Stellus Capital Investment Corp - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 1-35730

STELLUS CAPITAL INVESTMENT CORPORATION

(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.)

4400 Post Oak Parkway, Suite 2200
Houston, Texas 77027

(Address of Principal Executive Offices) (Zip Code)

(713) 292-5400

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

SCM

New York Stock Exchange

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 ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	x	Smaller reporting company	¨
Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

The number of shares of the issuer’s Common Stock, $0.001 par value per share, outstanding as of October 28, 2021 was 19,486,003.

STELLUS CAPITAL INVESTMENT CORPORATION
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	1
	Consolidated Statements of Assets and Liabilities as of September 30, 2021 (unaudited) and December 31, 2020	2
	Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2021 and 2020 (unaudited)	3
	Consolidated Statements of Changes in Net Assets for the three and nine-month periods ended September 30, 2021 and 2020 (unaudited)	4
	Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2021 and 2020 (unaudited)	5
	Consolidated Schedules of Investments as of September 30, 2021 (unaudited) and December 31, 2020	6
	Notes to Unaudited Consolidated Financial Statements	24
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	56
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	75
Item 4.	Controls and Procedures	76

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	77
Item 1A.	Risk Factors	77
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78
Item 3.	Defaults Upon Senior Securities	78
Item 4.	Mine Safety Disclosures	78
Item 5.	Other Information	78
Item 6.	Exhibits	78
SIGNATURES		79

PART I — FINANCIAL INFORMATION

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

	September 30,
	2021			December 31,
	(Unaudited)			2020
ASSETS
Non-controlled, non-affiliated investments, at fair value (amortized cost of $787,034,758 and $658,628,966, respectively)	$	785,698,750		$	653,424,495
Cash and cash equivalents		37,753,618			18,477,602
Receivable for sales and repayments of investments		441,058			215,929
Interest receivable		2,803,581			2,189,448
Other receivables		135,495			25,495
Deferred offering costs		—			90,000
Prepaid expenses		186,321			487,188
Total Assets	$	827,018,823		$	674,910,157
LIABILITIES
Notes payable	$	97,990,055		$	48,307,518
Credit facility payable		187,878,861			171,728,405
SBA-guaranteed debentures		244,329,030			173,167,496
Dividends payable		7,402,736			—
Management fees payable		5,251,520			2,825,322
Income incentive fees payable		1,630,149			681,660
Capital gains incentive fees payable		2,361,593			521,021
Interest payable		737,704			2,144,085
Unearned revenue		531,271			523,424
Administrative services payable		763,236			391,491
Deferred tax liability		946,050			359,590
Income tax payable		1,236,616			724,765
Other accrued expenses and liabilities		315,033			174,731
Total Liabilities	$	551,373,854		$	401,549,508
Commitments and contingencies (Note 7)
Net Assets	$	275,644,969		$	273,360,649
NET ASSETS
Common stock, par value $0.001 per share (100,000,000 shares authorized; 19,486,003 and 19,486,003 issued and outstanding, respectively)	$	19,486		$	19,486
Paid-in capital		276,026,667			276,026,667
Accumulated undistributed deficit		(401,184	)		(2,685,504	)
Net Assets	$	275,644,969		$	273,360,649
Total Liabilities and Net Assets	$	827,018,823		$	674,910,157
Net Asset Value Per Share	$	14.15		$	14.03

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

	For the three months ended September 30, 2021			For the three months ended September 30, 2020			For the nine months ended September 30, 2021			For the nine months ended September 30, 2020
INVESTMENT INCOME
Interest income	$	16,460,579		$	13,707,343		$	44,819,754		$	42,192,411
Other income		568,764			309,406			1,301,827			926,661
Total Investment Income	$	17,029,343		$	14,016,749		$	46,121,581		$	43,119,072
OPERATING EXPENSES
Management fees	$	3,473,041		$	2,796,878		$	9,715,381		$	8,259,127
Valuation fees		141,012			134,246			289,447			263,080
Administrative services expenses		437,804			431,894			1,354,295			1,335,423
Income incentive fees		1,451,752			461,590			1,507,651			1,969,976
Capital gains incentive fees		1,742,904			-			1,840,572			(880,913	)
Professional fees		267,332			224,517			772,509			761,745
Directors' fees		74,500			77,500			240,500			320,316
Insurance expense		120,119			94,094			356,439			280,236
Interest expense and other fees		4,854,388			3,861,072			13,869,834			12,245,870
Income tax expense		192,612			367,836			718,869			853,631
Other general and administrative expenses		209,779			238,177			796,338			706,559
Total Operating Expenses	$	12,965,243		$	8,687,804		$	31,461,835		$	26,115,050
Net Investment Income	$	4,064,100		$	5,328,945		$	14,659,746		$	17,004,022
Net realized gain on non-controlled, non-affiliated investments	$	7,921,322		$	151,697		$	6,601,885		$	(2,444,759	)
Loss on debt extinguishment	$	-		$	-		$	(539,250	)	$	-
Net change in unrealized appreciation (depreciation) on non-controlled, non-affiliated investments	$	2,080,603		$	2,120,787		$	3,868,463		$	(11,054,942	)
Provision for taxes on net unrealized gain on investments	$	(606,377	)	$	(92,749	)	$	(586,460	)	$	(122,699	)
Provision for taxes on realized gain on investments	$	(681,027	)		-		$	(681,027	)	$	-
Net Increase in Net Assets
Resulting from Operations	$	12,778,621		$	7,508,680		$	23,323,357		$	3,381,622
Net Investment Income Per Share	$	0.21		$	0.27		$	0.75		$	0.87
Net Increase in Net Assets Resulting from Operations Per Share	$	0.66		$	0.39		$	1.20		$	0.17
Weighted Average Shares of Common Stock Outstanding		19,486,003			19,486,003			19,486,003			19,466,647
Distributions Per Share	$	0.58		$	0.56		$	1.08		$	1.15

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (unaudited)

	For the three months ended September 30, 2021			For the three months ended September 30, 2020			For the nine months ended September 30, 2021			For the nine months ended September 30, 2020
Increase in Net Assets Resulting from Operations
Net investment income	$	4,064,100		$	5,328,945		$	14,659,746		$	17,004,022
Net realized gain (loss) on non-controlled, non-affiliated investments		7,921,322			151,697			6,601,885			(2,444,759	)
Loss on debt extinguishment		—			—			(539,250	)		—
Net change in unrealized appreciation (depreciation) on non-controlled, non-affiliated investments		2,080,603			2,120,787			3,868,463			(11,054,942	)
Provision for taxes on unrealized appreciation on investments		(606,377	)		(92,749	)		(586,460	)		(122,699	)
Provision for taxes on realized gain on investments		(681,027	)		—			(681,027	)		—
Net Increase in Net Assets Resulting from Operations	$	12,778,621		$	7,508,680		$	23,323,357		$	3,381,622
Stockholder Distributions From:
Net investment income	$	(11,299,933	)	$	(10,912,161	)	$	(21,039,037	)	$	(22,402,959	)
Total Distributions	$	(11,299,933	)	$	(10,912,161	)	$	(21,039,037	)	$	(22,402,959	)
Capital Share Transactions
Issuance of common stock	$	—		$	—		$	—		$	5,023,937
Sales load		—			—			—			(5,681	)
Offering costs		—			—			—			(18,169	)
Partial share transactions		—			—			—			(96	)
Net Increase in Net Assets Resulting From Capital Share Transactions	$	—		$	—		$	—		$	4,999,991
Total Increase (Decrease) in Net Assets	$	1,478,688		$	(3,403,481	)	$	2,284,320		$	(14,021,346	)
Net Assets at Beginning of Period	$	274,166,281		$	259,953,308		$	273,360,649		$	270,571,173
Net Assets at End of Period	$	275,644,969		$	256,549,827		$	275,644,969		$	256,549,827

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	For the			For the
	nine			nine
	months ended			months ended
	September 30,			September 30,
	2021			2020
Cash flows from operating activities
Net increase in net assets resulting from operations	$	23,323,357		$	3,381,622
Adjustments to reconcile net increase in net assets from operations to net cash operating activities:
Purchases of investments		(243,298,147	)		(87,193,368	)
Proceeds from sales and repayments of investments		123,617,259			82,360,666
Net change in unrealized (appreciation) depreciation on investments		(3,868,463	)		11,054,942
Increase in investments due to PIK		(607,393	)		(568,028	)
Amortization of premium and accretion of discount, net		(1,747,423	)		(1,611,189	)
Deferred tax provision		586,460			122,699
Amortization of loan structure fees		390,298			500,495
Amortization of deferred financing costs		346,123			249,532
Amortization of loan fees on SBA-guaranteed debentures		801,259			515,707
Net realized (gain) loss on investments		(6,595,217	)		2,444,759
Loss on debt extinguishment		539,250			—
Changes in other assets and liabilities
(Increase) decrease in interest receivable		(614,133	)		1,044,450
Increase in other receivable		(110,000	)		(35,000	)
Decrease in prepaid expenses		300,867			178,461
Increase in management fees payable		2,426,198			2,844,293
Increase (decrease) in incentive fees payable		948,489			(1,033,628	)
Increase (decrease) in capital gains incentive fees payable		1,840,572			(880,913	)
Increase in administrative services payable		371,745			363,606
Decrease in interest payable		(1,406,381	)		(1,484,237	)
Increase in unearned revenue		7,847			34,298
Increase (decrease) in income tax payable		511,851			(111,000	)
Increase in other accrued expenses and liabilities		140,302			236,255
Net Cash Operating Activities	$	(102,095,280	)	$	12,414,422
Cash flows from Financing Activities
Proceeds from the issuance of common stock	$	—		$	4,794,994
Sales load for commons stock issued		—			(5,681	)
Offering costs paid for common stock issued		—			(18,169	)
Stockholder distributions paid		(13,636,301	)		(18,300,982	)
Repayment of Notes Payable		(48,875,000	)		—
Proceeds from issuance of Notes		100,000,000			—
Financing costs from bond issuance		(2,237,835	)		—
Proceeds from SBA Debentures		73,500,000			—
Financing costs paid on SBA Debentures		(3,139,725	)		—
Financing costs paid on Credit facility		(39,843	)		(1,849,834	)
Borrowings under Credit Facility		191,200,000			97,450,000
Repayments of Credit Facility		(175,400,000	)		(72,000,000	)
Partial Share Redemption		—			(96	)
Net Cash Provided by Financing Activities	$	121,371,296		$	10,070,232
Net Increase in Cash and Cash Equivalents	$	19,276,016		$	22,484,654
Cash and Cash Equivalents balance at beginning of period		18,477,602			16,133,315
Cash and Cash Equivalents Balance at End of Period	$	37,753,618		$	38,617,969
Supplemental and Non-Cash Activities
Cash paid for interest expense	$	13,733,216		$	12,433,551
Excise tax paid		870,000			940,000
Shares issued pursuant to Dividend Reinvestment Plan		—			228,943
Increase in dividends payable		7,402,736			3,873,034
Decrease in deferred offering costs for Notes Payable offering		(90,000	)		—
Gain on conversion of equity investment		6,668			—

