmaceuticals |
$ | 4,987,500 | 4,894,360 | 4,831,624 | 2.74 | % | |||||||||||||
Term Loan-Second Lien, 13.75%, due 7/31/18 |
$ | 4,000,000 | 3,810,080 | 3,900,000 | 2.22 | % | ||||||||||||||
Total | 8,704,440 | 8,731,624 | 4.96 | % | ||||||||||||||||
Holley Performance Products Term Loan-First Lien, Prime + 6.00%, Prime floor 3.50%, due 11/30/2017 |
Bowling Green, KY/ Automotive |
$ | 12,343,750 | 12,203,449 | 12,203,449 | 6.93 | % | |||||||||||||
Livingston International, Inc. Term Loan-Second Lien, L + 7.75%, LIBOR floor 1.25%, due 4/18/2020(3) |
Toronto, Ontario/ Services: Business |
$ | 7,000,000 | 6,862,839 | 7,096,250 | 4.03 | % | |||||||||||||
ProPetro Services Inc. Term Loan-First Lien, 10%, due 6/30/2015 |
Midland, TX/ Energy: Oil & Gas |
$ | 10,000,000 | 9,952,567 | 9,975,000 | 5.66 | % | |||||||||||||
Refac Optical Group(6) Term A Loan-First Lien, L + 7.50%, due 3/23/2016 |
Blackwood, NJ/ Retail |
$ | 3,146,371 | 3,146,371 | 3,146,371 | 1.79 | % | |||||||||||||
Term B Loan-First Lien, L + 8.50% cash, 1.75% PIK, due 3/23/2016(2) | $ | 6,122,484 | 6,122,484 | 6,122,484 | 3.48 | % | ||||||||||||||
Total | 9,268,855 | 9,268,855 | 5.27 | % | ||||||||||||||||
Securus Technologies Holdings Term Loan-Second Lien, L + 7.75%, LIBOR floor 1.25%, due 4/30/2021 |
Dallas, TX/ Telecommunications |
$ | 7,000,000 | 6,931,318 | 7,032,830 | 3.99% |
See Notes to Unaudited Consolidated Financial Statements.
5
Investments | Headquarters/Industry | Principal Amount/Shares | Amortized Cost |
Fair Value(1) |
% of Net Assets | |||||||||||||||
Snowman Holdings, LLC Term Loan-Unsecured, 11.00% cash, 2.00% PIK, due 1/11/2017(2) |
Lebanon, IN/ Transportation: Cargo |
$ | 9,060,881 | 9,060,881 | 9,060,881 | 5.15 | % | |||||||||||||
SPM Capital, LLC Term Loan-First Lien, L + 5.50%, LIBOR floor 1.50%, due 10/31/2017 |
Bloomington, MN/ Healthcare & Pharmaceuticals |
$ | 7,443,750 | 7,308,853 | 7,404,298 | 4.20 | % | |||||||||||||
Sportsmans Warehouse Holdings, Inc. Term Loan-First Lien, L + 7.00%, LIBOR floor 1.50%, due 11/13/2018 |
Midvale, UT/ Retail |
$ | 9,950,000 | 9,858,883 | 9,999,750 | 5.68 | % | |||||||||||||
Studer Group, LLC (The) Term Loan-Unsecured, 12.00% cash, 2.00% PIK, due 3/29/2017(2) |
Gulf Breeze, FL/ Services: Business |
$ | 16,808,553 | 16,808,553 | 16,808,553 | 9.55 | % | |||||||||||||
Telecommunications Management, LLC Term Loan-Second Lien, L + 8.00%, LIBOR floor 1.00%, due 10/30/20 |
Sikeston, MO/ Media: Broadcasting & Subscription |
$ | 8,000,000 | 7,921,322 | 8,100,000 | 4.60 | % | |||||||||||||
Telular Corp. Term Loan-Second Lien, Euro + 8.00%, Euro floor 1.25%, due 6/24/2020 |
Chicago, IL/ High Tech Industries |
$ | 7,500,000 | 7,387,759 | 7,387,759 | 4.20 | % | |||||||||||||
Transaction Network Services, Inc. Term Loan-Second Lien, L + 8.00%, LIBOR floor 1.00%, due 8/14/2020 |
Reston, VA/ Telecommunications |
$ | 2,550,000 | 2,513,091 | 2,576,571 | 1.46 | % | |||||||||||||
Varel International Energy Funding Corp. Term Loan-First Lien, L + 7.75%, LIBOR floor 1.50%, due 7/17/2017 |
Dallas, TX/ Energy: Oil & Gas |
$ | 9,850,000 | 9,668,577 | 9,668,577 | 5.49 | % | |||||||||||||
Woodstream Group, Inc. Subordinated Debt-Unsecured, 11.00%, due 2/28/2017 |
Lititz, PA/ Consumer Goods: Non-Durable |
$ | 862,279 | 837,708 | 844,085 | 0.48 | % | |||||||||||||
Woodstream Corp. Senior Subordinated Note-Unsecured, 11.00%, due 2/27/2017 |
Lititz, PA/ Consumer Goods: Non-Durable |
$ | 9,137,721 | 8,812,080 | 8,944,915 | 5.08 | % | |||||||||||||
Total Non-controlled, non-affiliated investments | $ | 260,614,004 | $ | 262,185,828 | 148.88 | % | ||||||||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS | (86,079,271) | (48.88)% | ||||||||||||||||||
NET ASSETS | $ | 176,106,557 | 100.00% |
(1) | See Note 1 of the Notes to Financial Statements for a discussion of the methodologies used to value securities in the portfolio. |
(2) | Represents a payment-in-kind security which pays a portion of interest in additional par. |
(3) | The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. |
(4) | Security is non-income producing. |
(5) | This investment also includes a delayed draw term loan commitment in an amount not to exceed $12,500,000, an interest rate of 12.25%, and a maturity of May 31, 2018. This investment is accruing an unused commitment fee of 0.50% per annum. |
(6) | This investment also includes an undrawn revolving loan commitment in an amount not to exceed $2,000,000, an interest rate of LIBOR plus 7.5%, and a maturity of March 23, 2016. This investment is accruing an unused commitment fee of 0.50% per annum. |
See Notes to Unaudited Consolidated Financial Statements.
6
Investments | Headquarters/Industry | Principal Amount/Shares | Cost | Fair Value(1) |
% of Net Assets | |||||||||||||||
Non-controlled, non-affiliated investments |
||||||||||||||||||||
Aderant North America Inc. Term Loan-Second Lien, Prime + 7.75%, due 6/20/2019(2) |
Atlanta, GA/ Services: Business |
$ | 1,500,000 | $ | 1,477,622 | $ | 1,477,622 | 0.85 | % | |||||||||||
Ascend Learning, Inc. Term Loan-Second Lien, Euro + 10.00%, Euro 1.50%, due 12/6/2017(2) |
Burlington, MA/ High Tech Industries |
$ | 10,000,000 | 10,000,000 | 10,000,000 | 5.75 | % | |||||||||||||
ATX Networks Term Loan-Unsecured, 12.00% cash, 2.00% PIK, due 5/12/2016(2)(3)(4) |
West Ajax, Ontario/ High Tech Industries |
$ | 20,778,456 | 20,778,456 | 20,778,456 | 11.95 | % | |||||||||||||
Baja Broadband, LLC Term Loan-Second Lien, L + 11.00%, LIBOR 1.50%, due 12/20/2017(2) |
Fort Mill, SC/ Media: Broadcasting & Subscription |
$ | 15,000,000 | 15,000,000 | 15,000,000 | 8.63 | % | |||||||||||||
Binder and Binder Senior Subordinated Note-Unsecured, 13.00% cash, 2.00% PIK, due 2/27/2016(3) |
Hauppauge, New York/ Services: Business |
$ | 13,000,000 | 13,000,000 | 13,000,000 | 7.48 | % | |||||||||||||
Blackhawk Mining, LLC Term Loan-First Lien, 12.50%, due 10/5/2016(7) |
Lexington, KY/ Metals & Mining |
$ | 5,000,000 | 4,535,714 | 4,535,714 | 2.61 | % | |||||||||||||
Common Shares, Class B(5)(6) | 36 shares | 214,286 | 214,286 | 0.12 | % | |||||||||||||||
Total | 4,750,000 | 4,750,000 | 2.73 | % | ||||||||||||||||
Eating Recovery Center, LLC Mezzanine Term Loan-Unsecured, 12.00% cash, 1.00% PIK, due 12/28/2018(2)(3) |
Denver, CO/ Healthcare & Pharmaceuticals |
$ | 18,400,000 | 18,032,633 | 18,032,633 | 10.37 | % | |||||||||||||
Common Shares, Series A(5) | 86,667 shares | 1,500,000 | 1,500,000 | 0.86 | % | |||||||||||||||
Total | 19,532,633 | 19,532,633 | 11.23 | % | ||||||||||||||||
Holley Performance Products Term Loan-First Lien, Prime + 6.00%, Prime 3.50%, due 11/30/2017(2) |
Bowling Green, KY/ Automotive |
$ | 12,500,000 | 12,345,646 | 12,345,646 | 7.10 | % | |||||||||||||
Refac Optical Group(8) Term A Loan-First Lien, L + 7.50%, LIBOR 0.2077%, due 3/23/2016(2) |
Blackwood, NJ/ Retail |
$ | 3,780,408 | 3,780,408 | 3,780,408 | 2.18 | % | |||||||||||||
Term B Loan-First Lien, L + 8.50%, LIBOR 0.2077%, 1.75% PIK, due 3/23/2016(2)(3) |
$ | 6,098,781 | 6,098,781 | 6,098,781 | 3.51 | % | ||||||||||||||
Total | 9,879,189 | 9,879,189 | 5.69 | % | ||||||||||||||||
Securus Technologies Holdings Term Loan-Second Lien, Euro + 9.00%, Euro 1.75%, due 6/1/2018(2) |
Dallas, TX/ Telecommunications |
$ | 12,000,000 | 12,119,671 | 12,120,000 | 6.97 | % | |||||||||||||
Snowman Holdings, LLC Term Loan-Unsecured, 11.00% cash, 2.00% PIK, due 1/11/2017(3) |
Lebanon, IN/ Transportation: Cargo |
$ | 8,969,955 | 8,969,955 | 8,969,955 | 5.16 | % | |||||||||||||
SPM Capital, LLC Term Loan-First Lien, Euro + 5.50%, Euro 1.50%, due 10/31/2017(2) |
Stamford, CT/ Capital Markets |
$ | 7,500,000 | 7,351,604 | 7,351,604 | 4.23 | % | |||||||||||||
Sportsmans Warehouse Holdings, Inc. Term Loan-First Lien, L + 7.00%, LIBOR 1.50%, due 11/13/2018(2) |
Midvale, UT/ Retail |
$ | 10,000,000 | 9,902,063 | 9,902,062 | 5.70 | % | |||||||||||||
Studer Group, LLC (The) Term Loan-Unsecured, 12.00% cash, 2.00% PIK, due 3/29/2017(3) |
Gulf Breeze, FL/ Services: Business |
$ | 16,639,880 | 16,639,880 | 16,639,880 | 9.57 | % | |||||||||||||
Woodstream Corp. Subordinated Debt-Unsecured, 12.00%, due 2/27/2015(2) |
Lititz, PA/ Consumer Goods: Non-Durable |
$ | 3,017,977 | 2,910,987 | 2,906,244 | 1.67 | % | |||||||||||||
Woodstream Group, Inc. Senior Subordinated Note-Unsecured, 12.00%, due 2/27/2015 |
Lititz, PA/ Consumer Goods: Non-Durable |
$ | 31,982,023 | 30,797,965 | 30,797,965 | 17.72 | % | |||||||||||||
Total Non-controlled, non-affiliated investments | $ | 195,455,671 | $ | 195,451,256 | 112.43 | % | ||||||||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS | (21,605,301 | ) | (12.43 | )% | ||||||||||||||||
NET ASSETS | $ | 173,845,955 | 100.00 | % |
See Notes to Unaudited Consolidated Financial Statements.
