Stellus Capital Investment (US:SCM)2023-05-09 20:56PART I. FINANCIAL INFORMATION This section details the company's financial statements, management's analysis of operations, market risk exposures, and internal control effectiveness Item 1. Financial Statements The financial statements for Q1 2023 show increased total assets and net investment income, with the investment portfolio growing to $877.5 million Consolidated Statements of Assets and Liabilities This section presents the company's financial position, showing total assets, liabilities, and net assets as of March 31, 2023 Consolidated Balance Sheet Highlights (unaudited) | Metric | March 31, 2023 (USD) | December 31, 2022 (USD) | | :--- | :--- | :--- | | Total Assets | $900,852,176 | $898,182,782 | | Total Liabilities | $620,000,131 | $622,406,169 | | Net Assets | $280,852,045 | $275,776,613 | | Net Asset Value Per Share | $13.87 | $14.02 | - Net Asset Value (NAV) per share decreased slightly to $13.87 at the end of Q1 2023 from $14.02 at the end of 20227 Consolidated Statements of Operations This section outlines the company's investment income, operating expenses, and net investment income for the first quarter of 2023 Consolidated Statements of Operations Highlights (unaudited) | Metric | Three Months Ended Mar 31, 2023 (USD) | Three Months Ended Mar 31, 2022 (USD) | | :--- | :--- | :--- | | Total Investment Income | $24,075,347 | $15,494,404 | | Total Operating Expenses | $15,007,727 | $9,980,221 | | Net Investment Income | $9,067,620 | $5,514,183 | | Net Increase in Net Assets | $4,736,147 | $5,222,164 | | Net Investment Income Per Share | $0.46 | $0.28 | | Distributions Per Share | $0.40 | $0.28 | - Net investment income increased by 64.4% year-over-year, driven by a significant rise in total investment income which outpaced the growth in operating expenses9 Consolidated Statements of Changes in Net Assets This section details the changes in the company's net assets, reflecting investment income, distributions, and equity transactions - Net assets increased from $275.8 million at the end of 2022 to $280.9 million at March 31, 2023. The increase was primarily driven by $9.1 million in net investment income and $8.3 million from the net issuance of common stock, partially offset by $8.0 million in distributions and a $4.2 million net change in unrealized depreciation on investments11 Consolidated Statements of Cash Flows This section summarizes cash flows from operating, investing, and financing activities for the period ended March 31, 2023 Cash Flow Summary (unaudited) | Cash Flow Activity | Three Months Ended Mar 31, 2023 (USD) | Three Months Ended Mar 31, 2022 (USD) | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(32,043,024) | $(62,924,974) | | Net Cash Provided by Financing Activities | $1,851,795 | $43,380,901 | | Net Decrease in Cash | $(30,191,229) | $(19,544,073) | - Cash and cash equivalents decreased by $30.2 million during the quarter, ending at $17.9 million. The decrease was primarily due to $41.2 million in investment purchases, partially offset by proceeds from stock issuance and investment repayments14 Consolidated Schedules of Investments This section details the company's investment portfolio, including composition by type, fair value, and number of portfolio companies Portfolio Composition by Investment Type | Investment Type | Fair Value (Mar 31, 2023, USD) | % of Total | Fair Value (Dec 31, 2022, USD) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Senior Secured – First Lien | $767,818,131 | 87% | $735,555,508 | 87% | | Senior Secured – Second Lien | $43,780,075 | 5% | $45,304,300 | 5% | | Unsecured Debt | $5,428,810 | 1% | $4,823,898 | 1% | | Equity | $60,466,765 | 7% | $59,049,932 | 7% | | Total Investments | $877,493,781 | 100% | $844,733,638 | 100% | - As of March 31, 2023, the total fair value of the investment portfolio was $877.5 million, spread across 88 portfolio companies, an increase from $844.7 million in 85 companies at year-end 2022180183 Notes to Unaudited Financial Statements These notes detail the company's accounting policies, related-party transactions, equity offerings, debt facilities, and subsequent investment activities Advisory Fees Incurred (Q1 2023 vs Q1 2022) | Fee Type | Three Months Ended Mar 31, 2023 (USD) | Three Months Ended Mar 31, 2022 (USD) | | :--- | :--- | :--- | | Base Management Fees | $3,735,102 | $3,492,713 | | Income Incentive Fees | $2,124,835 | $0 | | Capital Gains Incentive Fee Reversal | $(569,528) | $(42,217) | - During Q1 2023, the company issued 581,614 shares under its At-The-Market (ATM) program, raising gross proceeds of $8.4 million and net proceeds of $8.3 million after fees and reimbursements from the Advisor172 Debt Outstanding as of March 31, 2023 | Debt Facility | Outstanding Principal (USD) | Weighted Avg. Interest Rate (%) | | :--- | :--- | :--- | | Credit Facility | $198,277,831 | 7.3% | | SBA-guaranteed debentures | $313,600,000 | 3.1% | | 2026 Notes | $100,000,000 | 4.9% | - Subsequent to quarter-end, the company invested in two new and five