Stellus Capital Investment Corporation

Consolidated Schedule of Investments (unaudited)

September 30, 2021

Investments	Footnotes	Security⁽³⁾	Coupon	LIBOR floor		Cash		PIK	Investment Date	Maturity	Headquarters/ Industry	Principal Amount/ Shares		Amortized Cost		Fair Value ⁽¹⁾		% of Net Assets
Non-controlled, non-affiliated investments	(2)(9)
Ad.Net Acquisition, LLC											Los Angeles, CA
Term Loan (SBIC II)	(9)(35)	First Lien	3M L+6.00%	1.00	%	7.00	%		5/7/2021	5/7/2026	Services: Business	$	15,549,265		15,332,045		15,316,026		5.56	%
Revolver	(19)(35)	First Lien	3M L+6.00%	1.00	%	7.00	%		5/7/2021	5/7/2026		$	220,833		220,833		217,521		0.08	%
Ad.Net Holdings, Inc. Series A Common Stock (SBIC II)	(9)	Equity							5/7/2021				7,794		77,941		77,941		0.03	%
Ad.Net Holdings, Inc. Series A Preferred Stock (SBIC II)	(9)	Equity							5/7/2021				7,015		701,471		720,000		0.26	%
Total														$	16,332,290	$	16,331,488		5.93	%
Adams Publishing Group, LLC											Greenville, TN
Term Loan	(35)	First Lien	1M L+7.00%	1.75	%	8.75	%		8/3/2018	6/30/2023	Media: Advertising, Printing & Publishing	$	4,184,129		4,167,145		4,184,129		1.52	%
Delayed Draw Term Loan	(35)	First Lien	1M L+7.00%	1.75	%	8.75	%		8/3/2018	6/30/2023		$	139,425		139,425		139,425		0.05	%
Total														$	4,306,570	$	4,323,554		1.57	%
ADS Group Opco, LLC											Lakewood, CO
Term Loan (SBIC II)	(9)(35)	First Lien	3M L+6.75%	1.00	%	7.75	%		6/4/2021	6/4/2026	Aerospace & Defense	$	14,925,000		14,642,493		14,626,500		5.31	%
Revolver	(33)(35)	First Lien	3M L+6.75%	1.00	%	7.75	%		6/4/2021	6/4/2026		$	30,000		30,000		29,400		0.01	%
Pluto Aggregator, LLC Class A Units		Equity							6/4/2021				77,626		288,691		310,000		0.11	%
Pluto Aggregator, LLC Class B Units		Equity							6/4/2021				56,819		211,309		230,000		0.08	%
Total														$	15,172,493	$	15,195,900		5.51	%
Advanced Barrier Extrusions, LLC											Rhinelander, WI
Term Loan B (SBIC)	(2)(35)	First Lien	1M L+7.00%	1.00	%	8.00	%		11/30/2020	11/30/2026	Containers, Packaging, & Glass	$	17,368,750		17,059,586		17,108,219		6.20	%
GP ABX Holdings Partnership, L.P. Common Stock	(4)	Equity							8/8/2018				644,737		528,395		720,000		0.26	%
Total														$	17,587,981	$	17,828,219		6.46	%
Anne Lewis Strategies, LLC	(20)										Washington, DC
Term Loan (SBIC II)	(9)(35)	First Lien	3M L+6.75%	1.00	%	7.75	%		3/5/2021	3/5/2026	Services: Business	$	11,212,500		11,009,494		11,212,500		4.07	%
SG AL Investment, LLC Common Units	(4)	Equity							3/5/2021				1,000		920,488		1,550,000		0.56	%
Total														$	11,929,982	$	12,762,500		4.63	%
APE Holdings, LLC											Deer Park, TX
Class A Common Units		Equity							9/5/2014		Chemicals, Plastics, & Rubber		375,000		375,000		40,000		0.01	%
Total														$	375,000	$	40,000		0.01	%
Atmosphere Aggregator Holdings II, LP											Atlanta, GA
Common Units		Equity							1/26/2016		Services: Business		254,250		0		1,780,000		0.65	%
Stratose Aggregator Holdings, LP Common Units		Equity							6/30/2015				750,000		0		5,240,000		1.90	%
Total														$	0	$	7,020,000		2.55	%
ASC Communications, LLC	(17)										Chicago, IL
Term Loan (SBIC)	(2)(35)	First Lien	1M L+5.00%	1.00	%	6.00	%		6/29/2017	6/29/2023	Healthcare & Pharmaceuticals	$	3,425,926		3,419,383		3,425,926		1.24	%
Term Loan	(35)	First Lien	1M L+5.00%	1.00	%	6.00	%		2/4/2019	6/29/2023		$	5,824,074		5,792,315		5,824,074		2.11	%
ASC Communications Holdings, LLC Class A Preferred Units (SBIC)	(2)(4)	Equity							6/29/2017				73,529		26,076		1,120,000		0.41	%
Total														$	9,237,774	$	10,370,000		3.76	%

Stellus Capital Investment Corporation

Consolidated Schedule of Investments (unaudited)

September 30, 2021

Investments	Footnotes	Security⁽³⁾	Coupon	LIBOR floor		Cash		PIK		Investment Date	Maturity	Headquarters/ Industry		Principal Amount/ Shares		Amortized Cost		Fair Value ⁽¹⁾	% of Net Assets
BW DME Acquisition, LLC												Tempe, AZ
Term Loan (SBIC)	(2)(13)(22)	First Lien	3M L+6.00%	1.00	%	8.51	%			8/24/2017	8/24/2022	Healthcare & Pharmaceuticals	$	16,695,804		16,582,387		16,695,804	6.06	%
BW DME Holdings, LLC, Term Loan	(6)	Unsecured	17.50%			0.00	%	17.50	%	6/1/2018	6/30/2020		$	444,515		444,515		444,515	0.16	%
BW DME Holdings, LLC Class A-1 Preferred Units		Equity								8/24/2017				1,000,000		1,000,000		3,000,000	1.09	%
BW DME Holdings, LLC Class A-2 Preferred Units		Equity								1/26/2018				937,261		937,261		2,810,000	1.02	%
Total															$	18,964,163	$	22,950,319	8.33	%
Café Valley, Inc.												Phoenix, AZ
Term Loan	(35)	First Lien	1M L+7.00%	1.25	%	8.25	%			8/28/2019	8/28/2024	Beverage, Food, & Tobacco	$	15,945,238		15,743,922		15,466,881	5.61	%
CF Topco LLC, Common Units		Equity								8/28/2019				9,160		916,015		720,000	0.26	%
Total															$	16,659,937	$	16,186,881	5.87	%
Camp Profiles LLC	(8)(16)											Boston, MA
Term Loan (SBIC)	(2)(35)	First Lien	3M L+6.00%	1.00	%	7.00	%			9/3/2021	9/3/2026	Media: Advertising, Printing & Publishing	$	10,250,000		10,047,773		10,047,773	3.65	%
CIVC VI-A 829 Blocker, LLC. Units		Equity								9/3/2021				250		250,000		250,000	0.09	%
Total															$	10,297,773	$	10,297,773	3.74	%
CEATI International, Inc.	(39)											Montreal, QC
Term Loan	(5)(35)	First Lien	3M L+6.50%	1.00	%	7.50	%			2/19/2021	2/19/2026	Services: Business	$	13,432,500		13,189,360		13,163,850	4.78	%
CEATI Holdings, LP, Class A Units	(5)	Equity								2/19/2021				250,000		250,000		290,000	0.11	%
Total															$	13,439,360	$	13,453,850	4.89	%
CF512, Inc.	(49)(50)											Blue Bell, PA
Term Loan (SBIC)	(2)(35)	First Lien	3M L+6.00%	1.00	%	7.00	%			9/1/2021	9/1/2026	Media: Advertising, Printing & Publishing	$	14,360,465		14,077,141		14,077,141	5.11	%
StellPen Holdings, LLC Membership Interests		Equity								9/1/2021				220,930		220,930		220,930	0.08	%
Total															$	14,298,071	$	14,298,071	5.19	%
Colford Capital Holdings, LLC												New York, NY
Preferred Units	(5)	Equity								8/20/2015		Finance		38,893		195,036		20,000	0.01	%
Total															$	195,036	$	20,000	0.01	%
CompleteCase, LLC												Seattle, WA
Term Loan (SBIC II)	(9)(35)	First Lien	3M L+6.50%	1.00	%	7.50	%			12/21/2020	12/21/2025	Services: Consumer	$	11,392,174		11,193,003		11,164,331	4.05	%
Revolver	(21)(35)	First Lien	3M L+6.50%	1.00	%	7.50	%			12/21/2020	12/21/2025		$	50,000		50,000		49,000	0.02	%
CompleteCase Holdings, Inc. Class A Common Units (SBIC II)	(9)	Equity								12/21/2020				417		5		0	0.00	%
CompleteCase Holdings, Inc. Series A Preferred Units (SBIC II)	(9)	Equity								12/21/2020				522		521,734		490,000	0.18	%
Total															$	11,764,742	$	11,703,331	4.25	%
Convergence Technologies, Inc.												Indianpolis, IN
Term Loan (SBIC)	(2)(35)	First Lien	3M L+6.75%	1.50	%	8.25	%			8/31/2018	8/30/2024	Services: Business	$	6,928,571		6,852,258		6,859,285	2.49	%
Term Loan B (SBIC)	(2)(35)	First Lien	3M L+6.75%	1.50	%	8.25	%			8/14/2020	8/30/2024		$	3,712,500		3,656,817		3,675,375	1.33	%
Term Loan	(35)	First Lien	3M L+6.75%	1.50	%	8.25	%			2/28/2019	8/30/2024		$	1,392,857		1,376,444		1,378,928	0.50	%
Delayed Draw Term Loan	(35)	First Lien	3M L+6.75%	1.50	%	8.25	%			8/31/2018	8/30/2024		$	5,209,821		5,209,821		5,157,723	1.87	%
Tailwind Core Investor, LLC Class A Preferred Units		Equity								8/31/2018				5,583		588,813		740,000	0.27	%
Total															$	17,684,153	$	17,811,311	6.46	%