7
(1) | See Note 1 of the Notes to Financial Statements for a discussion of the methodologies used to value securities in the portfolio. |
(2) | Coupon is subject to Prime and LIBOR floors. |
(3) | Represents a payment-in-kind security which pays a portion of interest in additional par. |
(4) | The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. |
(5) | Security is non-income producing. |
(6) | Common shares position will settle after December 31, 2012. |
(7) | The loan will settle after December 31, 2012. |
(8) | This instrument also includes an undrawn revolving loan commitment in an amount not to exceed $2,000,000, an interest rate of LIBOR plus 7.5%, and a maturity of March 23, 2016. This investment is accruing an unused fee of 0.50% per annum. |
See Notes to Unaudited Consolidated Financial Statements.
8
Stellus Capital Investment Corporation (the Company) was formed as a Maryland corporation on May 18, 2012 (Inception) and is an externally managed, closed-end, non-diversified management investment company. The Company has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (the 1940 Act) and intends to qualify as a regulated investment company (RIC) for U.S. federal income tax purposes. The Companys investment activities are managed by Stellus Capital Management, LLC (Stellus Capital or the Advisor).
On November 7, 2012, the Company priced its initial public offering (the Offering), at a price of $15.00 per share. Through its initial public offering the Company sold 9,200,000 shares (including 1,200,000 shares through the underwriters exercise of the overallotment option) for gross proceeds of $138,000,000. As of June 30, 2013, the Company has raised $180,409,145 including (i) $500,010 of seed capital contributed by Stellus Capital, (ii) $12,749,990 in a private placement to certain purchasers, including persons and entities associated with Stellus Capital, and (iii) $29,159,145 in connection with the acquisition of the Companys initial portfolio. The Companys shares are currently listed on the New York Stock Exchange under the symbol SCM.
Immediately prior to the pricing of the Offering the Company acquired its initial portfolio of assets for $165,235,169 in cash and $29,159,145 in shares of the Companys common stock, or $194,394,314 in total. The cash portion of the acquisition of the initial portfolio was financed by (i) borrowing $152,485,179 under a credit facility (Bridge Facility) with Sun Trust and (ii) using the $12,749,990 of proceeds received in connection with the private placement. The Bridge Facility had a maturity date of not more than 7 days after the pricing date of the Offering. Borrowings under the Bridge Facility bore interest at the highest of (i) a prime rate, (ii) the Federal Funds Rate plus 0.50% and (iii) LIBOR plus 1.00%. The Company used the net proceeds from the Offering together with borrowings under the Companys Credit Facility (see Note 9) to repay in full the outstanding indebtedness under the Bridge Facility, at which point the Bridge Facility terminated.
The Companys investment objective is to maximize the total return to its stockholders in the form of current income and capital appreciation through debt and related equity investments in middle-market companies. The Company seeks to achieve its investment objective by originating and investing primarily in private U.S. middle-market companies (typically those with $5.0 million to $50.0 million of EBITDA (earnings before interest, taxes, depreciation and amortization)) through first lien, second lien, unitranche and mezzanine debt financing, with corresponding equity co-investments. It sources investments primarily through the extensive network of relationships that the principals of its investment adviser have developed with financial sponsor firms, financial institutions, middle-market companies, management teams and other professional intermediaries.
The accompanying financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (GAAP).
In accordance with Regulation S-X under the Securities Act of 1933 and Securities Exchange Act of 1934, the Company does not consolidate portfolio company investments.
The accounting records of the Company are maintained in U.S. dollars.
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There were no shares of the Company outstanding for the period from Inception through June 30, 2012. As of June 30, 2012, the Company had not yet begun investment operations. Stellus Capital Management purchased the initial 100 shares for $500,010 in September, 2012. As such any per share data is not calculable as of June 30, 2012.
The Company classifies its portfolio investments with the requirements of the 1940 Act, (a) Control Investments are defined as investments in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation, (b) Affiliate Investments are defined as investments in which the Company owns between 5% and 25% of the voting securities and does not have rights to maintain greater than 50% of the board representation, and (c) Non-controlled, non-affiliate investments are defined as investments that are neither Control Investments or Affiliate Investments.
At June 30, 2013, cash balances totaling $733,098 exceeded FDIC insurance protection levels, subjecting the Company to risk related to the uninsured balance. All of the Companys cash deposits are held at a large established high credit quality financial institution and management believes that risk of loss associated with any uninsured balances is remote.
Cash consists of bank demand deposits. We deem certain U.S. Treasury Bills and other high-quality, short-term debt securities as cash equivalents. At the end of each fiscal quarter, we may take proactive steps to ensure we are in compliance with the RIC diversification requirements under Subchapter M of the Internal Revenue Code, which are dependent upon the composition of our total assets at quarter end. We may accomplish this in several ways, including purchasing U.S. Treasury Bills and closing out positions after quarter-end or temporarily drawing down on the Credit Facility (see footnote 9). On June 30, 2013, we held $10 million of U.S. Treasury Bills with a 25 day maturity purchased using $1 million in margin cash and the proceeds from a $9 million short term loan from Raymond James. The loan had an effective annual interest rate of approximately 1%. On July 1, 2013, we sold the remaining Treasury Bills, repaid the remainder of the loan from Raymond James and received back the $1 million margin payment (net of fees and expenses of $938).
On December 31, 2012, we held $50 million of U.S. Treasury Bills with a 30 day maturity purchased using $5 million in cash and the proceeds from a $45 million short term loan from Raymond James. The loan had an effective annual interest rate of approximately 1%. On January 2, 2013, we sold the Treasury Bills, repaid the $45 million loan from Raymond James and received back the $5 million margin payment (net of fees and expenses of $8,943).
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially.
Deferred financing costs consist of fees and expenses paid in connection with the closing of credit facilities and are capitalized at the time of payment. Deferred financing costs are amortized using the straight line method over the term of the credit facility.
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As a business development company, the Company generally invests in illiquid loans and securities including debt and equity securities of middle-market companies. Under procedures established by the board of directors, the Company values investments for which market quotations are readily available at such market quotations. The Company obtains these market values from an independent pricing service or at the mean between the bid and ask prices obtained from at least two brokers or dealers (if available, otherwise by a principal market maker or a primary market dealer). Debt and equity securities that are not publicly traded or whose market prices are not readily available are valued at fair value as determined in good faith by our board of directors. Such determination of fair values may involve subjective judgments and estimates, although the Company also engages independent valuation providers to review the valuation of each portfolio investment that does not have a readily available market quotation at least once quarterly. Investments purchased within 60 days of maturity are valued at cost plus accreted discount, or minus amortized premium, which approximates value. With respect to unquoted securities, our board of directors, together with our independent valuation advisors, values each investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies that are public and other factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the board uses the pricing indicated by the external event to corroborate and/or assist us in our valuation. Because there is not a readily available market for many of the investments in our portfolio, the fair value of most of our portfolio investments are determined in good faith by the board of directors using a documented valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.
In following these approaches, the types of factors that are taken into account in fair value pricing investments include, as relevant, but not be limited to:
| available current market data, including relevant and applicable market trading and transaction comparables; |
| applicable market yields and multiples; |
| security covenants; |
| call protection provisions; |
| information rights; |
| the nature and realizable value of any collateral; |
| the portfolio companys ability to make payments, its earnings and discounted cash flows and the markets in which it does business; |
| comparisons of financial ratios of peer companies that are public; |
| comparable merger and acquisition transactions; and |
| the principal market and enterprise values. |
Determination of fair values involves subjective judgments and estimates not susceptible to substantiation by auditing procedures. Under current auditing standards, the notes to our financial statements refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our financial statements.
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We record interest income on an accrual basis to the extent such interest is deemed collectible. For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, we do not accrue PIK interest if the portfolio company valuation indicates that such PIK interest is not collectible. We will not accrue interest on loans and debt securities if we have reason to doubt our ability to collect such interest. Loan origination fees, original issue discount and market discount or premium are capitalized, and we then accrete or amortize such amounts using the effective interest method as interest income. Upon the prepayment of a loan or debt security, any unamortized loan origination fee is recorded as interest income. We record prepayment premiums on loans and debt securities as interest income. Dividend income, if any, will be recognized on the ex-dividend date.
Under GAAP, the Company calculates the capital gains incentive fee payable to the Advisor as if the Company had realized all investments at their fair values as of the reporting date. Accordingly, the Company accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. As the provisional incentive fee is subject to the performance of investments until there is a realization event, the amount of provisional capital gains incentive fee accrued at a reporting date may vary from capital gains incentive fee that is ultimately realized and the differences could be material.
We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.
We have investments in our portfolio that contain a PIK interest provision. Any PIK interest is added to the principal balance of such investments and is recorded as income, if the portfolio company valuation indicates that such PIK interest is collectible. In order to qualify as a RIC, substantially all of this income must be paid out to stockholders in the form of dividends, even if we have not collected any cash.
Costs that are material associated with an investment transaction, including legal expenses, are included in the cost basis of purchases and deducted from the proceeds of sales unless such costs are reimbursed by the borrower.
The Company records all investments on a trade date basis.
The Company intends to elect to be treated as a regulated investment company (RIC) under subchapter M of the Internal Revenue Code of 1986, as amended (Code), and to operate in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Company is required to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. So long as the Company maintains its status as a RIC, it
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generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes at least annually to its stockholders as dividends. Rather, any tax liability related to income earned by the Company represents obligations of the Companys investors and will not be reflected in the financial statements of the Company.
As of June 30, 2013 and December 31, 2012, the Company had $825,106 and $0, respectively, of undistributed ordinary income and capital gains. The character of the Companys distributions is determined annually, based upon its taxable income for the full year and based upon distributions made for the full year. A determination of the character of distributions made on an interim basis may not be representative of the final determination based upon taxable income computed for the full year.
The Company evaluates tax positions taken or expected to be taken in the course of preparing its tax returns to determine whether the tax positions are more-likely-than-not of being sustained by the applicable tax authority. Tax positions deemed to meet a more-likely-than-not threshold would be recorded as a tax benefit or expense in the applicable period. Although the Company files federal and state tax returns, its major tax jurisdiction is federal. The 2012 federal tax year for the Company remains subject to examination by the Internal Revenue Service.
As of June 30, 2013 and December 31, 2012, the Company had not recorded a liability for any unrecognized tax positions. Managements evaluation of uncertain tax positions may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof. The Companys policy is to include interest and penalties related to income taxes, if applicable, in general and administrative expenses. There were no such expenses for the three months and six months ended June 30, 2013.
