Stellus Capital Investment (SCM) - 2024 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for Stellus Capital Investment Corporation as of March 31, 2024, and for the three-month period then ended Consolidated Statements of Assets and Liabilities As of March 31, 2024, total assets increased to $935.2 million from $908.1 million at year-end 2023, driven by a rise in cash and investments, with net assets increasing to $323.4 million and NAV per share to $13.41 Consolidated Balance Sheet Summary (unaudited) | Metric | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Assets | $935,221,348 | $908,086,328 | | Total Investments at Fair Value | $875,884,146 | $874,460,683 | | Cash and cash equivalents | $48,761,721 | $26,125,741 | | Total Liabilities | $611,780,944 | $588,146,540 | | Credit Facility payable | $181,343,929 | $156,564,776 | | SBA-guaranteed debentures | $320,587,412 | $320,273,358 | | Net Assets | $323,440,404 | $319,939,788 | | Net Asset Value Per Share | $13.41 | $13.26 | Consolidated Statements of Operations For Q1 2024, Net Increase in Net Assets from Operations significantly rose to $13.1 million ($0.54 per share) from $4.7 million ($0.24 per share) in Q1 2023, driven by unrealized appreciation despite a net realized loss Quarterly Operating Results (unaudited) | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Total Investment Income | $25,996,749 | $24,075,347 | | Total Operating Expenses, net | $15,760,833 | $15,007,727 | | Net Investment Income | $10,235,916 | $9,067,620 | | Net realized (loss) gain | ($20,384,731) | $34,967 | | Net change in unrealized appreciation (depreciation) | $23,518,590 | ($4,249,642) | | Net Increase in Net Assets from Operations | $13,148,460 | $4,736,147 | | NII Per Share | $0.42 | $0.46 | | Net Increase in Net Assets Per Share | $0.54 | $0.24 | | Distributions Per Share | $0.40 | $0.40 | Consolidated Statements of Changes in Net Assets Net assets increased by $3.5 million in Q1 2024 to $323.4 million, primarily due to net investment income and unrealized appreciation, partially offset by realized losses and distributions Reconciliation of Net Assets for Q1 2024 (unaudited) | Description | Amount | | :--- | :--- | | Net Assets at December 31, 2023 | $319,939,788 | | Net investment income | $10,235,916 | | Net realized loss on investments | ($20,384,731) | | Net change in unrealized appreciation on investments | $23,518,590 | | Distributions from net investment income | ($9,647,844) | | Other changes | ($221,315) | | Net Assets at March 31, 2024 | $323,440,404 | Consolidated Statements of Cash Flows The company generated $4.5 million in cash from operating activities in Q1 2024, a significant improvement from the prior year, resulting in a $22.6 million net increase in cash and cash equivalents Summary of Cash Flows (unaudited) | Cash Flow Activity | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net Cash Provided (Used) in Operating Activities | $4,456,954 | ($32,043,024) | | Net Cash Provided by Financing Activities | $18,179,026 | $1,851,795 | | Net Increase (Decrease) in Cash | $22,635,980 | ($30,191,229) | | Cash and Cash Equivalents at End of Period | $48,761,721 | $17,852,100 | Consolidated Schedules of Investments As of March 31, 2024, the investment portfolio had a fair value of $875.9 million across 94 companies, with 90% in senior secured first lien loans and significant concentrations in business services and healthcare Portfolio Composition by Investment Type (March 31, 2024) | Investment Type | Fair Value | % of Total | | :--- | :--- | :--- | | Senior Secured – First Lien | $782,845,785 | 90% | | Senior Secured – Second Lien | $11,948,850 | 1% | | Unsecured Debt | $6,210,612 | 1% | | Equity | $74,878,899 | 8% | | Total Investments | $875,884,146 | 100% | - The total investment portfolio consisted of investments in 94 companies with a total fair value of $875.9 million as of March 31, 2024[184][254] - All investments are valued using significant unobservable inputs and are therefore classified as Level 3 within the fair value hierarchy[35][189] Notes to Unaudited Financial Statements This section details the company's accounting policies, operations as a BDC and RIC, related-party agreements, dividend distributions, equity offerings, portfolio valuation, debt facilities, financial highlights, and subsequent events - The company operates as a Business Development Company (BDC) and a Regulated Investment Company (RIC), focusing on debt and equity investments in U.S. middle-market companies[85][96] - The company utilizes two wholly-owned Small Business Investment Company (SBIC) subsidiaries to access up to $325 million in