Stellus Capital Investment Corporation

Consolidated Schedule of Investments (unaudited)

September 30, 2021

Investments	Footnotes	Security⁽³⁾	Coupon		LIBOR floor		Cash		PIK		Investment Date	Maturity	Headquarters/ Industry		Principal Amount/ Shares		Amortized Cost		Fair Value ⁽¹⁾	% of Net Assets
Credit Connection, LLC	(36)												Fresno, CA
Term Loan (SBIC II)	(9)(35)	First Lien	3M L+5.50%		1.00	%	6.50	%			7/30/2021	7/30/2026	Software	$	10,000,000		9,805,607		9,805,607	3.56	%
Series A Units		Equity									7/30/2021				750,000		750,000		750,000	0.27	%
Total																$	10,555,607	$	10,555,607	3.83	%
Data Centrum Communications, Inc.													Montvale, NJ
Term Loan B	(6)(35)	First Lien	3M L+9.00%		1.00	%	8.50	%	1.50	%	5/15/2019	5/15/2024	Media: Advertising, Printing & Publishing	$	15,884,375		15,703,803		14,137,094	5.13	%
Health Monitor Holdings, LLC Series A Preferred Units		Equity									5/15/2019				1,000,000		1,000,000		250,000	0.09	%
Total																$	16,703,803	$	14,387,094	5.22	%
Douglas Products Group, LP													Liberty, MO
Class A Common Units		Equity									12/27/2018		Chemicals, Plastics, & Rubber		322		139,656		740,000	0.27	%
Total																$	139,656	$	740,000	0.27	%
Dresser Utility Solutions, LLC													Bradford, PA
Term Loan (SBIC)	(2)(35)	Second Lien	1M L+8.50%		1.00	%	9.50	%			10/1/2018	4/1/2026	Utilities: Oil & Gas	$	10,000,000		9,897,299		9,850,000	3.57	%
Total																$	9,897,299	$	9,850,000	3.57	%
DRS Holdings III, Inc.	(10)												St. Louis, MO
Term Loan	(35)	First Lien	1M L+6.25%		1.00	%	7.25	%			11/1/2019	11/1/2025	Consumer Goods: Durable	$	9,825,000		9,753,365		9,825,000	3.56	%
Total																$	9,753,365	$	9,825,000	3.56	%
DTE Enterprises, LLC	(18)												Roselle, IL
Term Loan	(6)(35)	First Lien	6M L+8.50%		1.50	%	9.50	%	0.50	%	4/13/2018	4/13/2023	Energy: Oil & Gas	$	9,356,894		9,288,947		8,561,558	3.11	%
DTE Holding Company, LLC Common Shares, Class A-2		Equity									4/13/2018				776,316		466,204		0	0.00	%
DTE Holding Company, LLC Preferred Shares, Class AA		Equity									4/13/2018				723,684		723,684		350,000	0.13	%
Total																$	10,478,835	$	8,911,558	3.24	%
EC Defense Holdings, LLC													Reston, VA
Class B Units (SBIC)	(2)	Equity									7/31/2020		Services: Business		20,054		500,000		630,000	0.23	%
Total																$	500,000	$	630,000	0.23	%
EH Real Estate Services, LLC													Skokie, IL
Term Loan (SBIC)	(2)	First Lien	10.00	%			10.00	%			9/3/2021	9/3/2026	FIRE: Real Estate	$	7,974,034		7,816,542		7,816,542	2.84	%
EH Holdco, LLC Series A Preferred Units		Equity									9/3/2021				7,892		7,891,642		7,891,642	2.86	%
Total																$	15,708,184	$	15,708,184	5.70	%
Elliott Aviation, LLC													Moline, IL
Term Loan	(35)	First Lien	3M L+8.00%		1.75	%	9.75	%			1/31/2020	1/31/2025	Aerospace & Defense	$	17,699,661		17,447,935		17,257,169	6.25	%
Revolver	(35)(37)	First Lien	3M L+8.00%		1.75	%	9.75	%			1/31/2020	1/31/2025		$	1,350,000		1,350,000		1,316,250	0.48	%
SP EA Holdings, LLC Preferred Shares, Class A		Equity									1/31/2020				900,000		900,000		250,000	0.09	%
Total																$	19,697,935	$	18,823,419	6.82	%
Energy Labs Holding Corp.													Houston, TX
Common Stock		Equity									9/29/2016		Energy: Oil & Gas		598		598,182		620,000	0.22	%
Total																$	598,182	$	620,000	0.22	%
EOS Fitness Holdings, LLC													Phoenix, AZ
Preferred Units		Equity									12/30/2014		Hotel, Gaming, & Leisure		118		0		210,000	0.08	%
Class B Common Units		Equity									12/30/2014				3,017		0		40,000	0.01	%
Total																$	0	$	250,000	0.09	%
Exacta Land Surveyors, LLC	(23)(25)												Cleveland, OH
Term Loan (SBIC)	(2)(35)	First Lien	3M L+7.75%		1.50	%	9.25	%			2/8/2019	2/8/2024	Services: Business	$	16,586,875		16,410,856		16,255,138	5.90	%
SP ELS Holdings LLC, Class A Common Units		Equity									2/8/2019				1,069,143		1,069,143		230,000	0.08	%
Total																$	17,479,999	$	16,485,138	5.98	%

Stellus Capital Investment Corporation

Consolidated Schedule of Investments (unaudited)

September 30, 2021

Investments	Footnotes	Security⁽³⁾	Coupon	LIBOR floor		Cash		PIK	Investment Date	Maturity	Headquarters/ Industry		Principal Amount/ Shares		Amortized Cost		Fair Value ⁽¹⁾	% of Net Assets
FB Topco, Inc.											Camden, NJ
Term Loan	(13)(22)	First Lien	6M L+6.35%	1.00	%	9.52	%		6/27/2018	4/24/2023	Education	$	20,435,204		20,274,540		20,435,204	7.40	%
Delayed Draw Term Loan	(13)(22)	First Lien	6M L+6.35%	1.00	%	9.55	%		6/27/2018	4/24/2023		$	1,120,467		1,120,467		1,120,467	0.41	%
Total														$	21,395,007	$	21,555,671	7.81	%
General LED OPCO, LLC											San Antonio, TX
Term Loan	(35)(40)	Second Lien	3M L+9.00%	1.50	%	0.00	%		5/1/2018	11/1/2023	Services: Business	$	4,500,000		4,460,441		3,667,500	1.33	%
Total														$	4,460,441	$	3,667,500	1.33	%
Grupo HIMA San Pablo, Inc., et al											San Juan, PR
Term Loan B	(27)(35)(41)	First Lien	3M L+7.00%	1.50	%	0.00	%		2/1/2013	1/31/2018	Healthcare & Pharmaceuticals	$	4,503,720		4,503,720		2,161,786	0.78	%
Term Loan	(15)(27)	Second Lien	13.75%			0.00	%		2/1/2013	7/31/2018		$	4,109,524		4,109,524		0	0.00	%
Total														$	8,613,244	$	2,161,786	0.78	%
GS HVAM Intermediate, LLC											Carlsbad, CA
Term Loan	(35)	First Lien	1M L+5.75%	1.00	%	6.75	%		10/18/2019	10/2/2024	Beverage, Food, & Tobacco	$	12,797,813		12,713,707		12,797,813	4.64	%
Revolver	(34)(35)	First Lien	1M L+5.75%	1.00	%	6.75	%		10/18/2019	10/2/2024		$	2,386,364		2,386,364		2,386,364	0.87	%
HV GS Acquisition, LP Class A Interests		Equity							6/29/2018				1,796		1,618,844		2,110,000	0.77	%
Total														$	16,718,915	$	17,294,177	6.28	%
I2P Holdings, LLC											Cleveland, OH
Series A Preferred		Equity							1/31/2018		Services: Business		750,000		750,000		3,490,000	1.27	%
Total														$	750,000	$	3,490,000	1.27	%
ICD Holdings, LLC											San Francisco, CA
Class A Preferred	(4)(5)	Equity							1/1/2018		Finance		9,962		464,616		1,320,000	0.48	%
Total														$	464,616	$	1,320,000	0.48	%
Integrated Oncology Network, LLC	(30)										Newport Beach, CA
Term Loan	(35)	First Lien	3M L+5.50%	1.50	%	7.00	%		7/17/2019	6/24/2024	Healthcare & Pharmaceuticals	$	16,034,753		15,843,707		16,034,753	5.82	%
Total														$	15,843,707	$	16,034,753	5.82	%
Interstate Waste Services, Inc.											Amsterdam, OH
Common Units		Equity							1/15/2020		Environmental Industries		21,925		946,125		470,000	0.17	%
Total														$	946,125	$	470,000	0.17	%
Intuitive Health, LLC											Plano, TX
Term Loan (SBIC II)	(9)(35)	First Lien	3M L+5.75%	1.00	%	6.75	%		10/18/2019	10/18/2027	Healthcare & Pharmaceuticals	$	5,910,000		5,831,653		5,910,000	2.14	%
Term Loan	(35)	First Lien	3M L+5.75%	1.00	%	6.75	%		10/18/2019	10/18/2027		$	11,327,500		11,177,335		11,327,500	4.11	%
Term Loan (SBIC II)	(9)(35)	First Lien	3M L+5.75%	1.00	%	6.75	%		8/31/2021	10/18/2027		$	3,112,335		3,066,155		3,112,335	1.13	%
Legacy Parent, Inc. Class A Common Units	(4)	Equity							10/30/2020				58		75		170,000	0.06	%
Total														$	20,075,218	$	20,519,835	7.44	%
Invincible Boat Company, LLC	(28)										Opa Locka, FL
Term Loan	(35)	First Lien	3M L+6.50%	1.50	%	8.00	%		8/28/2019	8/28/2025	Consumer Goods: Durable	$	5,661,687		5,534,958		5,633,379	2.04	%
Term Loan (SBIC II)	(9)(35)	First Lien	3M L+6.50%	1.50	%	8.00	%		8/28/2019	8/28/2025		$	5,226,172		5,152,154		5,200,041	1.89	%
Term Loan (SBIC II)	(9)(35)	First Lien	3M L+6.50%	1.50	%	8.00	%		6/1/2021	8/28/2025		$	1,161,846		1,140,158		1,156,037	0.42	%
Warbird Parent Holdco, LLC Class A Common Units	(4)	Equity							8/28/2019				1,362,575		1,299,691		1,460,000	0.53	%
Total														$	13,126,961	$	13,449,457	4.88	%