Basic per share calculations are computed utilizing the weighted average number of shares of common stock outstanding for the period. The Company has no unvested shares as of June 30, 2013 or December 31, 2012. As a result, there is no difference between diluted earnings per share and basic per share amounts.
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standards setting bodies that are adopted by the Company as of the specified effective date. The Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial statements upon adoption.
The Company entered into an investment advisory agreement with Stellus Capital. Pursuant to this agreement, the Company has agreed to pay to Stellus Capital a base annual fee of 1.75% of gross assets, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents, and an annual incentive fee consisting of two parts. The first part of the annual incentive fee, which is calculated and payable quarterly in arrears, equals 20.0% of the pre-incentive fee net investment income (as defined in the agreement) for the immediately preceding quarter, subject to a hurdle rate of 2.0% per quarter (8.0% annualized) and a catch-up feature. The net pre-incentive fee investment income used to calculate this part of the incentive fee is also included in the amount of our gross assets used to calculate the 1.75% base management fee.
For the three months and six months ended June 30, 2013, the Company incurred base management fees payable to the Advisor of $1,041,199 and $1,925,202, respectively.
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For the three and six months ended June 30, 2013, the Company incurred $766,109 and $1,081,487, respectively, of incentive fees related to pre-incentive fee net investment income. As of June 30, 2013, $734,098 of such incentive fees are currently payable to the Advisor, and $32,010 of pre-incentive fee net investment income incentive fees incurred by the Company were generated from deferred interest (i.e. PIK and certain discount accretion) and are not payable until such amounts are received in cash.
The second part of the annual incentive fee is calculated and payable in arrears as of the end of each calendar year (or, upon termination of the investment advisory agreement, as of the termination date) and equals 20.0% of the aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees. The capital gains incentive fee consists of fees related to both realized gains and unrealized gains (described in more detail below). For the three and six months ended June 30, 2013, the Company adjusted its capital gains incentive fee accrual related to realized gains by $163,973 and $187,176, respectively and related to unrealized gains by ($62,985) and $180,584, respectively.
The total capital gains incentive fee payable to the Companys Advisor under the investment management agreement as of June 30, 2013 and December 31, 2012 was $468,748 and $0, respectively. The capital gains incentive fee related to realized gains payable to the Companys Advisor under the investment management agreement as of June 30, 2013 and December 31, 2012 was $117,599 and $0, respectively.
With respect to the incentive fee expense accrual relating to the capital gains incentive fee, GAAP requires that the capital gains incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains incentive fee would be payable if such unrealized capital appreciation were realized, even though such unrealized capital appreciation is not permitted to be considered in calculating the fee actually payable under the investment management agreement. For accounting purposes in accordance with GAAP only, in order to reflect the potential capital gains incentive fee that would be payable for a given period as if all unrealized gains were realized, the Companys accrual for capital gains incentive fees includes an amount related to unrealized capital appreciation of $351,149 and $0 as of June 30, 2013 and December 31, 2012, respectively. There can be no assurance that such unrealized capital appreciation will be realized in the future. Accordingly, such fee, as calculated and accrued would not necessarily be payable under the investment management agreement, and may never be paid based upon the computation of capital gains incentive fees in subsequent periods.
For the years ending December 31, 2012 and December 31, 2013, the Advisor has agreed to waive its incentive fee to the extent required to support an annualized dividend yield of 9.0% (to be paid on a quarterly basis) based on the price per share of our common stock in connection with the Offering.
As of June 30, 2013 and December 31, 2012, the Company was not due any amount from Stellus Capital for reimbursement of expenses paid for by the Company that were the responsibility of Stellus Capital. Any such amounts due to the Company would be included in the Statement of Assets and Liabilities.
As of June 30, 2013 and December 31, 2012, the Company owed its independent directors $89,000 and $29,452, respectively, in total for unpaid director fees.
As agreed to in the Amended and Restated Side Agreement made and entered into as of November 12, 2012 by and between Stellus Capital and Raymond James & Associates, Inc. and Stifel, Nicolaus & Company, Incorporated, Stellus Capital has agreed to pay on behalf of the Company, 2.41% of the 6% underwriters sales load, or $3,320,280 in total, in connection with the Offering. Of this amount, $1,940,280 was paid on November 14, 2012, $460,000 was paid on March 25, 2013, $460,000 was paid on June 28, 2013 and the remaining $460,000 is due on September 30, 2013.
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We have entered into a license agreement with Stellus Capital Management under which Stellus Capital Management has agreed to grant us a non-exclusive, royalty-free license to use the name Stellus Capital. Under this agreement, we have a right to use the Stellus Capital name for so long as Stellus Capital Management or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we have no legal right to the Stellus Capital name. This license agreement will remain in effect for so long as the investment advisory agreement with Stellus Capital Management is in effect.
The Company intends to make quarterly distributions of available net investment income to its stockholders. The Company intends to distribute net capital gains (i.e., net capital gains in excess of net capital losses), if any, at least annually. The quarterly stockholder distributions, if any, will be determined by the board of directors. Any distribution to stockholders will be declared out of assets legally available for distribution.
The following table reflects the Companys dividends declared and paid or to be paid on its common stock:
Date Declared | Record Date | Payment Date | Amount Per Share | |||
December 7, 2012(1) | December 21, 2012 | December 27, 2012 | $0.18 | |||
March 7, 2013 | March 21, 2013 | March 28, 2013 | $0.34 | |||
June 7, 2013 | June 21, 2013 | June 28, 2013 | $0.34 |
(1) | The amount of the initial distribution was equal to an annualized dividend yield of 9.0% based on the price per share of our common stock in connection with the Offering and is proportionately reduced to reflect the number of days remaining in the quarter after completion of the Offering. |
Unless the stockholder elects to receive its distributions in cash, the Company intends to make such distributions in additional shares of the Companys common stock under the Companys dividend reinvestment plan. Although distributions paid in the form of additional shares of the Companys common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, investors participating in the Companys dividend reinvestment plan will not receive any corresponding cash distributions with which to pay any such applicable taxes. If a stockholder holds shares of the Companys common stock in the name of a broker or financial intermediary, the stockholder should contact such broker or financial intermediary regarding their election to receive distributions in cash in lieu of shares of the Companys common stock. Any distributions reinvested through the issuance of shares through the Companys dividend reinvestment plan will increase the Companys gross assets on which the base management fee and the incentive fee are determined and paid to Stellus Capital. Of the total distributions of $8,189,000 made to shareholders in 2013 through June 30, 2013, $7,749,111 was made in cash and the remainder in shares.
In accordance with the authoritative guidance on fair value measurements and disclosures under GAAP, the Company discloses the fair value of its investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
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Level 2 Quoted prices in markets that are not considered to be active or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes observable requires significant judgment by management.
The Company considers whether the volume and level of activity for the asset or liability have significantly decreased and identifies transactions that are not orderly in determining fair value. Accordingly, if the Company determines that either the volume and/or level of activity for an asset or liability has significantly decreased (from normal conditions for that asset or liability) or price quotations or observable inputs are not associated with orderly transactions, increased analysis and management judgment will be required to estimate fair value. Valuation techniques such as an income approach might be appropriate to supplement or replace a market approach in those circumstances.
At June 30, 2013, the Company had investments in 25 portfolio companies. The total cost and fair value of the investments were $260,614,004 and $262,185,828, respectively. The composition of our investments as of June 30, 2013 is as follows:
Cost | Fair Value | |||||||
Senior Secured First Lien | $ | 80,541,308 | $ | 80,733,973 | ||||
Senior Secured Second Lien | 78,574,423 | 80,163,210 | ||||||
Unsecured Debt | 99,783,987 | 99,574,359 | ||||||
Equity | 1,714,286 | 1,714,286 | ||||||
Total Investments | $ | 260,614,004 | $ | 262,185,828 |
At December 31, 2012, the Company had investments in 15 portfolio companies. The total cost and fair value of the investments were $195,455,671 and $195,451,256, respectively. The composition of our investments as of December 31, 2012 is as follows:
Cost | Fair Value | |||||||
Senior Secured First Lien | $ | 44,014,214 | $ | 44,014,214 | ||||
Senior Secured Second Lien | 38,597,293 | 38,597,622 | ||||||
Unsecured Debt | 111,129,878 | 111,125,134 | ||||||
Equity | 1,714,286 | 1,714,286 | ||||||
Total Investments | $ | 195,455,671 | $ | 195,451,256 |
The Companys investment portfolio may contain loans which have a component that is unfunded and requires the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2013 and December 31, 2012, the Company had two and one such investments with aggregate unfunded commitments of $14,500,000 and $2,000,000, respectively. The Company maintains sufficient liquidity to fund such unfunded loan commitments should the need arise.
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The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of June 30, 2013 are as follows:
Quoted Prices in Active Markets for Identical Securities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | |||||||||||||
Senior Secured First Lien | $ | | $ | | $ | 80,733,973 | $ | 80,733,973 | ||||||||
Senior Secured Second Lien | | 26,786,951 | 53,376,259 | 80,163,210 | ||||||||||||
Unsecured Debt | | | 99,574,359 | 99,574,359 | ||||||||||||
Equity | | | 1,714,286 | 1,714,286 | ||||||||||||
Total Investments | $ | | $ | 26,786,951 | $ | 235,398,877 | $ | 262,185,828 |
The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of December 31, 2012 are as follows:
Quoted Prices in Active Markets for Identical Securities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | |||||||||||||
Senior Secured First Lien | $ | | $ | | $ | 44,014,214 | $ | 44,014,214 | ||||||||
Senior Secured Second Lien | | 12,120,000 | 26,477,622 | 38,597,622 | ||||||||||||
Unsecured Debt | | | 111,125,134 | 111,125,134 | ||||||||||||
Equity | | | 1,714,286 | 1,714,286 | ||||||||||||
Total Investments | $ | | $ | 12,120,000 | $ | 183,331,256 | $ | 195,451,256 |
The aggregate value changes of Level 3 portfolio investments during the six months ended June 30, 2013 are as follows:
Senior Secured Loans First Lien |
Senior Secured Loans Second Lien |
Unsecured Debt |
Equity | Total | ||||||||||||||||
Fair value at beginning of period | $ | 44,014,214 | $ | 26,477,622 | $ | 111,125,134 | $ | 1,714,286 | $ | 183,331,256 | ||||||||||
Purchases of investments | 50,311,802 | 38,722,500 | 12,692,587 | | 101,726,889 | |||||||||||||||
Sales and Redemptions | (13,895,750 | ) | (450,000 | ) | (25,000,000 | ) | | (39,345,750 | ) | |||||||||||
Realized gains | 6,492 | 6,552 | 903,322 | 916,366 | ||||||||||||||||
Change in unrealized appreciation (depreciation) | ||||||||||||||||||||
included in earnings | 192,665 | 1,172,564 | (204,884 | ) | | 1,160,345 | ||||||||||||||
Accretion of discount | 104,550 | 23,592 | 58,200 | | 186,342 | |||||||||||||||
Transfer from Level 2 | | | | | | |||||||||||||||
Transfer to Level 2 | | (12,576,571 | ) | | | (12,576,571 | ) | |||||||||||||
Fair value at end of period | $ | 92,956,338 | $ | 53,376,259 | $ | 87,351,994 | $ | 1,714,286 | $ | 235,398,877 | ||||||||||
Change in unrealized appreciation (depreciation) on Level 3 investments still held as of June 30, 2013 | $ | 192,665 | $ | 1,172,564 | $ | (204,884 | ) | $ | | $ | 1,160,345 |
During the six months ended June 30, 2013, there were no transfers from Level 2 to Level 3.