SBA-guaranteed debentures, which are excluded from the BDC asset coverage test[88][89][223] Financial Highlights Per Share (Q1 2024 vs Q1 2023) | Per Share Data | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net asset value at beginning of period | $13.26 | $14.02 | | Net investment income | $0.42 | $0.46 | | Total from operations | $0.54 | $0.24 | | Stockholder distributions | ($0.40) | ($0.40) | | Net asset value at end of period | $13.41 | $13.87 | - As of March 31, 2024, the company's asset coverage ratio was 214% (or 2.14x), well above the regulatory minimum of 150%[95][209] - Subsequent to quarter-end, the company made new investments totaling over $10 million, realized its investment in Nutritional Medicinals, and declared monthly dividends of $0.1333 per share for April, May, and June 2024[239][240][242] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and operating results, covering investment objectives, portfolio composition, asset quality, operating performance, liquidity, capital resources, and debt facilities - The company's investment objective is to maximize total return through debt and equity investments in middle-market companies, typically those with $5.0 million to $50.0 million of EBITDA[246][253] - As of March 31, 2024, 82% of the portfolio by fair value was rated in the top two categories (performing at or above expectations), an improvement from 86% at year-end 2023, with four portfolio companies on non-accrual status, representing 2.1% of the portfolio's fair value[269][270] - The increase in net investment income in Q1 2024 compared to Q1 2023 was attributed to portfolio growth and rising interest rates, which was partially offset by higher management and incentive fees[276][280][282] - Liquidity is derived from a $260 million Credit Facility, $325 million in SBA-guaranteed debentures, and $100 million in Notes Payable, with $48.8 million in cash and cash equivalents as of March 31, 2024[293][295] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, as 98% of its debt portfolio consists of floating-rate loans, with a 100 basis point interest rate increase or decrease impacting annual net interest income by approximately $6.1 million - As of March 31, 2024, 98% of the company's loans by fair value bore interest at floating rates, primarily indexed to SOFR, making the company sensitive to changes in interest rates[330] Annual Impact of Interest Rate Changes on Net Income (as of March 31, 2024) | Change in Basis Points | Net Interest Income Impact ($ in millions) | | :--- | :--- | | Up 200 | $12.1 | | Up 100 | $6.1 | | Up 50 | $3.1 | | Down 50 | ($3.1) | | Down 100 | ($6.1) | | Down 200 | ($12.1) | Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of March 31, 2024, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are effective as of the end of the period covered by the report[335] - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2024, that materially affected, or are reasonably likely to materially affect, the company's internal controls[336] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not currently subject to any material legal proceedings, nor is it aware of any material legal proceedings being threatened against it - The company reports no material legal proceedings as of the filing date[338] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2023 - No material changes to the risk factors discussed in the company's Annual Report on Form 10-K filed on March 4, 2024, were identified during the three months ended March 31, 2024[339][340] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not engage in any unregistered sales of its equity securities during the three months ended March 31, 2024 - The company did not conduct any unregistered sales of equity securities in the first quarter of 2024[341] Item 3. Defaults Upon Senior Securities This item is not applicable as there were no defaults upon senior securities during the reporting period - Not applicable[342] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[343] Item 5. Other Information During the fiscal quarter ended March 31, 2024, none of the company's directors or executive officers adopted or terminated any Rule 10b5-1 trading plans or any non-Rule 10b5-1 trading arrangements - No directors or executive officers adopted or terminated any Rule 10b5-1 trading plans during the quarter[344] Item 6. Exhibits This section lists the exhibits filed as part of the quarterly report, including certifications by the CEO and CFO as required by the Sarbanes-Oxley Act of 2002 and XBRL data files - The report includes required certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[345]