Stellus Capital Investment Corporation

Consolidated Schedule of Investments (unaudited)

September 30, 2021

Investments	Footnotes	Security⁽³⁾	Coupon	LIBOR floor		Cash		PIK		Investment Date	Maturity	Headquarters/ Industry		Principal Amount/ Shares		Amortized Cost		Fair Value ⁽¹⁾	% of Net Assets
J.R. Watkins, LLC
Term Loan (SBIC)	(2)(6)	First Lien	10.00%			7.00	%	3.00	%	12/22/2017	12/22/2022	San Francisco Consumer Goods: Non-Durable	$	12,437,051		12,366,620		12,437,051	4.51	%
J.R. Watkins Holdings, Inc. Class A Preferred		Equity								12/22/2017				1,133		1,132,576		560,000	0.20	%
Total															$	13,499,196	$	12,997,051	4.71	%
Jurassic Acquisiton Corp.
Term Loan	(12)	First Lien	3M L+5.50%	0.00	%	5.65	%			12/28/2018	11/15/2024	Sparks, MD Metals & Mining	$	17,018,750		16,871,320		17,018,750	6.17	%
Total															$	16,871,320	$	17,018,750	6.17	%
Kelleyamerit Holdings, Inc.
Term Loan (SBIC)	(2)(13)(22)	First Lien	3M L+6.50%	1.00	%	8.85	%			12/24/2020	12/24/2025	Walnut Creek, CA Automotive	$	9,750,000		9,581,146		9,555,000	3.47	%
Term Loan	(13)(22)	First Lien	3M L+6.50%	1.00	%	8.85	%			12/24/2020	12/24/2025		$	1,500,000		1,474,022		1,470,000	0.53	%
Total															$	11,055,168	$	11,025,000	4.00	%
KidKraft, Inc.	(38)
Term Loan	(22)(29)	First Lien	3M L+5.00%	1.00	%	6.00	%			9/30/2016	8/15/2022	Dallas, TX Consumer Goods: Durable	$	1,580,768		1,580,768		1,580,768	0.57	%
KidKraft Group Holdings, LLC Preferred B Units		Equity								4/3/2020				4,000,000		4,000,000		4,000,000	1.45	%
Total															$	5,580,768	$	5,580,768	2.02	%
Lynx FBO Operating, LLC	(31)
Term Loan	(35)	First Lien	3M L+5.75%	1.50	%	7.25	%			9/30/2019	9/30/2024	Houston, TX Aerospace & Defense	$	13,475,000		13,297,181		13,475,000	4.89	%
Lynx FBO Investments, LLC Class A-1 Common Units		Equity								9/30/2019				4,288		593,480		1,410,000	0.51	%
Total															$	13,890,661	$	14,885,000	5.40	%
Madison Logic, Inc.
Term Loan A (SBIC)	(2)(35)	First Lien	1M L+6.00%	1.00	%	7.00	%			2/4/2021	5/31/2023	New York, NY Media: Broadcasting & Subscription	$	3,791,247		3,777,363		3,791,247	1.38	%
Madison Logic Holdings, Inc. Common Stock (SBIC)	(2)	Equity								11/30/2016				5,000		50,000		220,000	0.08	%
Madison Logic Holdings, Inc. Preferred Stock (SBIC)	(2)	Equity								11/30/2016				4,500		450,000		1,940,000	0.70	%
Total															$	4,277,363	$	5,951,247	2.16	%
Mobile Acquisition Holdings, LP
Class A Common Units		Equity								11/1/2016		Santa Clara, CA Software		750		455,385		2,830,000	1.03	%
Total															$	455,385	$	2,830,000	1.03	%
MOM Enterprises, LLC
Term Loan (SBIC II)	(9)(35)	First Lien	3M L+6.25%	1.00	%	7.25	%			5/19/2021	5/19/2026	Richmond, CA Consumer goods: non-durable	$	16,425,500		16,115,173		16,096,990	5.84	%
Revolver	(35)(43)	First Lien	3M L+6.25%	1.00	%	7.25	%			5/19/2021	5/19/2026		$	31,250		31,250		30,625	0.01	%
MBliss SPC Holdings, LLC Units		Equity								5/19/2021				933,333		933,333		960,000	0.35	%
Total															$	17,079,756	$	17,087,615	6.20	%
Munch's Supply, LLC
Term Loan	(35)	First Lien	3M L+6.25%	1.00	%	7.25	%			4/11/2019	4/11/2024	New Lenox,IL Capital Equipment	$	7,174,147		7,134,300		7,174,147	2.60	%
Term Loan (SBIC)	(2)(35)	First Lien	3M L+6.25%	1.00	%	7.25	%			3/31/2021	4/11/2024		$	3,989,862		3,921,712		3,989,862	1.45	%
Term Loan	(35)	First Lien	3M L+6.25%	1.00	%	7.25	%			5/28/2021	4/11/2024		$	1,152,875		1,132,189		1,152,875	0.42	%
Delayed Draw Term Loan	(35)	First Lien	3M L+6.25%	1.00	%	7.25	%			4/11/2019	4/11/2024		$	2,149,362		2,123,532		2,149,362	0.78	%
Cool Supply Holdings, LLC Class A Common Units	(4)	Equity								4/11/2019				500,000		475,836		1,030,000	0.37	%
Total															$	14,787,569	$	15,496,246	5.62	%

Stellus Capital Investment Corporation

Consolidated Schedule of Investments (unaudited)

September 30, 2021

Investments	Footnotes	Security⁽³⁾	Coupon	LIBOR floor		Cash		PIK		Investment Date	Maturity	Headquarters/ Industry		Principal Amount/ Shares		Amortized Cost		Fair Value ⁽¹⁾	% of Net Assets
Naumann/Hobbs Material Handling Corporation II, Inc.	(32)
Term Loan	(35)	First Lien	3M L+6.25%	1.50	%	7.75	%			8/30/2019	8/30/2024	Phoenix, AZ Services: Business	$	9,125,549		9,009,691		9,125,549	3.31	%
Term Loan (SBIC II)	(9)(35)	First Lien	3M L+6.25%	1.50	%	7.75	%			8/30/2019	8/30/2024		$	5,754,605		5,681,544		5,754,605	2.09	%
CGC NH, Inc. Common Units		Equity								8/30/2019				123		440,758		710,000	0.26	%
Total															$	15,131,993	$	15,590,154	5.66	%
NS412, LLC
Term Loan	(35)	Second Lien	3M L+8.50%	1.00	%	9.50	%			5/6/2019	11/6/2025	Dallas, TX Services: Consumer	$	7,615,000		7,508,305		7,462,700	2.71	%
NS Group Holding Company, LLC Class A Common Units		Equity								5/6/2019				782		795,002		570,000	0.21	%
Total															$	8,303,307	$	8,032,700	2.92	%
NuMet Machining Techniques, LLC
Term Loan	(5)(35)	Second Lien	1M L+9.00%	2.00	%	11.00	%			11/5/2019	5/5/2026	Birmingham, United Kingdom Aerospace & Defense	$	12,675,000		12,483,105		11,977,875	4.35	%
Bromford Industries Limited Term Loan	(5)(35)	Second Lien	1M L+9.00%	2.00	%	11.00	%			11/5/2019	5/5/2026		$	7,800,000		7,678,092		7,371,000	2.67	%
Bromford Holdings, L.P. Class A Membership Units	(5)	Equity								11/5/2019				866,629		866,629		30,000	0.01	%
Bromford Holdings, L.P. Class D Membership Units	(5)	Equity								3/18/2021				280,078		280,078		440,000	0.16	%
Total															$	21,307,904	$	19,818,875	7.19	%
NuSource Financial, LLC
Term Loan (SBIC II)	(9)(35)	First Lien	1M L+9.00%	1.00	%	10.00	%			1/29/2021	1/29/2026	Eden Prairie, MN Services: Business	$	11,165,625		10,965,780		10,942,313	3.97	%
NuSource Financial Acquisition, Inc. (SBIC II)	(6)(9)	Unsecured	13.75%			4.00	%	9.75	%	1/29/2021	7/29/2026		$	4,989,657		4,902,628		4,864,916	1.76	%
NuSource Holdings, Inc., Warrants (SBIC II)	(9)	Equity								1/29/2021				54,966		0		0	0.00	%
Total															$	15,868,408	$	15,807,229	5.73	%
Nutritional Medicinals, LLC	(24)
Term Loan	(35)	First Lien	3M L+6.00%	1.00	%	7.00	%			11/15/2018	11/15/2023	Centerville, OH Healthcare & Pharmaceuticals	$	11,654,201		11,543,624		11,654,201	4.23	%
Functional Aggregator, LLC Common Units		Equity								11/15/2018				12,500		1,250,000		1,590,000	0.58	%
Total															$	12,793,624	$	13,244,201	4.81	%
Onpoint Industrial Services, LLC
Term Loan (SBIC)	(2)(35)	First Lien	3M L+7.25%	1.00	%	8.25	%			3/15/2021	3/15/2026	Deer Park, TX Services: Business	$	10,447,500		10,258,104		10,238,550	3.71	%
Onpoint Parent Holdings, LLC, Class A Units		Equity								3/15/2021				500,000		500,000		500,000	0.18	%
Total															$	10,758,104	$	10,738,550	3.89	%
PCP MT Aggregator Holdings, L.P.
Common LP Units		Equity								3/29/2019		Oak Brook, IL Finance		750,000		0		1,800,000	0.65	%
Total															$	0	$	1,800,000	0.65	%
PCS Software, Inc.
Term Loan	(35)	First Lien	3M L+5.75%	1.50	%	7.25	%			7/1/2019	7/1/2024	Shenandoah, TX Transportation & Logistics	$	14,246,676		14,074,246		14,246,676	5.17	%
Term Loan (SBIC)	(2)(35)	First Lien	3M L+5.75%	1.50	%	7.25	%			7/1/2019	7/1/2024		$	1,868,417		1,845,803		1,868,417	0.68	%
Delayed Draw Term Loan	(35)	First Lien	3M L+5.75%	1.50	%	7.25	%			7/1/2019	7/1/2024		$	985,000		985,000		985,000	0.36	%
Revolver	(11)(35)	First Lien	3M L+5.75%	1.50	%	7.25	%			7/1/2019	7/1/2024		$	878,762		878,762		878,762	0.32	%
PCS Software Holdings, LLC Class A Preferred Units		Equity								7/1/2019				325,000		325,000		250,000	0.09	%
PCS Software Holdings, LLC Class A-2 Preferred Units		Equity								11/12/2020				63,312		63,312		50,000	0.02	%
Total															$	18,172,123	$	18,278,855	6.64	%