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During the six months ended June 30, 2013, there were two transfers from Level 3 to Level 2 due to quoted prices available for the financial instruments.
The aggregate values of Level 3 portfolio investments changed during the period from Inception through December 31, 2012 are as follows:
Senior Secured Loans First Lien | Senior Secured Loans Second Lien | Unsecured Debt |
Equity | Total | ||||||||||||||||
Fair value at beginning of period | $ | | $ | | $ | | $ | | $ | | ||||||||||
Purchases of investments | 97,066,024 | 16,477,500 | 124,507,797 | 1,714,286 | 239,765,607 | |||||||||||||||
Sales and Redemptions | (53,057,372 | ) | | (13,400,740 | ) | | (66,458,112 | ) | ||||||||||||
Change in unrealized appreciation (depreciation) included in earnings |
| | (4,744 | ) | | (4,744 | ) | |||||||||||||
Accretion of discount | 5,562 | 122 | 22,821 | | 28,505 | |||||||||||||||
Transfer from Level 2 | | 10,000,000 | | | 10,000,000 | |||||||||||||||
Transfer to Level 2 | | | | | | |||||||||||||||
Fair value at end of period | $ | 44,014,214 | $ | 26,477,622 | $ | 111,125,134 | $ | 1,714,286 | $ | 183,331,256 | ||||||||||
Change in unrealized appreciation (depreciation) on Level 3 investments still held as of December 31, 2012 | $ | | $ | | $ | (4,744 | ) | $ | | $ | (4,744 | ) |
The following is a summary of geographical concentration of our investment portfolio as of June 30, 2013:
Cost | Fair Value | % of Total Investments | ||||||||||
Colorado | $ | 36,222,535 | $ | 36,416,980 | 13.90 | % | ||||||
Canada | 27,851,919 | 28,085,330 | 10.71 | % | ||||||||
Texas | 26,552,462 | 26,676,407 | 10.17 | % | ||||||||
New York | 25,222,365 | 25,222,365 | 9.62 | % | ||||||||
Minnesota | 20,117,198 | 20,209,298 | 7.71 | % | ||||||||
Kentucky | 16,995,155 | 16,995,155 | 6.48 | % | ||||||||
Florida | 16,808,553 | 16,808,553 | 6.41 | % | ||||||||
South Carolina | 15,000,000 | 15,231,000 | 5.81 | % | ||||||||
Massachusetts | 10,000,000 | 10,081,300 | 3.84 | % | ||||||||
Utah | 9,858,883 | 9,999,750 | 3.81 | % | ||||||||
Pennsylvania | 9,649,788 | 9,789,000 | 3.73 | % | ||||||||
New Jersey | 9,268,855 | 9,268,855 | 3.54 | % | ||||||||
Indiana | 9,060,881 | 9,060,881 | 3.46 | % | ||||||||
Puerto Rico | 8,704,440 | 8,731,624 | 3.33 | % | ||||||||
Missouri | 7,921,322 | 8,100,000 | 3.09 | % | ||||||||
Illinois | 7,387,759 | 7,387,759 | 2.82 | % | ||||||||
Virginia | 2,513,091 | 2,576,571 | 0.98 | % | ||||||||
Georgia | 1,478,798 | 1,545,000 | 0.59 | % | ||||||||
$ | 260,614,004 | $ | 262,185,828 | 100.00 | % |
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The following is a summary of geographical concentration of our investment portfolio as of December 31, 2012:
Cost | Fair Value | % of Total Investments | ||||||||||
Pennsylvania | $ | 33,708,952 | $ | 33,704,209 | 17.24 | % | ||||||
Canada | 20,778,456 | 20,778,456 | 10.63 | % | ||||||||
Colorado | 19,532,633 | 19,532,633 | 9.99 | % | ||||||||
Kentucky | 17,095,646 | 17,095,646 | 8.75 | % | ||||||||
Florida | 16,639,880 | 16,639,880 | 8.51 | % | ||||||||
South Carolina | 15,000,000 | 15,000,000 | 7.67 | % | ||||||||
New York | 13,000,000 | 13,000,000 | 6.65 | % | ||||||||
Texas | 12,119,671 | 12,120,000 | 6.20 | % | ||||||||
Massachusetts | 10,000,000 | 10,000,000 | 5.12 | % | ||||||||
Utah | 9,902,063 | 9,902,062 | 5.07 | % | ||||||||
New Jersey | 9,879,189 | 9,879,189 | 5.05 | % | ||||||||
Indiana | 8,969,955 | 8,969,955 | 4.59 | % | ||||||||
Connecticut | 7,351,604 | 7,351,604 | 3.76 | % | ||||||||
Georgia | 1,477,622 | 1,477,622 | 0.77 | % | ||||||||
$ | 195,455,671 | $ | 195,451,256 | 100.00 | % |
The following is a summary of industry concentration of our investment portfolio as of June 30, 2013:
Cost | Fair Value | % of Total Investments | ||||||||||
Services: Business | $ | 36,671,392 | $ | 36,904,803 | 14.08 | % | ||||||
Healthcare & Pharmaceuticals | 35,566,612 | 35,340,402 | 13.48 | % | ||||||||
High Tech Industries | 28,376,839 | 28,376,839 | 10.82 | % | ||||||||
Media: Broadcasting & Subscription | 22,921,322 | 23,331,000 | 8.90 | % | ||||||||
Telecommunications | 22,252,754 | 22,414,401 | 8.55 | % | ||||||||
Energy: Oil & Gas | 19,621,144 | 19,643,577 | 7.49 | % | ||||||||
Retail | 19,127,738 | 19,268,605 | 7.35 | % | ||||||||
Beverage, Food, & Tobacco | 16,669,216 | 17,212,500 | 6.57 | % | ||||||||
Finance | 12,222,365 | 12,222,365 | 4.66 | % | ||||||||
Automotive | 12,203,449 | 12,203,449 | 4.65 | % | ||||||||
Software | 11,478,798 | 11,626,300 | 4.43 | % | ||||||||
Consumer Goods: Non-Durable | 9,649,788 | 9,789,000 | 3.73 | % | ||||||||
Transportation: Cargo | 9,060,881 | 9,060,881 | 3.46 | % | ||||||||
Metals & Mining | 4,791,706 | 4,791,706 | 1.83 | % | ||||||||
$ | 260,614,004 | $ | 262,185,828 | 100.00 | % |
19
The following is a summary of industry concentration of our investment portfolio as of December 31, 2012:
Cost | Fair Value | % of Total Investments | ||||||||||
Consumer Goods: Non-Durable | $ | 33,708,952 | $ | 33,704,209 | 17.24 | % | ||||||
Services: Business | 31,117,502 | 31,117,501 | 15.93 | % | ||||||||
High Tech Industries | 30,778,456 | 30,778,456 | 15.75 | % | ||||||||
Health & Pharmaceuticals | 26,884,237 | 26,884,237 | 13.75 | % | ||||||||
Retail | 19,781,252 | 19,781,252 | 10.12 | % | ||||||||
Media: Broadcasting & Subscription | 15,000,000 | 15,000,000 | 7.67 | % | ||||||||
Automotive | 12,345,646 | 12,345,646 | 6.32 | % | ||||||||
Telecommunications | 12,119,671 | 12,120,000 | 6.20 | % | ||||||||
Transportation: Cargo | 8,969,955 | 8,969,955 | 4.59 | % | ||||||||
Metals & Mining | 4,750,000 | 4,750,000 | 2.43 | % | ||||||||
$ | 195,455,671 | $ | 195,451,256 | 100.00 | % |
The following provides quantitative information about Level 3 fair value measurements as of June 30, 2013:
Description: | Fair Value | Valuation Technique | Unobservable Inputs | Range (Average)(1)(3) | ||||||||||||
First lien debt | $ | 80,733,973 | Income/Market approach(2) |
HY credit spreads, Risk free rates, credit quality(3) |
-.34% to .39% (.09%) |
|||||||||||
Second lien debt | $ | 53,376,259 | Income/Market approach(2) |
HY credit spreads, Risk free rates, credit quality(3) |
-.24% to -.82% (.01%) |
|||||||||||
Unsecured debt | $ | 99,574,359 | Income/Market approach(2) |
HY credit spreads, Risk free rates, credit quality(3) |
-.02% to 3.48% (.67%) |
|||||||||||
Equity investments | $ | 1,714,286 | Market approach(4) |
Underwriting multiple/EBITDA Multiple |
5x to 12x | |||||||||||
Total Long Term Level 3 Investments | $ | 235,398,877 |
(1) | Weighted average based on fair value as of June 30, 2013. |
(2) | Inclusive of but not limited to the income approach (by discounting future cash flows using an appropriate yield) and the market approach (by ensuring sufficient enterprise value). |
(3) | The Company calculates the price of the loan by discounting future cash flows using an appropriate yield calculated as of the valuation date. This yield is calculated based on the loan's yield at the original investment and is adjusted as of the valuation date based on: changes in comparable credit spreads (per Barclay's high yield indexes, changes in risk free interest rates (per swap rates), and changes in credit quality (via an estimated shadow rating). Significant increases (decreases) in any of these factors would result in a significantly lower (higher) fair value measurement. As an example, the Range (Average) for first lien debt instruments in the table above indicates that the change in the HY spreads and the risk |
20
free rates between the date a loan closed and the valuation date ranged from -.34% (34 basis points) to .39% (39 basis points). The average of all changes was -.09%. |
(4) | The primary significant unobservable input used in the fair value measurement of the Company's equity investments is the EBITDA multiple, or the Multiple. Significant increases (decreases) in the Multiple in isolation would result in a significantly higher (lower) fair value measurement. To determine the Multiple for the market approach, the Company considers current market trading and/or transaction multiple, portfolio company performance (financial ratios) relative to public and private peer companies and leverage levels, among other factors. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate Multiple to use in the market approach. |
The following provides quantitative information about Level 3 fair value measurements as of December 31, 2012:
Description: | Fair Value | Valuation Technique | Unobservable Inputs | Range (Average)(1)(3) | ||||||||||||
First lien debt | $ | 44,014,214 | Income/Market approach(2) |
HY credit spreads, Risk free rates, credit quality(3) |
-.22% to.11% (-.12%) |
|||||||||||
Second lien debt | $ | 26,477,622 | Income/Market approach(2) |
HY credit spreads, Risk free rates, credit quality(3) |
-.49% to -.18% (-.30%) |
|||||||||||
Unsecured debt | $ | 111,125,134 | Income/Market approach(2) |
HY credit spreads, Risk free rates, credit quality(3) |
-.31% to.03% (-.20%) |
|||||||||||
Equity investments | $ | 1,714,286 | Market approach(4) |
Underwriting multiple/EBITDA Multiple |
5x to 12x | |||||||||||
Total Long Term Level 3 Investments | $ | 183,331,256 |
(1) | Weighted average based on fair value as of December 31, 2012. |
(2) | Inclusive of but not limited to the income approach (by discounting future cash flows using an appropriate yield) and the market approach (by ensuring sufficient enterprise value). |
(3) | The Company calculates the price of the loan by discounting future cash flows using an appropriate yield calculated as of the valuation date. This yield is calculated based on the loans yield at the original investment and is adjusted as of the valuation date based on: changes in comparable credit spreads (per Barclays high yield indexes), changes in risk free interest rates (per swap rates), and changes in credit quality (via an estimated shadow rating). Significant movements in any of these factors would result in a significantly lower (higher) fair value measurement. As an example, the Range (Average) for first lien debt instruments in the table above indicates that the change in the HY spreads and the risk free rates between the date a loan closed and the valuation date ranged from -.22% (22 basis points) to .11% (11 basis points). The average of all changes was -.12%. |
(4) | The primary significant unobservable input used in the fair value measurement of the Companys equity investments is the EBITDA multiple, or the Multiple. Significant increases (decreases) in the Multiple in isolation would result in a significantly higher (lower) fair value measurement. To determine the Multiple for the market approach, the Company considers current market trading and/or transaction multiple, portfolio company performance (financial ratios) relative to public and private peer companies and leverage levels, among other factors. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate Multiple to use in the market approach. |
21
The Company issued 30,996 shares of common stock during the six months ended June 30, 2013 in connection with the stockholder distribution reinvestment.