existing portfolio companies, issued an additional 587,363 shares under its ATM program, and declared monthly dividends of $0.1333 per share for April, May, and June 2023240241245 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, portfolio growth, asset quality, and liquidity position, highlighting increased net investment income Portfolio Composition and Investment Activity This section details the investment portfolio's fair value, composition by type and geography, and quarterly investment activity - The weighted average yield on all debt investments increased to 11.4% as of March 31, 2023, from 11.1% at the end of 2022, reflecting the impact of rising interest rates on its predominantly floating-rate portfolio269 - During Q1 2023, the company invested $41.2 million in four new and four existing portfolio companies and received $5.9 million in proceeds from investment repayments271 Investment Rating of Portfolio | Investment Category | Fair Value (Mar 31, 2023, USD) | % of Total Portfolio | | :--- | :--- | :--- | | 1 - Performing above expectations | $153.0 million | 17% | | 2 - Performing within expectations | $573.4 million | 66% | | 3 - Performing below expectations | $130.8 million | 15% | | 4 - Substantially below, loss of return expected | $20.3 million | 2% | | 5 - Substantially below, loss of principal expected | $0 | 0% | - As of March 31, 2023, loans to four portfolio companies were on non-accrual status, representing 2.5% of the loan portfolio at fair value, a slight increase from 2.3% at year-end 2022275 Results of Operations This section analyzes the company's Q1 2023 financial performance, highlighting growth in investment income and net investment income despite increased operating expenses Comparison of Results of Operations (in millions) | Metric | Q1 2023 (USD Millions) | Q1 2022 (USD Millions) | | :--- | :--- | :--- | | Total Investment Income | $24.1 | $15.5 | | Total Operating Expenses | $15.0 | $10.0 | | Net Investment Income | $9.1 | $5.5 | | Net Realized Gain | $0.0 | $3.5 | | Net Unrealized Depreciation | $(4.2) | $(3.7) | | Net Increase in Net Assets | $4.7 | $5.2 | Financial condition, liquidity and capital resources This section assesses the company's financial condition, liquidity sources, capital resources, and compliance with regulatory asset coverage requirements - The company's asset coverage ratio was 194% as of March 31, 2023, an increase from 192% at year-end 2022 and well above the regulatory requirement of 150%302 - As of March 31, 2023, the company had $198.3 million outstanding on its $265.0 million Credit Facility308 - The company had a total of $313.6 million in SBA-guaranteed debentures outstanding across its two SBIC subsidiaries as of March 31, 2023311312 Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's primary exposure to interest rate risk, with a sensitivity analysis on net interest income from rate changes - As of March 31, 2023, 97% of the company's debt investments bore interest at floating rates, making its income sensitive to changes in benchmark rates like SOFR and LIBOR340 Annual Impact on Net Income from Interest Rate Changes (in millions) | Change in Basis Points | Impact on Net Interest Income (USD Millions) | | :--- | :--- | | Up 200 bps | $12.0 | | Up 100 bps | $6.0 | | Up 50 bps | $3.0 | | Down 50 bps | $(3.0) | | Down 100 bps | $(6.0) | | Down 200 bps | $(12.0) | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, 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 were effective as of the end of the period covered by the report343 - No changes in the company's internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls344 PART II. OTHER INFORMATION This section addresses legal proceedings, updated risk factors, unregistered equity sales, and other required disclosures Item 1. Legal Proceedings The company is not currently subject to any material legal proceedings, nor is it aware of any threatened actions - The company reports no material legal proceedings as of the filing date347 Item 1A. Risk Factors A new risk factor was added concerning the potential impact of bank impairments or failures on the company's portfolio companies - A new risk factor was added concerning the potential impact of bank impairments or failures on the company's portfolio companies. The failures of Silicon Valley Bank, Signature Bank, and First Republic Bank are cited as examples that could inhibit portfolio companies' access to capital and ability to meet debt obligations350 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No shares were issued under the company's distribution reinvestment program during Q1 2023 or the comparable prior period - The company did not issue any shares through its distribution reinvestment program in Q1 2023 or Q1 2022351 Other Items This section notes no defaults on senior securities, no mine safety disclosures, and lists the exhibits filed with the report - The company reported no defaults upon senior securities (Item 3), no mine safety disclosures (Item 4), and no other information (Item 5) for the period352353354