Stellus Capital Investment Corporation

Consolidated Schedule of Investments (unaudited)

September 30, 2021

Investments	Footnotes	Security⁽³⁾	Coupon	LIBOR floor		Cash		PIK		Investment Date	Maturity	Headquarters/ Industry		Principal Amount/ Shares		Amortized Cost		Fair Value ⁽¹⁾	% of Net Assets
Premiere Digital Services, Inc.
Term Loan (SBIC)	(2)(13)(22)	First Lien	3M L+5.50%	1.50	%	8.14	%			10/18/2018	10/18/2023	Los Angeles, CA Media: Broadcasting & Subscription	$	9,992,518		9,851,335		9,992,518	3.63	%
Term Loan	(13)(22)	First Lien	3M L+5.50%	1.50	%	8.14	%			10/18/2018	10/18/2023		$	2,428,772		2,395,490		2,428,772	0.88	%
Premiere Digital Holdings, Inc., Common Stock		Equity								10/18/2018				5,000		50,000		1,270,000	0.46	%
Premiere Digital Holdings, Inc., Preferred Stock		Equity								10/18/2018				4,500		314,550		560,000	0.20	%
Total															$	12,611,375	$	14,251,290	5.17	%
Protect America, Inc.												Austin, TX
Term Loan (SBIC)	(2)(26)(35)	Second Lien	3M L+7.75%	1.00	%	0.00	%			8/30/2017	10/30/2020	Services: Consumer	$	17,979,749		17,979,749		2,157,570	0.78	%
Total															$	17,979,749	$	2,157,570	0.78	%
Rogers Mechanical Contractors, LLC	(44)(45)											Atlanta, GA
Term Loan	(35)	First Lien	3M L+6.50%	1.00	%	7.50	%			4/28/2021	9/9/2025	Construction & Building	$	10,676,816		10,504,933		10,516,664	3.82	%
Total															$	10,504,933	$	10,516,664	3.82	%
Sales Benchmark Index, LLC	(7)											Dallas, TX
Term Loan	(35)	First Lien	3M L+6.00%	1.75	%	7.75	%			1/7/2020	1/7/2025	Services: Business	$	13,888,565		13,693,668		13,819,122	5.01	%
SBI Holdings Investments, LLC Class A Preferred Units		Equity								1/7/2020				66,573		665,730		420,000	0.15	%
Total															$	14,359,398	$	14,239,122	5.16	%
Skopos Financial Group, LLC												Irving, TX
Series A Preferred Units	(5)	Equity								1/31/2014		Finance		1,120,684		1,162,544		340,000	0.12	%
Total															$	1,162,544	$	340,000	0.12	%
Spire Power Solutions, L.P.												Franklin, WI
Term Loan (SBIC II)	(9)(35)	First Lien	6M L+6.25%	1.50	%	7.75	%			11/22/2019	8/12/2026	Capital Equipment	$	4,900,000		4,843,590		4,900,000	1.78	%
Term Loan (SBIC II)	(9)(35)	First Lien	1M L+6.25%	1.50	%	7.75	%			8/12/2021	8/12/2026		$	3,557,226		3,496,644		3,557,226	1.29	%
Total															$	8,340,234	$	8,457,226	3.07	%
SQAD LLC												Tarrytown, NY
Term Loan (SBIC)	(2)(35)	First Lien	3M L+6.50%	1.00	%	7.50	%			12/22/2017	12/22/2022	Media: Broadcasting & Subscription	$	14,218,094		14,196,349		14,218,094	5.16	%
SQAD Holdco, Inc. Preferred Shares, Series A (SBIC)	(2)	Equity								10/31/2013				5,624		156,001		590,000	0.21	%
SQAD Holdco, Inc. Common Shares (SBIC)	(2)	Equity								10/31/2013				5,800		62,485		70,000	0.03	%
Total															$	14,414,835	$	14,878,094	5.40	%
TAC LifePort Purchaser, LLC	(42)											Woodland, WA
Term Loan (SBIC II)	(9)(35)	First Lien	3M L+6.00%	1.00	%	7.00	%			3/1/2021	3/2/2026	Aerospace & Defense	$	10,679,336		10,486,354		10,465,749	3.80	%
TAC LifePort Holdings, LLC Common Units		Equity								3/1/2021				500,000		500,000		640,000	0.23	%
Total															$	10,986,354	$	11,105,749	4.03	%
TechInsights, Inc.												Ottawa, Ontario
Term Loan	(5)(13)(22)	First Lien	3M L+6.00%	1.00	%	8.36	%			8/16/2017	10/2/2023	High Tech Industries	$	21,540,925		21,414,367		21,540,925	7.80	%
Total															$	21,414,367	$	21,540,925	7.80	%
TFH Reliability, LLC												Houston, TX
Term Loan (SBIC)	(2)(35)	Second Lien	3M L+10.75%	0.80	%	11.55	%			10/21/2016	9/30/2023	Chemicals, Plastics, & Rubber	$	5,875,000		5,856,473		5,757,500	2.09	%
TFH Reliability Group, LLC Class A-1 Units		Equity								6/29/2020				27,129		21,511		20,000	0.01	%
TFH Reliability Group, LLC Class A Common Units		Equity								10/21/2016				250,000		231,521		70,000	0.03	%
Total															$	6,109,505	$	5,847,500	2.13	%
Time Manufacturing Acquisition, LLC												Waco, TX
Term Loan	(6)	Unsecured	11.50%			10.75	%	0.75	%	2/3/2017	8/3/2023	Capital Equipment	$	13,579,993		13,421,445		13,579,993	4.93	%
Time Manufacturing Investments, LLC Class A Common Units		Equity								2/3/2017				5,268		553,600		1,180,000	0.43	%
Total															$	13,975,045	$	14,759,993	5.36	%

Stellus Capital Investment Corporation

Consolidated Schedule of Investments (unaudited)

September 30, 2021

Investments	Footnotes	Security⁽³⁾	Coupon	LIBOR floor		Cash		PIK	Investment Date	Maturity	Headquarters/ Industry		Principal Amount/ Shares		Amortized Cost		Fair Value ⁽¹⁾		% of Net Assets
TradePending, LLC	(14)										Carrboro, NC
Term Loan (SBIC II)	(9)(35)	First Lien	3M L+6.25%	1.00	%	7.25	%		3/2/2021	3/2/2026	Software	$	9,950,000		9,770,082		9,751,000		3.54	%
TradePending Holdings, LLC Series A Units		Equity							3/2/2021				750,000		750,000		730,000		0.26	%
Total														$	10,520,082	$	10,481,000		3.80	%
Unicat Catalyst Holdings, LLC	(46)										Alvin, TX
Term Loan	(35)	First Lien	3M L+6.50%	1.00	%	7.50	%		4/27/2021	4/27/2026	Chemicals, Plastics, & Rubber	$	7,453,125		7,314,346		7,304,063		2.65	%
Unicat Catalyst, LLC Class A Units		Equity							4/27/2021				7,500		750,000		750,000		0.27	%
Total														$	8,064,346	$	8,054,063		2.92	%
U.S. Auto Sales, Inc. et al											Lawrenceville, GA
USASF Blocker II, LLC Common Units	(5)	Equity							6/8/2015		Finance		441		441,000		530,000		0.19	%
USASF Blocker III, LLC Series C Preferred Units	(5)	Equity							2/13/2018				125		125,000		250,000		0.09	%
USASF Blocker IV, LLC Units	(5)	Equity							5/27/2020				110		110,000		330,000		0.12	%
USASF Blocker LLC Common Units	(5)	Equity							6/8/2015				9,000		9,000		0		0.00	%
Total														$	685,000	$	1,110,000		0.40	%
Venbrook Buyer, LLC											Los Angeles, CA
Term Loan B (SBIC)	(2)(35)	First Lien	3M L+6.50%	1.50	%	8.00	%		3/13/2020	3/13/2026	Services: Business	$	12,985,657		12,781,348		12,985,657		4.71	%
Term Loan B	(35)	First Lien	3M L+6.50%	1.50	%	8.00	%		3/13/2020	3/13/2026		$	147,751		145,426		147,751		0.05	%
Revolver	(35)	First Lien	3M L+6.50%	1.50	%	8.00	%		3/13/2020	3/13/2026		$	2,222,222		2,222,222		2,222,222		0.81	%
Delayed Draw Term Loan	(35)	First Lien	3M L+6.50%	1.50	%	8.00	%		3/13/2020	3/13/2026		$	4,426,667		4,386,128		4,426,667		1.61	%
Venbrook Holdings, LLC Common Units		Equity							3/13/2020				786,361		782,865		640,000		0.23	%
Total														$	20,317,989	$	20,422,297		7.41	%
Vortex Companies, LLC											Houston, TX
Term Loan (SBIC II)	(9)(35)	Second Lien	3M L+9.50%	1.00	%	10.50	%		12/21/2020	6/21/2026	Environmental Industries	$	10,000,000		9,820,727		9,800,000		3.56	%
Total														$	9,820,727	$	9,800,000		3.56	%
Whisps Holdings LP											Elgin, IL
Class A Common Units		Equity							4/18/2019		Beverage, Food, & Tobacco		500,000		500,000		510,000		0.19	%
Total														$	500,000	$	510,000		0.19	%
Wise Parent Company, LLC											Salt Lake City, UT
Membership Units	(4)	Equity							8/27/2018		Beverage, Food, & Tobacco		6		0		410,000		0.15	%
Total														$	0	$	410,000		0.15	%
Xanitos, Inc.	(47)(48)										Newtown Square, PA
Term Loan (SBIC)	(2)(35)	First Lien	3M L+6.50%	1.00	%	7.50	%		6/25/2021	6/25/2026	Healthcare & Pharmaceuticals	$	12,768,000		12,523,139		12,512,640		4.54	%
Pure TopCo, LLC Class A Units		Equity							6/25/2021				318,849		760,063		780,000		0.28	%
Total														$	13,283,202	$	13,292,640		4.82	%