The following information sets forth the computation of net increase (decrease) in net assets resulting from operations per common share for the three months and six months ended June 30, 2013.
Three months ended June 30, 2013 |
Six months ended June 30, 2013 |
|||||||
Net increase in net assets resulting from operations | $ | 4,477,595 | $ | 10,009,713 | ||||
Average common shares | 12,050,618 | 12,043,117 | ||||||
Basic and diluted earnings per common share | $ | 0.37 | $ | 0.83 |
The Company is currently not subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our business, financial condition or results of operations.
Six months ended June 30, 2013 (Unaudited) |
Three months ended June 30, 2013 (Unaudited) |
|||||||
Per Share Data:(1) |
||||||||
Net asset value at beginning of period | $ | 14.45 | $ | 14.56 | ||||
Net investment income | 0.64 | 0.33 | ||||||
Change in unrealized appreciation (depreciation) | 0.11 | 0.04 | ||||||
Realized gain | 0.08 | 0.01 | ||||||
Total from investment operations | 0.83 | 0.38 | ||||||
Stockholder distributions | (0.68 | ) | (0.34 | ) | ||||
Net asset value at end of period | $ | 14.60 | $ | 14.60 | ||||
Per share market value at end of period | $ | 15.05 | $ | 15.05 | ||||
Total return based on market value(2) | 3.95 | % | (4.28 | )% | ||||
Weighted average shares outstanding at end of period | 12,043,117 | 12,050,618 | ||||||
Ratio/Supplemental Data: |
||||||||
Net assets at end of period | $ | 176,106,557 | $ | 176,106,557 | ||||
Average net assets(3) | $ | 174,715,502 | $ | 175,520,716 | ||||
Annualized ratio of net operating expenses to net assets(3) | 7.02 | % | 7.67 | % | ||||
Annualized ratio of net investment income to net assets(3) | 8.77 | % | 9.05 | % | ||||
Portfolio Turnover(4) | 21 | % | 9 | % |
(1) | Financial highlights are based on shares outstanding as of June 30, 2013. |
(2) | Total return on market value is based on the change in market price per share since the end of the prior quarter and includes dividends paid. The total returns are not annualized. |
(3) | Financial highlights for periods of less than one year are annualized and the ratios of operating expenses to average net assets and net investment income to average net assets are adjusted accordingly. |
(4) | Calculated as payoffs divided by average portfolio balance. |
22
On November 7, 2012, the Company entered into a revolving credit facility (the Credit Facility) with various lenders. SunTrust Bank is one of the lenders and serves as administrative agent under the Credit Facility. As of June 30, 2013, the Credit Facility provided for borrowings in an aggregate amount up to $115,000,000 on a committed basis and an accordion for an additional $35,000,000 for a total facility size of $150,000,000. The exercise of the accordion will require sufficient borrowing base and additional commitments from the existing lender group and/or new lenders.
The Companys obligations to the lenders are secured by a first priority security interest in its portfolio of securities and cash, but excluding short term investments. The Credit Facility contains certain affirmative and negative covenants, including but not limited to: (i) maintaining a minimum liquidity test of at least 85% of adjusted borrowing base, (ii) maintaining an asset coverage ratio of at least 2.0 to 1.0, and (iii) maintaining a minimum shareholders equity. As of June 30, 2013, the Company was in compliance with these covenants.
Borrowings under the Credit Facility bear interest, subject to the Companys election, on a per annum basis equal to (i) LIBOR plus 3.00% with no LIBOR floor or (ii) 2.00% plus an alternate base rate based on the highest of the Prime Rate, Federal Funds Rate plus 0.5% or one month LIBOR plus 1.0%. The Company pays unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility. Interest is payable quarterly in arrears. Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on November 12, 2016.
As of June 30, 2013 and December 31, 2012, $91,000,000 and $38,000,000 was outstanding under the Credit Facility, respectively. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value. The Company incurred costs of $2,015,415 in connection with obtaining the Credit Facility, which the Company has recorded as prepaid loan structure fees on its statement of assets and liabilities and is amortizing these fees over the life of the Credit Facility. As of June 30, 2013 and December 31, 2012, $1,716,629 and $1,947,820 of such prepaid loan structure fees had yet to be amortized, respectively.
For the three months ended June 30, 2013 the effective interest rate under the Credit Facility was approximately 3.4% (approximately 4.0% including commitment fees on the unused portion of the Credit Facility). Interest is paid quarterly in arrears. The Company recorded interest and fee expense of $718,219 for the three months ended June 30, 2013, of which $512,790 was interest expense, $125,532 was amortization of loan fees paid on the Credit Facility, $67,430 related to commitment fees on the unused portion of the Credit Facility, and $12,467 related to loan administration fees.
For the six months ended June 30, 2013 the effective interest rate under the Credit Facility was approximately 3.3% (approximately 4.0% including commitment fees on the unused portion of the Credit Facility). Interest is paid quarterly in arrears. The Company recorded interest and fee expense of $1,284,759 for the six months ended June 30, 2013, of which $849,668 was interest expense, $249,685 was amortization of loan fees paid on the Credit Facility, $160,611 related to commitment fees on the unused portion of the Credit Facility, and $24,795 related to loan administration fees. The Company paid $548,126 and $870,980 in interest expense and unused commitment fees for the three and six months ended June 30, 2013, respectively. The average borrowings under the Credit Facility for the three and six months ended June 30, 2013 were $61,648,352 and $51,110,497, respectively.
23
On July 17, 2013, we made a $14,800,000 investment in the second lien loan of Help Systems.
On August 1, 2013, we received full repayment on our second lien term loan of Baja Broadband at par resulting in total proceeds of $15,000,000.
These two transactions bring the investment portfolio to approximately $261,820,000 and the average investment per company to $10,500,000.
On July 30, 2013, the Company partially exercised the accordion feature under its Credit Facility and received additional commitments from the existing bank group in the amount of $20,000,000 which increased the total commitments to $135,000,000 under the facility.
The outstanding balance under the Credit Facility as of August 2, 2013 was $87,000,000 due to the additional borrowings and repayments subsequent to June 30, 2013.
24
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:
| our future operating results; |
| our business prospects and the prospects of our portfolio companies; |
| the effect of investments that we expect to make; |
| our contractual arrangements and relationships with third parties; |
| actual and potential conflicts of interest with Stellus Capital Management, LLC; |
| the dependence of our future success on the general economy and its effect on the industries in which we invest; |
| the ability of our portfolio companies to achieve their objectives; |
| the use of borrowed money to finance a portion of our investments; |
| the adequacy of our financing sources and working capital; |
| the timing of cash flows, if any, from the operations of our portfolio companies; |
| the ability of Stellus Capital Management, LLC to locate suitable investments for us and to monitor and administer our investments; |
| the ability of Stellus Capital Management, LLC to attract and retain highly talented professionals; |
| our ability to qualify and maintain our qualification as a RIC and as a BDC; and |
| the effect of future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to business development companies or RICs. |
Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words may, might, will, intend, should, could, can, would, expect, believe, estimate, anticipate, predict, potential, plan or similar words.
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or SEC rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this quarterly report on Form 10-Q.
We were organized as a Maryland corporation on May 18, 2012 and formally commenced operations on November 7, 2012. Our investment objective is to maximize the total return to our stockholders in the form of current income and capital appreciation through debt and related equity investments in middle-market companies.
25
We are an externally managed, non-diversified, closed-end investment company that has elected to be regulated as a BDC under the 1940 Act. As a BDC, we are required to comply with certain regulatory requirements.
As a BDC, we must not acquire any assets other than qualifying assets specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in eligible portfolio companies. Under the relevant SEC rules, the term eligible portfolio company includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized in the United States.
In order to expedite the ramp-up of our investment activities and further our ability to meet our investment objectives, we acquired our initial portfolio on November 7, 2012. The total consideration paid was $194.4 million, consisting of $165.2 million in cash and $29.2 million in shares of our common stock based on the price of $15.00 per share, or $194.4 million in total for 11 companies (excluding accrued interest of approximately $2.3 million) from a private investment fund to which the D. E. Shaw group serves as investment adviser and Stellus Capital Management, LLC serves as a non-discretionary sub-adviser.
We financed the cash portion of the acquisition of our initial portfolio by (i) borrowing $152.5 million under a $156 million credit facility led by SunTrust Bank (the Bridge Facility) and (ii) using the $12.7 million of proceeds we received in connection with the sale of shares of our common stock in a private placement transaction to certain purchasers, including persons and entities associated with Stellus Capital Management, LLC, at a purchase price of $15.00 per share.
On November 13, 2012, we completed our initial public offering (IPO) and sold 9,200,000 shares (including 1,200,000 shares through the underwriters exercise of their overallotment option) of our common stock through a group of underwriters at an initial public offering price of $15.00 per share. We received $132.2 million of total net proceeds in connection with the IPO. We used the net proceeds from our IPO and borrowings under the Credit Facility (as described below) to pay down all amounts outstanding under the Bridge Facility and terminated the Bridge Facility in conjunction with such repayment.
On November 13, 2012, we entered into a senior secured revolving credit facility (the Credit Facility), which provides for borrowings in an aggregate amount up to $115 million on a committed basis and an accordion for an additional $35 million for a total facility size of $150 million. The exercise of the accordion will require sufficient borrowing base and additional commitments from the existing lender group and/or new lenders. Borrowings under the Credit Facility bear interest, subject to the Companys election, on a per annum basis equal to (i) LIBOR plus 3.00% with no LIBOR floor or (ii) 2.00% plus an alternate base rate based on the highest of the Prime Rate, Federal Funds Rate plus 0.5% or one month LIBOR plus 1.0%. The Company pays unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility. Interest is payable quarterly in arrears. Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on November 12, 2016. As of June 30, 2013, we had $91 million in borrowings outstanding under the Credit Facility.
