Stellus Capital Investment (SCM) - 2025 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for the quarter ended March 31, 2025, covering assets, operations, net assets, cash flows, investments, and accounting policies Consolidated Statements of Assets and Liabilities As of March 31, 2025, total assets were $1,011.7 million, liabilities $639.0 million, and net assets $372.8 million, with NAV per share decreasing to $13.25 Consolidated Statements of Assets and Liabilities (in thousands) | | March 31, 2025 (unaudited) | December 31, 2024 | | :--- | :--- | :--- | | Total Assets | $1,011,737 | $980,900 | | Total Liabilities | $638,971 | $610,978 | | Net Assets | $372,766 | $369,922 | | Net Asset Value Per Share | $13.25 | $13.46 | Consolidated Statements of Operations For Q1 2025, total investment income was $25.0 million, net investment income $9.8 million, and net assets increased by $5.0 million, a decrease from Q1 2024 Key Operational Metrics (unaudited, for the three months ended) | Metric | March 31, 2025 | March 31, 2024 | | :--- | :--- | :--- | | Total Investment Income | $24,951,658 | $25,996,749 | | Total Operating Expenses, net | $15,162,849 | $15,760,833 | | Net Investment Income | $9,788,809 | $10,235,916 | | Net Increase in Net Assets | $4,993,545 | $13,148,460 | | Net Investment Income Per Share | $0.35 | $0.42 | | Net Increase in Net Assets Per Share | $0.18 | $0.54 | Consolidated Statements of Changes in Net Assets Net assets increased from $369.9 million to $372.8 million, driven by net investment income and stock issuance, offset by distributions and realized losses Changes in Net Assets (Q1 2025) | Description | Amount | | :--- | :--- | | Net Assets at Dec 31, 2024 | $369,921,940 | | Net investment income | $9,788,809 | | Net realized loss on investments | ($5,967,221) | | Net change in unrealized appreciation | $1,193,293 | | Distributions from net investment income | ($11,087,389) | | Issuance of common stock, net | $8,938,086 | | Other changes | ($21,336) | | Net Assets at March 31, 2025 | $372,766,182 | Consolidated Statements of Cash Flows Q1 2025 saw a net cash outflow of $36.9 million from operations, offset by $27.8 million from financing, resulting in a $9.2 million net decrease in cash Cash Flow Summary (unaudited, for the three months ended) | Activity | March 31, 2025 | March 31, 2024 | | :--- | :--- | :--- | | Net Cash (Used) Provided in Operating Activities | ($36,924,026) | $4,456,954 | | Net Cash Provided by Financing Activities | $27,754,253 | $18,179,026 | | Net (Decrease) Increase in Cash | ($9,169,773) | $22,635,980 | Consolidated Schedules of Investments As of March 31, 2025, the $991.1 million investment portfolio, primarily first lien senior secured debt, was diversified across 110 companies with $46.5 million in unfunded commitments Portfolio Composition by Investment Type (March 31, 2025) | Investment Type | Fair Value | % of Total | | :--- | :--- | :--- | | Senior Secured – First Lien | $888,500,654 | 89.6% | | Senior Secured – Second Lien | $11,948,850 | 1.2% | | Unsecured Debt | $6,705,769 | 0.7% | | Equity | $83,948,504 | 8.5% | | Total Investments | $991,103,777 | 100.0% | - Total investments of $991.1 million were held in 110 portfolio companies as of March 31, 2025[39][212][288] - As of March 31, 2025, the company had outstanding unfunded commitments totaling $46.5 million, consisting of $46.2 million in debt and $0.3 million in equity[48][214][239] Notes to Unaudited Financial Statements This section details the company's accounting policies, BDC/RIC status, SBIC leverage, Level 3 valuations, major debt instruments, and the subsequent issuance of $75 million in 7.250% Notes due 2030 - The company operates as a BDC and has elected to be treated as a RIC for U.S. federal income tax purposes[107] - As of March 31, 2025, the company's asset coverage ratio was 216%, compliant with the 150% regulatory requirement[116] - As of March 31, 2025, loans to five portfolio companies were on non-accrual status, representing 4.0% of the loan portfolio at fair value[144] - Subsequent to the quarter end, on April 1, 2025, the company issued $75 million in aggregate principal amount of 7.250% Notes due 2030[270] Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes Q1 2025 financial condition and operations, covering portfolio growth, asset quality, decreased net investment income, liquidity, capital resources, and subsequent note issuance Portfolio Composition and Investment Activity The investment portfolio grew to $991.1 million across 110 companies, primarily first lien debt, with $55.4 million in new investments and a 10.3% weighted average yield Portfolio Value and Composition | Date | Total Fair Value | Number of Companies | First Lien Debt % (Fair Value) | | :--- | :--- | :--- | :--- | | Mar 31, 2025 | $991.1 million | 110 | 90% | | Dec 31, 2024 | $953.5 million | 105 | 90% | - In Q1 2025, investment activity included $55.4 million in new investments and $15.0 million in proceeds from repayments[301] - The weighted average yield on all debt investments was approximately 10.3% as of March 31, 2025[299] Asset Quality Asset quality improved with non-accrual loans decreasing to 4.0% of fair value, and 84% of the portfolio rated at or above expectations Investment Risk Ratings (% of Total Portfolio Fair Value) | Investment Category | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | 1 (Above Expectations) | 26% | 24% | | 2 (Within Expectations) | 58% | 59% | | 3 (Below Expectations) | 12% | 12% | | 4 (Substantially Below) | 3% | 4% | | 5 (Loss Expected) | 1% | 1% | - Loans on non-accrual status decreased to 5 companies, representing 4.0% of the loan portfolio at fair value as of March 31, 2025, compared to 7 companies representing 5.4% at December 31, 2024[306] Results of Operations Q1 2025 net investment income decreased to $9.8 million due to lower investment income, partially offset by reduced expenses, leading to a sharp decline in net asset increase Comparison of Results of Operations (in millions) | Metric | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Total Investment Income | $25.0 | $26.0 | | Total Operating Expenses, net | $15.2 | $15.8 | | Net Investment Income | $9.8 | $10.2 | | Net Realized Loss | ($6.0) | ($20.4) | | Net Change in Unrealized Appreciation | $1.2 | $23.5 | | Net Increase in Net Assets | $5.0 | $13.1 | Financial Condition, Liquidity and Capital Resources The company maintains liquidity via credit facilities and notes, with $630.6 million total debt and a 216% asset coverage ratio, further bolstered by a $75.0 million note issuance post-quarter - As of March 31, 2025, the company had cash and cash equivalents of $10.9 million[300][332] Debt Outstanding as of March 31, 2025 | Debt Instrument | Amount Outstanding | | :--- | :--- | | Credit Facility | $221.8 million | | SBA-guaranteed debentures | $308.8 million | | 4.875% Notes due 2026 | $100.0 million | - The company's asset coverage ratio was 216% as of March 31, 2025[332] - Subsequent to quarter-end, on April 1, 2025, the company issued $75.0 million of 7.250% Notes due 2030[368] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate volatility, with 91.4% floating-rate debt, where a 100 bps rate change impacts net interest income by $6.1 million annually - As of March 31, 2025, 91.4% of the loans in the company's portfolio bore interest at a floating rate[373] Annual Impact on Net Income from Interest Rate Changes (in millions) | Change in Basis Points | Net Interest Income Change | | :--- | :--- | | Up 200 | $12.3 | | Up 100 | $6.1 | | Down 100 | ($6.1) | | Down 200 | ($12.3) | Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2025, with no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are effective as of March 31, 2025[377] - No material changes to the company's internal control over financial reporting were identified during the first quarter of 2025[378] PART II. OTHER INFORMATION Legal Proceedings The company is not currently subject to any material legal proceedings, nor is it aware of any threatened against it - The company is not currently a party to any material legal proceedings[381] Risk Factors No material changes to previously disclosed risk factors were identified during the three months ended March 31, 2025 - There have been no material changes to the risk factors previously disclosed in the company's SEC filings during the three months ended March 31, 2025[383] Unregistered Sales of Equity Securities and Use of Proceeds The company did not engage in any unregistered sales of equity securities or issue shares via its dividend reinvestment program in Q1 2025 - The company did not conduct any unregistered sales of equity securities in the three months ended March 31, 2025[384] Other Information No directors or executive officers adopted or terminated Rule 10b5-1 trading plans or other trading arrangements during Q1 2025 - No directors or executive officers adopted or terminated any Rule 10b5-1 trading plans during the quarter[387] Exhibits This section lists all exhibits filed, including CEO/CFO certifications, XBRL data, and incorporated by reference documents like the 7.250% Notes due 2030 indenture - The report includes required CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[388] - The Fourth Supplemental Indenture related to the 7.250% Notes due 2030 is incorporated by reference[388]