Total Non-controlled, non-affiliated investments														$	787,034,758	$	785,698,750		285.04	%
Net Investments														$	787,034,758	$	785,698,750		285.04	%
LIABILITIES IN EXCESS OF OTHER ASSETS																$	(510,053,781	)	(185.04	)%
NET ASSETS																$	275,644,969		100.00	%

Stellus Capital Investment Corporation

Consolidated Schedule of Investments (unaudited)

September 30, 2021

	(1)	See Note 1 of the Notes to the Consolidated Financial Statements for a discussion of the methodologies used to value securities in the portfolio.
	(2)	Investments held by the SBIC subsidiary (as defined in Note 1), which include $23,073,454 of cash and $222,003,743 of investments (at cost), are excluded from the obligations to the lenders of the Credit Facility (as defined in Note 9). Stellus Capital Investment Corporation’s (the “Company”) obligations to the lenders of the Credit Facility are secured by a first priority security interest in all investments and cash and cash equivalents, except for cash and investments held by the SBIC subsidiaries (as defined in Note 1).
	(3)	Debt investments are income producing and equity securities are non-income producing, unless otherwise noted.
	(4)	Security is income producing through dividends or distributions.
	(5)	The investment is not a “qualifying asset” under the Investment Company Act of 1940, as amended. The Company may not acquire any non-qualifying assets unless, at the time of the acquisition, qualifying assets represent at least 70% of the Company’s total assets. Qualifying assets represent approximately 93% of the Company’s total assets as of September 30, 2021.
	(6)	Represents a PIK interest security. At the option of the issuer, interest can be paid in cash or cash and PIK interest. The percentage of PIK interest shown is the maximum PIK interest that can be elected by the issuer.
	(7)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,331,461, with an interest rate of LIBOR plus 6.00% and a maturity of January 7, 2025. This investment is accruing an unused commitment fee of 0.50% per annum.
	(8)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.00% and a maturity of September 3, 2026. This investment is accruing an unused commitment fee of 0.50% per annum.
	(9)	Investments held by the SBIC II subsidiary (as defined in Note 1), which include $14,441,853 of cash and $154,556,435 of investments (at cost), are excluded from the obligations to the lenders of the Credit Facility. The Company’s obligations to the lenders of the Credit Facility are secured by a first priority security interest in all investments and cash and cash equivalents, except for cash and investments held by the SBIC subsidiaries.
	(10)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $909,091, with an interest rate of LIBOR plus 6.25% and a maturity of November 1, 2025. This investment is accruing an unused commitment fee of 0.50% per annum.
	(11)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $439,381, with an interest rate of LIBOR plus 5.75% and a maturity of July 1, 2024. This investment is accruing an unused commitment fee of 0.50% per annum.
	(12)	These loans have LIBOR floors, which are lower than the applicable LIBOR rates; therefore, the floors are not in effect.
	(13)	These loans are last-out term loans with contractual rates higher than the applicable LIBOR rates; therefore, the floors are not in effect.
	(14)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.25% and a maturity of March 2, 2026. This investment is accruing an unused commitment fee of 0.50% per annum.
	(15)	Investment has been on non-accrual since October 31, 2017.
	(16)	Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $3,750,000, with an interest rate of LIBOR plus 6.00% and a maturity of September 3, 2026. This investment is accruing an unused commitment fee of 1.00% per annum.
	(17)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $666,667, with an interest rate of LIBOR plus 5.00% and a maturity of June 29, 2023. This investment is accruing an unused commitment fee of 0.50% per annum.
	(18)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $750,000, with an interest rate of LIBOR plus 8.50% and a maturity of April 13, 2023. The Company has full discretion to fund the revolver commitment.
	(19)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,078,186, with an interest rate of LIBOR plus 6.00% and a maturity of May 7, 2026. This investment is accruing an unused commitment fee of 0.50% per annum.
	(20)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.75% and a maturity of March 5, 2026. This investment is accruing an unused commitment fee of 0.50% per annum.
	(21)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $50,000 with an interest rate of LIBOR plus 6.50% and a maturity of December 21, 2025. This investment is accruing an unused commitment fee of 0.50% per annum.
	(22)	This loan is a unitranche investment.
	(23)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,500,000 with an interest rate of LIBOR plus 7.75% and a maturity of February 8, 2024. The Company has full discretion to fund the revolver commitment.
	(24)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $2,000,000 with an interest rate of LIBOR plus 6.00% and a maturity of November 15, 2023. This investment is accruing an unused commitment fee of 0.50% per annum.
	(25)	Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $4,000,000, with an interest rate of LIBOR plus 7.75% and a maturity of February 8, 2024. The Company has full discretion to fund the delayed draw term loan commitment.
	(26)	Investment has been on non-accrual since June 28, 2019.
	(27)	Maturity date is under ongoing negotiations with portfolio company and other lenders.
	(28)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,063,830, with an interest rate of LIBOR plus 6.50% and a maturity of August 28, 2025. This investment is accruing an unused commitment fee of 0.50% per annum.
	(29)	These loans are last-out term loans with contractual rates lower than the applicable LIBOR rates; therefore, the floors are in effect.
	(30)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $553,517, with an interest rate of LIBOR plus 5.50% and a maturity of June 24, 2024. This investment is accruing an unused commitment fee of 0.50% per annum.
	(31)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,875,000, with an interest rate of LIBOR plus 5.75% and a maturity of September 30, 2024. This investment is accruing an unused commitment fee of 0.50% per annum.
	(32)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,763,033, with an interest rate of LIBOR plus 6.25% and a maturity of August 30, 2024. This investment is accruing an unused commitment fee of 0.50% per annum.
	(33)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $70,000, with an interest rate of LIBOR plus 6.75% and a maturity of June 4, 2026. This investment is accruing an unused commitment fee of 0.50% per annum.

Stellus Capital Investment Corporation

Consolidated Schedule of Investments (unaudited)

September 30, 2021

	(34)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $265,152, with an interest rate of LIBOR plus 5.75% and a maturity of October 2, 2024. This investment is accruing an unused commitment fee of 0.50% per annum.
	(35)	These loans have LIBOR floors, which are higher than the current applicable LIBOR rates; therefore, the floors are in effect.
	(36)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 5.50% and a maturity of July 30, 2026. This investment is accruing an unused commitment fee of 0.50% per annum.
	(37)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,350,000, with an interest rate of LIBOR plus 8.00% and a maturity of January 31, 2025. This investment is accruing an unused commitment fee of 0.50% per annum.
	(38)	Instrument was restructured into a first lien term loan and preferred equity on April 3, 2020.
	(39)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.50% and a maturity of February 19, 2026. This investment is accruing an unused commitment fee of 0.50% per annum.
	(40)	Investment has been on non-accrual since December 31, 2020.
	(41)	Investment has been on non-accrual since January 1, 2021.
	(42)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.00% and a maturity of March 2, 2026. This investment is accruing an unused commitment fee of 0.50% per annum.
	(43)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $68,750, with an interest rate of LIBOR plus 6.25% and a maturity of May 19, 2026. This investment is accruing an unused commitment fee of 0.50% per annum.
	(44)	Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.50% and a maturity of September 9, 2025. This investment is accruing an unused commitment fee of 1.00% per annum.
	(45)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.50% and a maturity of September 9, 2025. This investment is accruing an unused commitment fee of 0.75% per annum.
	(46)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $2,000,000, with an interest rate of LIBOR plus 6.50% and a maturity of April 27, 2026. This investment is accruing an unused commitment fee of 0.50% per annum.
	(47)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.50% and a maturity of June 25, 2026. This investment is accruing an unused commitment fee of 0.50% per annum.
	(48)	Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $3,800,000, with an interest rate of LIBOR plus 6.50% and a maturity of June 25, 2026. This investment is accruing an unused commitment fee of 1.00% per annum.
	(49)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.00% and a maturity of September 1, 2026. This investment is accruing an unused commitment fee of 0.50% per annum.
	(50)	Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $3,313,953, with an interest rate of LIBOR plus 6.00% and a maturity of September 1, 2026. This investment is accruing an unused commitment fee of 0.50% per annum.