The Company incurred costs of $2.0 million in connection with obtaining the Credit Facility, which the Company has recorded as prepaid loan structure fees on its statement of assets and liabilities and is amortizing these fees over the life of the Credit Facility. As of June 30, 2013, $1.7 million of such prepaid loan structure fees have yet to be amortized.
We intend to elect to be treated for tax purposes as a RIC under Subchapter M of the Code. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. As a RIC, we generally will not have to pay corporate-level taxes on any income we distribute to our stockholders.
26
We originate and invest primarily in privately-held middle-market companies (typically those with $5.0 million to $50.0 million of EBITDA) through first lien, second lien, unitranche and mezzanine debt financing, often times with a corresponding equity investment.
As of June 30, 2013, we had $262.2 million (at fair value) invested in 25 companies. As of June 30, 2013, our portfolio included approximately 30.8% of first lien debt, 30.6% of second lien debt, 38.0% of mezzanine debt and 0.6% of equity investments at fair value.
As of December 31, 2012, we had $195.5 million (at fair value) invested in 15 companies. As of December 31, 2012, our portfolio included approximately 22.5% of first lien debt, 19.7% of second lien debt, 56.9% of mezzanine debt and 0.9% of equity investments at fair value.
The composition of our investments as of June 30, 2013 and December 31, 2012 was as follows:
As of June 30, 2013 | As of December 31, 2012 | |||||||||||||||
Cost | Fair Value | Cost | Fair Value | |||||||||||||
Senior Secured First Lien | $ | 80,541,308 | $ | 80,733,973 | $ | 44,014,214 | $ | 44,014,214 | ||||||||
Senior Secured Second Lien | 78,574,423 | 80,163,210 | 38,597,293 | 38,597,622 | ||||||||||||
Unsecured Debt | 99,783,987 | 99,574,359 | 111,129,878 | 111,125,134 | ||||||||||||
Equity | 1,714,286 | 1,714,286 | 1,714,286 | 1,714,286 | ||||||||||||
Total Investments | $ | 260,614,004 | $ | 262,185,828 | $ | 195,455,671 | $ | 195,451,256 |
The following is a summary of geographical concentration of our investment portfolio as of June 30, 2013:
Cost | Fair Value | % of Total Investments | ||||||||||
Colorado | $ | 36,222,535 | $ | 36,416,980 | 13.90 | % | ||||||
Canada | 27,851,919 | 28,085,330 | 10.71 | % | ||||||||
Texas | 26,552,462 | 26,676,407 | 10.17 | % | ||||||||
New York | 25,222,365 | 25,222,365 | 9.62 | % | ||||||||
Minnesota | 20,117,198 | 20,209,298 | 7.71 | % | ||||||||
Kentucky | 16,995,155 | 16,995,155 | 6.48 | % | ||||||||
Florida | 16,808,553 | 16,808,553 | 6.41 | % | ||||||||
South Carolina | 15,000,000 | 15,231,000 | 5.81 | % | ||||||||
Massachusetts | 10,000,000 | 10,081,300 | 3.84 | % | ||||||||
Utah | 9,858,883 | 9,999,750 | 3.81 | % | ||||||||
Pennsylvania | 9,649,788 | 9,789,000 | 3.73 | % | ||||||||
New Jersey | 9,268,855 | 9,268,855 | 3.54 | % | ||||||||
Indiana | 9,060,881 | 9,060,881 | 3.46 | % | ||||||||
Puerto Rico | 8,704,440 | 8,731,624 | 3.33 | % | ||||||||
Missouri | 7,921,322 | 8,100,000 | 3.09 | % | ||||||||
Illinois | 7,387,759 | 7,387,759 | 2.82 | % | ||||||||
Virginia | 2,513,091 | 2,576,571 | 0.98 | % | ||||||||
Georgia | 1,478,798 | 1,545,000 | 0.59 | % | ||||||||
$ | 260,614,004 | $ | 262,185,828 | 100.00 | % |
27
The following is a summary of geographical concentration of our investment portfolio as of December 31, 2012:
Cost | Fair Value | % of Total Investments | ||||||||||
Pennsylvania | $ | 33,708,952 | $ | 33,704,209 | 17.24 | % | ||||||
Canada | 20,778,456 | 20,778,456 | 10.63 | % | ||||||||
Colorado | 19,532,633 | 19,532,633 | 9.99 | % | ||||||||
Kentucky | 17,095,646 | 17,095,646 | 8.75 | % | ||||||||
Florida | 16,639,880 | 16,639,880 | 8.51 | % | ||||||||
South Carolina | 15,000,000 | 15,000,000 | 7.67 | % | ||||||||
New York | 13,000,000 | 13,000,000 | 6.65 | % | ||||||||
Texas | 12,119,671 | 12,120,000 | 6.20 | % | ||||||||
Massachusetts | 10,000,000 | 10,000,000 | 5.12 | % | ||||||||
Utah | 9,902,063 | 9,902,062 | 5.07 | % | ||||||||
New Jersey | 9,879,189 | 9,879,189 | 5.05 | % | ||||||||
Indiana | 8,969,955 | 8,969,955 | 4.59 | % | ||||||||
Connecticut | 7,351,604 | 7,351,604 | 3.76 | % | ||||||||
Georgia | 1,477,622 | 1,477,622 | 0.77 | % | ||||||||
$ | 195,455,671 | $ | 195,451,256 | 100.00 | % |
The following is a summary of industry concentration of our investment portfolio as of June 30, 2013:
Cost | Fair Value | % of Total Investments | ||||||||||
Services: Business | $ | 36,671,392 | $ | 36,904,803 | 14.08 | % | ||||||
Healthcare & Pharmaceuticals | 35,566,612 | 35,340,402 | 13.48 | % | ||||||||
High Tech Industries | 28,376,839 | 28,376,839 | 10.82 | % | ||||||||
Media: Broadcasting & Subscription | 22,921,322 | 23,331,000 | 8.90 | % | ||||||||
Telecommunications | 22,252,754 | 22,414,401 | 8.55 | % | ||||||||
Energy: Oil & Gas | 19,621,144 | 19,643,577 | 7.49 | % | ||||||||
Retail | 19,127,738 | 19,268,605 | 7.35 | % | ||||||||
Beverage, Food, & Tobacco | 16,669,216 | 17,212,500 | 6.57 | % | ||||||||
Finance | 12,222,365 | 12,222,365 | 4.66 | % | ||||||||
Automotive | 12,203,449 | 12,203,449 | 4.65 | % | ||||||||
Software | 11,478,798 | 11,626,300 | 4.43 | % | ||||||||
Consumer Goods: Non-Durable | 9,649,788 | 9,789,000 | 3.73 | % | ||||||||
Transportation: Cargo | 9,060,881 | 9,060,881 | 3.46 | % | ||||||||
Metals & Mining | 4,791,706 | 4,791,706 | 1.83 | % | ||||||||
$ | 260,614,004 | $ | 262,185,828 | 100.00 | % |
28
The following is a summary of industry concentration of our investment portfolio as of December 31, 2012:
Cost | Fair Value | % of Total Investments | ||||||||||
Consumer Goods: Non-Durable | $ | 33,708,952 | $ | 33,704,209 | 17.24 | % | ||||||
Services: Business | 31,117,502 | 31,117,501 | 15.93 | % | ||||||||
High Tech Industries | 30,778,456 | 30,778,456 | 15.75 | % | ||||||||
Health & Pharmaceuticals | 26,884,237 | 26,884,237 | 13.75 | % | ||||||||
Retail | 19,781,252 | 19,781,252 | 10.12 | % | ||||||||
Media: Broadcasting & Subscription | 15,000,000 | 15,000,000 | 7.67 | % | ||||||||
Automotive | 12,345,646 | 12,345,646 | 6.32 | % | ||||||||
Telecommunications | 12,119,671 | 12,120,000 | 6.20 | % | ||||||||
Transportation: Cargo | 8,969,955 | 8,969,955 | 4.59 | % | ||||||||
Metals & Mining | 4,750,000 | 4,750,000 | 2.43 | % | ||||||||
$ | 195,455,671 | $ | 195,451,256 | 100.00 | % |
At June 30, 2013, our average portfolio company investment at amortized cost and fair value was approximately $10.4 million and $10.5 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $21.0 million and $21.0 million, respectively. At December 31, 2012, our average portfolio company investment at amortized cost and fair value was approximately $13.0 million and $13.0 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $33.0 million and $33.0 million, respectively.
At June 30, 2013, 55% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 45% bore interest at fixed rates. At December 31, 2012, 40% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 60% bore interest at fixed rates.
The weighted average yield on all of our debt investments as of June 30, 2013 and December 31, 2012 was approximately 11.7% and 12.5%, respectively. The weighted average yield was computed using the effective interest rates for all of our debt investments, including accretion of original issue discount.
As of June 30, 2013 and December 31, 2012, we had cash of $1.0 million and $12.1 million, respectively, and United States Treasury securities of $10.0 million and $50.0 million, respectively. The United States Treasury securities were purchased and temporarily held in connection with complying with RIC diversification requirements under Subchapter M of the Code.
On November 7, 2012, we acquired our initial portfolio for $165.2 million in cash and $29.2 million in shares of our common stock based on the price of $15.00 per share, or $194.4 million in total (excluding accrued interest of approximately $2.3 million) from a private investment fund to which the D. E. Shaw group serves as investment adviser and Stellus Capital Management, LLC serves as a non-discretionary sub-adviser. Our initial portfolio was comprised of a portion of the loans to middle-market companies that were originated over the previous three years by the Stellus Capital Management, LLC investment team during their time with the D. E. Shaw group and were selected for our initial portfolio because they are similar to the type of investments we originate. Our initial portfolio included middle-market loans that had an internal risk rating of 2 or better (i.e., investments that were performing at or above expectations and whose risks were neutral or favorable compared to the expected risk at the time of the original investment).
During the three months ended June 30, 2013, we made $80.8 million of investments in seven new portfolio companies and one to an existing portfolio company. During the six months ended June 30, 2013, we made $112 million of investments in 11 new portfolio companies and one to an existing portfolio company.
During the three months ended June 30, 2013, we received $23.8 million in proceeds principally from prepayments of our investments, including $1.3 million from amortization of certain other investments. During
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the six months ended June 30, 2013, we received $49 million in proceeds principally from prepayments of our investments, including $1.5 million from amortization of certain other investments.
Our level of investment activity can vary substantially from period to period depending on many factors, including the amount of debt and equity capital to middle market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.
In addition to various risk management and monitoring tools, Stellus Capital Management, LLC uses an investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in our portfolio. This investment rating system uses a five-level numeric scale. The following is a description of the conditions associated with each investment rating:
| Investment Rating 1 is used for investments that are performing above expectations, and whose risks remain favorable compared to the expected risk at the time of the original investment. |
| Investment Rating 2 is used for investments that are performing within expectations and whose risks remain neutral compared to the expected risk at the time of the original investment. All new loans are initially rated 2. |
| Investment Rating 3 is used for investments that are performing below expectations and that require closer monitoring, but where no loss of return or principal is expected. Portfolio companies with a rating of 3 may be out of compliance with financial covenants. |
| Investment Rating 4 is used for investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are often in work out. Investments with a rating of 4 are those for which some loss of return but no loss of principal is expected. |
| Investment Rating 5 is used for investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are almost always in work out. Investments with a rating of 5 are those for which some loss of return and principal is expected. |
The following table shows the investment rankings of our investments at fair value:
As of June 30, 2013 | As of December 31, 2012 | |||||||||||||||||||||||
Investment Rating | Fair Value |
% of Total Portfolio | Number of Portfolio Companies | Fair Value |
% of Total Portfolio | Number of Portfolio Companies | ||||||||||||||||||
1 | $ | 19.1 | 7 | % | 2 | $ | | | % | | ||||||||||||||
2 | 230.1 | 88 | % | 22 | 195.5 | 100 | 15 | |||||||||||||||||
3 | 13.0 | 5 | % | 1 | | | | |||||||||||||||||
4 | | | | | | | ||||||||||||||||||
5 | | | | | | | ||||||||||||||||||
$ | 262.2 | 25 | $ | 195.5 | 100 | % | 15 |
We will not accrue interest on loans and debt securities if we have reason to doubt our ability to collect such interest. As of June 30, 2013 and December 31, 2012, we had no loans on non-accrual.
An important measure of our financial performance is net increase (decrease) in net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income (loss) is the difference between our income from interest, dividends, fees and other investment income and our operating expenses including interest on borrowed funds. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of
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portfolio investments and their amortized cost. Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio.
We generate revenue in the form of interest income on debt investments and capital gains and distributions, if any, on investment securities that we may acquire in portfolio companies. Our debt investments typically have a term of five to seven years and bear interest at a fixed or floating rate. Interest on our debt securities is generally payable quarterly. Payments of principal on our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments may pay interest in-kind, or PIK. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect that the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases. In addition, we may generate revenue in the form of prepayment fees, commitment, loan origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees.
Investment income for the three months and six months ended June 30, 2013 totaled $7.3 million and $13.8 million, respectively, and was entirely composed of interest income.
Our primary operating expenses include the payment of fees to Stellus Capital Management, LLC under the investment advisory agreement, our allocable portion of overhead expenses under the administration agreement and other operating costs described below. We bear all other out-of-pocket costs and expenses of our operations and transactions, which may include:
| the cost of calculating our net asset value, including the cost of any third-party valuation services; |
| the cost of effecting sales and repurchases of shares of our common stock and other securities; |
| fees payable to third parties relating to making investments, including out-of-pocket fees and expenses associated with performing due diligence and reviews of prospective investments; |
| transfer agent and custodial fees; |
| out-of-pocket fees and expenses associated with marketing efforts; |
| federal and state registration fees and any stock exchange listing fees; |
| U.S. federal, state and local taxes; |
| independent directors fees and expenses; |
| brokerage commissions; |
| fidelity bond, directors and officers liability insurance and other insurance premiums; |
| direct costs, such as printing, mailing, long distance telephone and staff; |
| fees and expenses associated with independent audits and outside legal costs; |
| costs associated with our reporting and compliance obligations under the 1940 Act and other applicable U.S. federal and state securities laws; and |
| other expenses incurred by Stellus Capital Management, LLC or us in connection with administering our business, including payments under the administration agreement that are based upon our allocable portion of overhead (subject to the review of our board of directors). |
Operating expenses for the three months and six months ended June 30, 2013 totaled $3.3 million and $6.1 million, respectively and consisted of base management fees, incentive fees, administrative services expenses, fees related to the Credit Facility, professional fees, valuation fees, insurance expenses, directors fees, and other general and administrative expenses.
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The base management fee for the three months and six months ended June 30, 2013 was $1.0 million and $1.9 million, respectively.
For the three and six months ended June 30, 2013, the Company incurred incentive fees totaling $0.9 million and $1.5 million, respectively. For the three and six months ended June 30, 2013, the Company adjusted its capital gains incentive fee accrual related to realized gains by ($0.1) million and $0.1 million respectively and related to unrealized gains by $0.2 million and $0.3 million respectively.
The total capital gains incentive fee payable to Stellus Capital Management, LLC, the Companys advisor, under the investment management agreement as of June 30, 2013 and December 31, 2012 was $0.4 million and $0, respectively. The capital gains incentive fee related to realized gains payable to the Companys advisor under the investment management agreement as of June 30, 2013 and December 31, 2012 was $0.1 million and $0, respectively.
Borrowings under the Credit Facility were $91.0 million and $38.0 million as of June 30, 2013 and December 31, 2012, respectively.
For the three months ended June 30, 2013 the effective interest rate under the Credit Facility was approximately 3.4% (approximately 4.0% including commitment fees on the unused portion of the Credit Facility). Interest is paid quarterly in arrears. The Company recorded interest and fee expense of $718,219 for the three months ended June 30, 2013, of which $512,790 was interest expense, $125,532 was amortization of loan fees paid on the Credit Facility, $67,430 related to commitment fees on the unused portion of the Credit Facility, and $12,467 related to loan administration fees.
For the six months ended June 30, 2013 the effective interest rate under the Credit Facility was approximately 3.3% (approximately 4.0% including commitment fees on the unused portion of the Credit Facility). Interest is paid quarterly in arrears. The Company recorded interest and fee expense of $1,284,759 for the six months ended June 30, 2013, of which $849,668 was interest expense, $249,685 was amortization of loan fees paid on the Credit Facility, $160,611 related to commitment fees on the unused portion of the Credit Facility, and $24,795 related to loan administration fees.
The Company paid $548,126 and $870,980 in interest expense and unused commitment fees for the three and six months ended June 30, 2013, respectively. The average borrowings under the Credit Facility for the three and six months ended June 30, 2013 were $61.6 million and $51.1 million, respectively.
Administrative services expenses for the three months ended June 30, 2013 totaled $228,535, $111,167 of which was related to our third party administrator and $117,368 of which was allocated to us from Stellus Capital Management, LLC. Administrative expenses for the six months ended June 30, 2013 totaled $399,576, $210,777 of which was related to our third party administrator and $188,799 of which was allocated to us from Stellus Capital. Expenses for valuation, professional fees, insurance expenses, directors fees, and other general and administrative expense for the three months and six months ended June 30, 2013 totaled $513,520 and $967,854, respectively. Expenses for valuation, professional fees, insurance expenses, directors fees, and other general and administrative expense for the three months and six months ended June 30, 2012 totaled $126,628 and $126,628, respectively.
For the three months ended June 30, 2013, net investment income was $4.0 million, or $0.33 per common share (based on 12,050,618 weighted-average common shares outstanding at June 30, 2013). Net investment income includes incremental accruals of $0.1 million of incentive fees related to realized and unrealized capital gains.
For the six months ended June 30, 2013, net investment income was $7.7 million, or $0.64 per common share (based on 12,043,117 weighted-average common shares outstanding at June 30, 2013). Net investment income includes accruals of $0.5 million of incentive fees related to realized and unrealized capital gains.
We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized.
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Repayments of investments and amortization of other certain investments for the three months ended June 30, 2013 totaled $23.8 million and net realized gains totaled $0.1 million. Repayments of investments and amortization of other certain investments for the six months ended June 30, 2013 totaled $49.0 million and net realized gains totaled $1.0 million.
Net change in unrealized appreciation primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded appreciation or depreciation when gains or losses are realized.
Net change in unrealized depreciation on investments and cash equivalents for the three and six months ended June 30, 2013 totaled $0.4 million and $1.3 million, respectively.
For the three months ended June 30, 2013, net increase in net assets resulting from operations totaled $4.5 million, or $.37 per common share (based on 12,050,618 weighted-average common shares outstanding at June 30, 2013). For the six months ended June 30, 2013, net increase in net assets resulting from operations totaled $10.0 million, or $0.83 per common share (based on 12,043,117 weighted-average common shares outstanding at June 30, 2013).
Our operating activities used cash of $60.3 million for the six months ended June 30, 2013, primarily in connection with the purchase of investments. Our operating activities used cash of $0.1 million for the six months ended June 30, 2012, primarily related to the formation of the Company. Our financing activities for the six months ended June 30, 2013 provided cash of $9.1 million primarily from borrowings under the Credit Facility.
Our liquidity and capital resources are derived from the Credit Facility and cash flows from operations, including investment sales and repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies and other operating expenses we incur, as well as the payment of dividends to the holders of our common stock. We used, and expect to continue to use, these capital resources as well as proceeds from turnover within our portfolio and from public and private offerings of securities to finance our investment activities.
Although we expect to fund the growth of our investment portfolio through the net proceeds from future public and private equity offerings and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act, our plans to raise capital may not be successful. In this regard, if our common stock trades at a price below our then-current net asset value per share, we may be limited in our ability to raise equity capital given that we cannot sell our common stock at a price below net asset value per share unless our stockholders approve such a sale and our board of directors makes certain determinations in connection therewith. A proposal, approved by our stockholders at our 2013 Annual Meeting of Stockholders, authorizes us to sell shares of our common stock below the then current net asset value per share of our common stock in one or more offerings for the period ending on the earlier of (i) May 23, 2014, the one year anniversary of our 2013 Annual Meeting of Stockholders, or (ii) the date of our 2014 Annual Meeting of Stockholders. We would need similar future approval from our stockholders to issue shares below the then current net asset value per share any time after the expiration of the current approval.
In addition, we intend to distribute between 90% and 100% of our taxable income to our stockholders in order to satisfy the requirements applicable to RICs under Subchapter M of the Code. Consequently, we may not have the funds or the ability to fund new investments, to make additional investments in our portfolio companies, to fund our unfunded commitments to portfolio companies or to repay borrowings. In addition, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.
Also, as a business development company, we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which
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include all of our borrowings and any outstanding preferred stock, of at least 200%. This requirement limits the amount that we may borrow. We were in compliance with the asset coverage at all times. As of June 30, 2013 and December 31, 2012 our asset coverage ratio was 276% and 309%, respectively.
The amount of leverage that we employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing, such as the maturity, covenant package and rate structure of the proposed borrowings, our ability to raise funds through the issuance of shares of our common stock and the risks of such borrowings within the context of our investment outlook. Ultimately, we only intend to use leverage if the expected returns from borrowing to make investments will exceed the cost of such borrowing.
As of June 30, 2013 and December 31, 2012, we had cash of $1.0 million and $12.1 million, respectively, and United States Treasury securities of $10.0 million and $25.0 million, respectively.
The Credit Facility is a syndicated multi-currency facility and provides for borrowings up to $115 million and matures in November 2016. As of June 30, 2013, we had $91 million of borrowings outstanding under the Credit Facility. Borrowings under the Credit Facility generally bear interest at LIBOR plus 3.00%. The Credit Facility size may be increased up to $150 million, subject to certain conditions, with additional new lenders or through an increase in commitments of current lenders. The Credit Facility is a four-year revolving facility secured by substantially all of our investment portfolio assets. The Credit Facility contains affirmative and restrictive covenants, including but not limited to maintenance of a minimum shareholders equity amount and maintenance of a ratio of total assets (less total liabilities other than indebtedness) to total indebtedness of not less than 2.0:1.0. In addition to the asset coverage ratio described in the preceding sentence, borrowings under the Credit Facility (and the incurrence of certain other permitted debt) are subject to compliance with a borrowing base that applies different advance rates to different types of assets in our portfolio. We have also generally agreed under the terms of the Credit Facility not to incur any additional secured indebtedness. In addition, we have agreed not to incur any additional unsecured indebtedness that has a maturity date prior to the maturity date of the Credit Facility. Furthermore, the Credit Facility contains a covenant requiring us to maintain compliance with RIC provisions at all times, subject to certain remedial provisions.