	Abbreviation Legend
	PIK — Payment-In-Kind
	L — LIBOR

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2020

Investments	Footnotes	Security	Coupon	LIBOR floor		Cash			PIK			Investment Date	Maturity		Headquarters/ Industry	Principal Amount/ Shares	Amortized Cost		Fair Value⁽¹⁾		% of Net Assets
Non-controlled, non-affiliated investments	⁽²⁾⁽⁹⁾
Adams Publishing Group, LLC															Greenville, TN
Term Loan	⁽³⁵⁾	First Lien	1M L+7.00%	1.75	%		8.75	%				8/3/2018		6/30/2023	Media: Advertising, Printing & Publishing	$4,990,080		4,962,046		4,990,080		1.83	%
Delayed Draw Term Loan	⁽³⁵⁾	First Lien	1M L+7.00%	1.75	%		8.75	%				8/3/2018		6/30/2023		$162,106		162,106		162,106		0.06	%
Total																	$	5,124,152	$	5,152,186		1.89	%
Advanced Barrier Extrusions, LLC															Rhinelander, WI
Term Loan(SBIC)	^(2)(35)	First Lien	1M L+6.50%	1.00	%		7.50	%				11/30/2020		11/30/2026	Containers, Packaging & Glass	$17,500,000		17,153,813		17,150,000		6.27	%
GP ABX Holdings Partnership, L.P. Common Stock	⁽⁴⁾	Equity										8/8/2018				644,737 units		700,000		740,000		0.27	%
Total																	$	17,853,813	$	17,890,000		6.54	%
APE Holdings, LLC															Deer Park, TX
Class A Common Units	⁽⁴⁾	Equity										9/5/2014			Chemicals, Plastics, & Rubber	375,000 units		375,000		80,000		0.03	%

Atmosphere Aggregator Holdings II, LP															Atlanta, GA
Common Units	⁽⁴⁾	Equity										1/26/2016			Services: Business	254,250 units		0		1,350,000		0.49	%
Stratose Aggregator Holdings, LP Common Units	⁽⁴⁾	Equity										6/30/2015				750,000 units		0		3,970,000		1.45	%
Total																	$	0	$	5,320,000		1.94	%
ASC Communications, LLC	⁽¹⁷⁾														Chicago, IL
Term Loan (SBIC)	^(2)(35)	First Lien	1M L+5.00%	1.00	%		6.00	%				6/29/2017		6/29/2023	Healthcare & Pharmaceuticals	$4,058,642		4,044,314		3,896,296		1.43	%
Term Loan	⁽³⁵⁾	First Lien	1M L+5.00%	1.00	%		6.00	%				2/4/2019		6/29/2023		$6,899,691		6,847,391		6,623,704		2.42	%

ASC Communications Holdings, LLC Class A Preferred Units (SBIC)	⁽²⁾⁽⁴⁾	Equity										6/29/2017				73,529 shares		58,828		330,000		0.12	%
Total																	$	10,950,533	$	10,850,000		3.97	%
BFC Solmetex, LLC															Nashville, TN
Revolver	⁽³⁵⁾	First Lien	3M L+8.50%	1.00	%		9.50	%				4/2/2018		9/26/2023	Environmental Industries	$2,139,364		2,139,364		2,139,364		0.78	%
Term Loan (SBIC)	^(2)(35)	First Lien	3M L+8.50%	1.00	%		9.50	%				4/2/2018		9/26/2023		$11,474,603		11,384,927		11,474,603		4.20	%
Bonded Filter Co. LLC, Term Loan(SBIC)	^(2)(35)	First Lien	3M L+8.50%	1.00	%		9.50	%				4/2/2018		9/26/2023		$1,193,460		1,184,133		1,193,460		0.44	%
Total																	$	14,708,424	$	14,807,427		5.42	%
BW DME Acquisition, LLC															Tempe, AZ
Term Loan (SBIC)	^(2)(13)(22)	First Lien	3M L+6.00%	1.00	%		8.58	%				8/24/2017		8/24/2022	Healthcare & Pharmaceuticals	$16,695,804		16,496,876		16,695,804		6.11	%
BW DME Holdings, LLC, Term Loan	⁽⁶⁾	Unsecured	17.50%							17.50	%	6/1/2018		6/30/2020		$391,063		391,063		391,063		0.14	%
BW DME Holdings, LLC Class A-1 Preferred Units	⁽⁴⁾	Equity										8/24/2017				1,000,000 shares		1,000,000		1,500,000		0.55	%
BW DME Holdings, LLC Class A-2 Preferred Units	⁽⁴⁾	Equity										1/26/2018				937,261 shares		937,261		1,410,000		0.52	%
Total																	$	18,825,200	$	19,996,867		7.32	%
Café Valley, Inc.															Phoenix, AZ
Term Loan	⁽³⁵⁾	First Lien	1M L+7.00%	1.25	%		8.25	%				8/28/2019		8/28/2024	Beverage, Food, & Tobacco	$16,077,381		15,829,176		15,675,447		5.73	%
CF Topco LLC, Common Units	⁽⁴⁾	Equity										8/28/2019				9,160 shares		916,015		720,000		0.26	%
Total																	$	16,745,191	$	16,395,447		5.99	%
Colford Capital Holdings, LLC															New York, NY
Preferred Units	⁽⁴⁾⁽⁵⁾	Equity										8/20/2015			Finance	38,893 units		195,036		20,000		0.01	%

CommentSold, LLC	⁽⁸⁾														Huntsville, AL
Term Loan (SBIC)	^(2)(35)	First Lien	1M L+6.00%	1.00	%		7.00	%				11/20/2020		11/20/2026	High Tech Industries	$12,500,000		12,252,768		12,252,768		4.48	%

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2020

Investments	Footnotes	Security	Coupon	LIBOR floor		Cash		PIK	Investment Date	Maturity	Headquarters/ Industry	Principal Amount/ Shares		Amortized Cost		Fair Value⁽¹⁾		% of Net Assets
CompleteCase, LLC	⁽²¹⁾										Seattle, WA
Term Loan (SBIC II)	^(9)(35)	First Lien	3M L+6.50%	1.00	%	7.50	%		12/21/2020	12/21/2025	Services: Consumer	$	11,478,261		11,248,696		11,248,696		4.11	%
Revolver	⁽³⁵⁾	First Lien	3M L+6.50%	1.00	%	7.50	%		12/21/2020	12/21/2025		$	33,333		33,333		32,667		0.01	%
CompleteCase Holdings, Inc. Class A Common Units (SBIC II)	⁽⁴⁾⁽⁹⁾	Equity							12/21/2020			417 units			5		0		0.00	%
CompleteCase Holdings, Inc.Series A Preferred Units (SBIC II)	⁽⁴⁾⁽⁹⁾	Equity							12/21/2020			522 units			521,734		520,000		0.19	%
Total														$	11,803,768	$	11,801,363		4.31	%
Convergence Technologies, Inc.											Indianapolis, IN
Term Loan (SBIC)	^(2)(35)	First Lien	3M L+6.75%	1.50	%	8.25	%		8/31/2018	8/30/2024	Services: Business	$	6,982,143		6,888,406		6,982,143		2.55	%
Term Loan	⁽³⁵⁾	First Lien	3M L+6.75%	1.50	%	8.25	%		2/28/2019	8/30/2024		$	1,403,571		1,383,414		1,403,571		0.51	%
Term Loan B (SBIC)	^(2)(35)	First Lien	3M L+6.75%	1.50	%	8.25	%		8/14/2020	8/30/2024		$	3,740,625		3,672,274		3,740,625		1.37	%
Delayed Draw Term Loan	⁽³⁵⁾	First Lien	3M L+6.75%	1.50	%	8.25	%		8/31/2018	8/30/2024		$	5,250,000		5,250,000		5,250,000		1.92	%
Tailwind Core Investor, LLC Class A Preferred Units	⁽⁴⁾	Equity							8/31/2018				5,282 units		547,795		650,000		0.24	%
Total														$	17,741,889	$	18,026,339		6.59	%
Data Centrum Communications, Inc.											Montvale, NJ
Term Loan	⁽³⁵⁾	First Lien	3M L+5.50%	1.00	%	6.50	%		5/15/2019	5/15/2024	Media: Advertising, Printing & Publishing	$	16,006,250		15,778,905		15,446,031		5.65	%
Health Monitor Holdings, LLC Seires A Preferred Units	⁽⁴⁾	Equity							5/15/2019			1,000,000 shares			1,000,000		750,000		0.27	%
Total														$	16,778,905	$	16,196,031		5.92	%
Douglas Products Group, LP											Liberty, MO
Class A Common Units	⁽⁴⁾	Equity							12/27/2018		Chemicals, Plastics, & Rubber	322 shares			139,656		820,000		0.30	%
DRS Holdings III, Inc.	⁽¹⁰⁾										St. Louis, MO
Term Loan	⁽³⁵⁾	First Lien	1M L+5.75%	1.00	%	6.75	%		11/1/2019	11/1/2025	Consumer Goods: Durable	$	9,900,000		9,816,898		9,900,000		3.62	%
DTE Enterprises, LLC	⁽¹⁸⁾										Roselle, IL
Term Loan	⁽³⁵⁾	First Lien	6M L+8.50%	1.50	%	10.00	%		4/13/2018	4/13/2023	Energy: Oil & Gas	$	9,323,691		9,226,943		8,531,177		3.12	%
DTE Holding Company, LLC Common Shares, Class A-2	⁽⁴⁾	Equity							4/13/2018			776,316 shares			466,204		220,000		0.08	%
DTE Holding Company, LLC Preferred Shares, Class AA	⁽⁴⁾	Equity							4/13/2018			723,684 shares			723,684		200,000		0.07	%
Total														$	10,416,831	$	8,951,177		3.27	%
Elliott Aviation, LLC											Moline, IL
Term Loan	⁽³⁵⁾	First Lien	3M L+6.00%	1.75	%	7.75	%		1/31/2020	1/31/2025	Aerospace & Defense	$	18,427,500		18,115,703		18,151,088		6.64	%
Revolver	^(3)(35)	First Lien	3 M L+6.00%	1.75	%	7.75	%		1/31/2020	1/31/2025		$	450,000		450,000		443,250		0.16	%
SP EA Holdings, LLC Preferred Shares, Class A	⁽⁴⁾	Equity							1/31/2020			900,000 shares			900,000		560,000		0.20	%
Total														$	19,465,703	$	19,154,338		7.00	%
Empirix Holdings I, Inc.											Billerica, MA
Common Shares, Class A	⁽⁴⁾	Equity							11/1/2013		Software	1,304 shares			1,304,232		1,760,000		0.64	%
Common Shares, Class B	⁽⁴⁾	Equity							11/1/2013			1,317,406 shares			13,174		20,000		0.01	%
Total														$	1,317,406	$	1,780,000		0.65	%
Energy LabsHolding Corp.											Houston, TX
Common Stock	⁽⁴⁾	Equity							9/29/2016		Energy: Oil & Gas	598 shares			598,182		1,040,000		0.38	%
Exacta Land Surveyors, LLC	^(23)(25)										Cleveland, OH
Term Loan (SBIC)	^(2)(35)	First Lien	3M L+5.75%	1.50	%	7.25	%		2/8/2019	2/8/2024	Services: Business	$	16,714,375		16,488,364		16,547,231		6.05	%
SP ELS Holdings LLC, Class A Common Units	⁽⁴⁾	Equity							2/8/2019			1,069,143 shares			1,069,143		720,000		0.26	%
Total														$	17,557,507	$	17,267,231		6.31	%
EOS Fitness Holdings, LLC											Phoenix, AZ
Preferred Units	⁽⁴⁾	Equity							12/30/2014		Hotel, Gaming, & Leisure	118 shares			0		10,000		0.00	%
Class B Common Units	⁽⁴⁾	Equity							12/30/2014			3,017 shares			0		0		0.00	%
Total														$	0	$	10,000		0.00	%