We have applied for a license to form a SBIC subsidiary; however, the application is subject to approval by the SBA and we can make no assurances that the SBA will approve our application. The SBIC subsidiary would be allowed to issue SBA-guaranteed debentures up to a maximum of $150 million under current SBIC regulations, subject to required capitalization of the SBIC subsidiary and other requirements. SBA guaranteed debentures generally have longer maturities and lower interest rates than other forms of debt that may be available to us, and we believe therefore would represent an attractive source of debt capital.
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of June 30, 2013, our only off-balance sheet arrangements consisted of $14.5 million of unfunded commitments, which was comprised of $14.5 million to provide debt financing to two of our portfolio companies. As of December 31, 2012, our only off-balance sheet arrangements consisted of $2.0 million of unfunded commitments, which was comprised of $2.0 million to provide debt financing to one of our portfolio companies.
We intend to elect to be treated as a RIC under Subchapter M of the Code. If we qualify as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis.
Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.
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To qualify for RIC tax treatment, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). If we qualify as a RIC, we will also be subject to a federal excise tax, based on distributive requirements of our taxable income on a calendar year basis.
We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, the covenants contained in the Credit Facility may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement. In addition, we may retain for investment some or all of our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividends for that fiscal year, a portion of those dividend distributions may be deemed a return of capital to our stockholders.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a business development company under the 1940 Act and due to provisions in Credit Facility. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.
In accordance with certain applicable Treasury regulations and private letter rulings issued by the Internal Revenue Service, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our stock in accordance with these Treasury regulations or private letter rulings.
See Note 1 to the financial statements for a description of recent accounting pronouncements, if any, including the expected dates of adoption and the anticipated impact on the financial statements.
The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, our significant accounting policies are further described in the notes to the financial statements.
As a business development company, we generally invest in illiquid loans and securities including debt and equity securities of middle-market companies. Under procedures established by our board of directors, we value investments for which market quotations are readily available at such market quotations. We obtain these market values from an independent pricing service or at the mean between the bid and ask prices obtained from at least two brokers or dealers (if available, otherwise by a principal market maker or a primary market dealer). Debt and equity securities that are not publicly traded or whose market prices are not readily
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available are valued at fair value as determined in good faith by our board of directors. Such determination of fair values may involve subjective judgments and estimates, although we engage independent valuation providers to review the valuation of each portfolio investment that does not have a readily available market quotation at least once each quarter. Investments purchased within 60 days of maturity are valued at cost plus accreted discount, or minus amortized premium, which approximates value. With respect to unquoted securities, our board of directors, together with our independent valuation advisors, values each investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies that are public and other factors.
When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, our board of directors uses the pricing indicated by the external event to corroborate and/or assist us in our valuation. Because there is not a readily available market for substantially all of the investments in our portfolio, we value most of our portfolio investments at fair value as determined in good faith by our board of directors using a documented valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.
With respect to investments for which market quotations are not readily available, our board of directors undertakes a multi-step valuation process each quarter, as described below:
| Our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of Stellus Capital Management, LLC responsible for the portfolio investment; |
| Preliminary valuation conclusions are then documented and discussed with our senior management and Stellus Capital Management, LLC; |
| The audit committee of our board of directors then reviews these preliminary valuations; |
| At least once each quarter, the valuation for each portfolio investment is reviewed by an independent valuation firm; and |
| The board of directors then discusses valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of Stellus Capital Management, LLC, the independent valuation firm and the audit committee. |
We record interest income on an accrual basis to the extent it is deemed collectible. For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, we do not accrue PIK interest if the portfolio company valuation indicates that such PIK interest is not collectible. We will not accrue interest on loans and debt securities if we have reason to doubt our ability to collect such interest. Loan origination fees, original issue discount and market discount or premium are capitalized, and we then accrete or amortize such amounts using the effective interest method as interest income. Upon the prepayment of a loan or debt security, any unamortized loan origination is recorded as interest income. We record prepayment premiums on loans and debt securities as interest income. Dividend income, if any, will be recognized on the ex-dividend date.
We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.
Under GAAP, the Company calculates the capital gains incentive fee payable to the Advisor as if the Company had realized all investments at their fair values as of the reporting date. Accordingly, the Company
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accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. As the provisional incentive fee is subject to the performance of investments until there is a realization event, the amount of provisional capital gains incentive fee accrued at a reporting date may vary from capital gains incentive fee that is ultimately realized and the differences could be material.
We have investments in our portfolio that contain a PIK interest provision. Any PIK interest is added to the principal balance of such investments and is recorded as income, if the portfolio company valuation indicates that such PIK interest is collectible. In order to maintain our status as a RIC, substantially all of this income must be paid out to stockholders in the form of dividends, even if we have not collected any cash.
On July 17, 2013, the Company made a $14.8 million investment in the second lien loan of Help Systems.
On August 1, 2013, the Company received full repayment on our second lien term loan of Baja Broadband at par resulting in total proceeds of $15 million.
These two transactions bring the investment portfolio to approximately $261.8 million and the average investment per company to $10.5 million.
On July 29, 2013, the Company received stockholder approval to sell or otherwise issue up to 25% of the Companys common stock at an offering price that is below the Companys then current net asset value per share.
On July 30, 2013, the Company partially exercised the accordion feature under its Credit Facility and received additional commitments from the existing bank group in the amount of $20.0 million which increased the total commitments to $135.0 million under the Credit Facility.
The outstanding balance under the Credit Facility as of August 2, 2013 was $87.0 million due to the additional borrowings and repayments subsequent to June 30, 2013.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We are subject to financial market risks, including changes in interest rates. At June 30, 2013, 55%, based on market value, or 17 of the loans in our portfolio bore interest at floating rates. Fifteen of these 17 loans in our portfolio have interest rate floors, which have effectively converted the loans to fixed rate loans in the current interest rate environment. At December 31, 2012, 40%, or nine of the loans in our portfolio bore interest at floating rates. Seven of these nine loans in our portfolio had interest rate floors, which effectively converted the loans to fixed rate loans. In the future, we expect other loans in our portfolio will have floating rates. Assuming that the Statement of Assets and Liabilities as of June 30, 2013 were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical one percent increase in LIBOR would increase our net income by less than $24 thousand due the current floors in place. A hypothetical decrease in LIBOR would not affect our net income, again, due to the aforementioned floors in place. Although we believe that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet and other business developments that could affect net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate. We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contacts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. For period since Inception (May 18, 2012) through December 31, 2012 and the six months ended June 30, 2013, we did not engage in hedging activities.
Changes in interest rates will affect our cost of funding. Our interest expense will be affected by changes in the published LIBOR rate in connection with our Credit Facility. As of June 30, 2013, we had not entered into any interest rate hedging arrangements. At June 30, 2013, based on our applicable levels of our Credit
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Facility, a 1% increase in interest rates would have decreased our net income by approximately $149,917 and $247,056 for the three and six months ended June 30, 2013, respectively.
Item 4. | Controls and Procedures |
As of June 30, 2013, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in timely alerting management, including the Chief Executive Officer and Chief Financial Officer, of material information about us required to be included in periodic SEC filings.
Management did not identify any change in the Companys internal control over financial reporting that occurred during the quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
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Item 1. | Legal Proceedings |
We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
Item 1A. | Risk Factors |
Except as set forth below, there has been no material changes during the six months ended June 30, 2013 in the information provided under the heading Risk Factors in our Annual Report on Form 10-K as of December 31, 2012. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially affect our business, financial condition and/or operating results.
Concerns have been publicized that some of the member banks surveyed by the British Bankers Association, or BBA, in connection with the calculation of LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them in order to profit on their derivatives positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations and reviews of the framework for the setting of LIBOR by regulators and governmental authorities in various jurisdictions are ongoing. In this regard, the recommendation of one governmental committee undertaking such a review will result in the transfer of the administration of LIBOR to NYSE Euronext Rates Administration Limited in early 2014.
Actions by the LIBOR administrator, regulators or law enforcement agencies may result in changes to the manner in which LIBOR is determined. Uncertainty as to the nature of such potential changes may adversely affect the market for LIBOR-based securities, including our portfolio of LIBOR-indexed, floating-rate debt securities. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based securities or the value of our portfolio of LIBOR-indexed, floating-rate debt securities.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
During the three months ended June 30, 2013, we issued 15,747 shares of our common stock under our dividend reinvestment plan pursuant to an exemption from the registration requirements of the Securities Act of 1933. The aggregate value for the shares of common stock issued during the three months ended June 30, 2013, under the dividend reinvestment plan was approximately $225,182.
Item 3. | Defaults Upon Senior Securities |
Not applicable.
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information |
Not applicable.
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Item 6. | Exhibits |
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
31.1* | Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended. | |||||
31.2* | Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended. | |||||
32.1* | Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. | |||||
32.2* | Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. | |||||
* | Filed herewith |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STELLUS CAPITAL INVESTMENT CORPORATION
Dated: August 6, 2013
By: | /s/ Robert T. Ladd Name: Robert T. Ladd Title: Chief Executive Officer and President |
By: | /s/ W. Todd Huskinson Name: Robert T. Ladd Title: Chief Financial Officer |
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Exhibit Number | Description | |
31.1 | Chief Executive Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* | |
31.2 | Chief Financial Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* | |
32.1 | Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | |
32.2 | Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
* | Filed herewith. |
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Exhibit 31.1
I, Robert T. Ladd, Chief Executive Officer of Stellus Capital Investment Corporation certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stellus Capital Investment Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated this 6th day of August 2013.
By: | /s/Robert T. Ladd | |
Robert T. Ladd | ||
Chief Executive Officer |
Exhibit 31.2
I, W. Todd Huskinson, Chief Financial Officer of Stellus Capital Investment Corporation certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stellus Capital Investment Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated this 6th day of August 2013.
By: | /s/ W. Todd Huskinson | |
W. Todd Huskinson | ||
Chief Financial Officer |
Exhibit 32.1
Certification of Chief Executive Officer
Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
In connection with this Quarterly report on Form 10-Q (the “Report”) of Stellus Capital Investment Corporation (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, Robert T. Ladd, the Chief Executive Officer of the Registrant, hereby certify, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
/s/ Robert T. Ladd | ||
Name: | Robert T. Ladd | |
Date: | August 6, 2013 |
Exhibit 32.2
Certification of Chief Financial Officer
Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
In connection with this Quarterly report on Form 10-Q (the “Report”) of Stellus Capital Investment Corporation (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, W. Todd Huskinson, the Chief Financial Officer of the Registrant, hereby certify, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
/s/ W. Todd Huskinson | ||
Name: | W. Todd Huskinson | |
Date: | August 6, 2013 |