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2020

Investments	Footnotes	Security	Coupon	LIBOR floor		Cash		PIK	Investment Date	Maturity	Headquarters/ Industry	Principal Amount/ Shares		Amortized Cost		Fair Value⁽¹⁾		% of Net Assets
Fast Growing Trees, LLC	⁽¹⁶⁾										Fort Mill, SC
Term Loan (SBIC)	^(2)(35)	First Lien	3M L+6.75%	1.00	%	7.75	%		2/5/2018	02/05/23	Retail	$	14,992,490		14,850,620		14,992,490		5.48	%
SP FGT Holdings, LLC, Class A Common	⁽⁴⁾	Equity							2/5/2018			1,000,000 shares			983,851		3,140,000		1.15	%
Total														$	15,834,471	$	18,132,490		6.63	%
FB Topco, Inc.											Camden, NJ
Term Loan	^(13)(22)	First Lien	6M L+6.35%	1.00	%	9.52	%		6/27/2018	4/24/2023	Education	$	20,550,738		20,322,696		20,447,984		7.48	%
Delayed Draw Term Loan	^(13)(22)	First Lien	6M L+6.35%	1.00	%	9.55	%		6/27/2018	4/24/2023		$	1,126,758		1,126,758		1,121,124		0.41	%
Total														$	21,449,454	$	21,569,108		7.89	%
GK Holdings, Inc.											Cary, NC
Term Loan	^(33)(35)	Second Lien	3M L+10.25%	1.00	%	0.00	%		1/30/2015	1/20/2022	Education	$	5,000,000		4,979,153		2,925,000		1.07	%
General LED OPCO, LLC											San Antonio, TX
Term Loan	⁽³⁵⁾	Second Lien	3M L+9.00%	1.50	%	10.50	%		5/1/2018	11/1/2023	Services: Business	$	4,500,000		4,447,700		3,690,000		1.35	%
GS HVAM Intermediate, LLC	⁽³⁴⁾										Carlsbad, CA
Term Loan	⁽³⁵⁾	First Lien	1M L+5.75%	1.00	%	6.75	%		10/18/2019	10/2/2024	Beverage, Food, & Tobacco	$	12,895,506		12,792,753		12,895,506		4.72	%
HV GS Acquisition, LP Class A Interests	⁽⁴⁾	Equity							6/29/2018			1,796 shares			1,618,844		2,460,000		0.90	%
Total														$	14,411,597	$	15,355,506		5.62	%
Grupo HIMA San Pablo, Inc., et al											San Juan, PR
Term Loan	^(27)(35)	First Lien	3M L+7.00%	1.50	%	8.50	%		2/1/2013	1/31/2018	Healthcare & Pharmaceuticals	$	4,503,720		4,503,720		2,589,639		0.95	%
Term Loan	^(15)(27)	Second Lien	13.75%			0.00	%		2/1/2013	7/31/2018		$	4,109,524		4,109,524		0		0.00	%
Total														$	8,613,244	$	2,589,639		0.95	%
I2P Holdings, LLC											Cleveland, OH
Series A Preferred	⁽⁴⁾	Equity							1/31/2018		Services: Business	750,000 shares			750,000		3,160,000		1.16	%
Ian, Evan & Alexander Corporation	⁽³⁶⁾										Reston, VA
Term Loan (SBIC)	^(2)(35)	First Lien	3M L+8.50%	1.00	%	9.50	%		7/31/2020	7/31/2025	Services: Business	$	7,140,425		7,005,287		7,069,020		2.59	%
EC Defense Holding, Class B Units (SBIC)	⁽²⁾⁽⁴⁾	Equity							7/31/2020			20,054 shares			500,000		690,000		0.25	%
Total														$	7,505,287	$	7,759,020		2.84	%
ICD Holdings, LLC											San Francisco, CA
Class A Preferred	⁽⁴⁾⁽⁵⁾	Equity							1/1/2018			9,962 shares			474,182		2,090,000		0.76	%
Industry Dive, Inc.											Washington, D.C.
Term Loan (SBIC)	^(2)(35)	First Lien	1M L+6.75%	1.00	%	7.75	%		7/17/2020	8/30/2024	Services: Business	$	7,015,841		6,887,907		6,980,762		2.55	%
Revolver	^(35)(37)	First Lien	1M L+6.75%	1.00	%	7.75	%		7/17/2020	8/30/2024		$	50,000		50,000		49,750		0.02	%
Total														$	6,937,907	$	7,030,512		2.57	%
Integrated Oncology Network, LLC	⁽³⁰⁾										Newport Beach, CA
Term Loan	⁽³⁵⁾	First Lien	3M L+5.50%	1.50	%	7.00	%		7/17/2019	6/24/2024	Healthcare & Pharmaceuticals	$	16,470,413		16,227,281		16,470,413		6.03	%
Revolver	⁽³⁵⁾	First Lien	3M L+5.50%	1.50	%	7.00	%		7/17/2019	6/24/2024		$	553,517		553,517		553,517		0.20	%
Total														$	16,780,798	$	17,023,930		6.23	%
Interstate Waste Services, Inc.											Amsterdam, OH
Common Units	⁽⁴⁾	Equity							10/30/2015		Environmental Industries	21,925 shares			946,125		370,000		0.14	%
Intuitive Health, LLC											Plano, TX
Term Loan (SBIC II)	^(9)(35)	First Lien	3M L+6.00%	1.50	%	7.50	%		10/18/2019	10/18/2024	Healthcare & Pharmaceuticals	$	5,940,000		5,844,850		5,940,000		2.17	%
Term Loan	⁽³⁵⁾	First Lien	3M L+6.00%	1.50	%	7.50	%		10/18/2019	10/18/2024		$	11,385,000		11,202,629		11,385,000		4.16	%
Legacy Parent, Inc. Class A Common Units	⁽⁴⁾	Equity							10/30/2020			58 shares			125,000		130,000
Total														$	17,172,479	$	17,455,000		6.33	%
Invincible Boat Company, LLC	⁽²⁸⁾										Opa Locka, FL
Term Loan (SBIC II)	^(9)(35)	First Lien	3M L+6.50%	1.50	%	8.00	%		8/28/2019	8/28/2025	Consumer Goods: Durable	$	5,469,818		5,380,207		5,469,818		2.00	%

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2020

Investments	Footnotes	Security	Coupon	LIBOR floor		Cash		PIK	Investment Date	Maturity	Headquarters/ Industry	Principal Amount/ Shares		Amortized Cost		Fair Value⁽¹⁾		% of Net Assets
Term Loan	⁽³⁵⁾	First Lien	3M L+6.50%	1.50	%	8.00	%		8/28/2019	8/28/2025		$	5,925,636		5,772,336		5,925,636		2.17	%
Revolver	⁽³⁵⁾	First Lien	3M L+6.50%	1.50	%	8.00	%		8/28/2019	8/28/2025		$	284,091		284,091		284,091
Invincible Parent Holdco, LLC Class A Common Units	⁽⁴⁾	Equity							8/28/2019			1,000,000 shares			968,105		620,000		0.23	%
Total														$	12,404,739	$	12,299,545		4.40	%
J.R. Watkins, LLC											San Francisco, CA
Term Loan (SBIC)	⁽²⁾	First Lien	7.00%			7.00	%		12/22/2017	12/22/2022	Consumer Goods: non-durable	$	12,250,000		12,139,807		12,250,000		4.48	%
J.R. Watkins Holdings, Inc. Class A Preferred	⁽⁴⁾	Equity							12/22/2017			1,133 shares			1,132,576		680,000		0.25	%
Total														$	13,272,383	$	12,930,000		4.73	%
Jurassic Acquisiton Corp.											Sparks, MD
Term Loan	⁽¹²⁾	First Lien	3M L+5.50%	0.00	%	5.75	%		12/28/2018	11/15/2024	Metals & Mining	$	17,150,000		16,970,057		17,064,250		6.24	%
Kelleyamerit Holdings, Inc.											Walnut Creek, CA
Term Loan (SBIC)	^(2)(13)(22)	First Lien	3M L+6.50%	1.00	%	8.89	%		12/24/2020	12/24/2025	Automotive	$	9,750,000		9,557,708		9,557,708		3.50	%
Term Loan	^(13)(22)	First Lien	3M L+6.50%	1.00	%	8.89	%		12/24/2020	12/24/2025		$	1,500,000		1,470,417		1,470,417		0.54	%
Total														$	11,028,125	$	11,028,125		4.04	%
KidKraft, Inc.	⁽³⁸⁾										Dallas, TX
Term Loan	^(22)(29)	First Lien	3M L+5.00%	1.00	%	6.00	%		9/30/2016	8/15/2022	Consumer Goods: Durable	$	1,580,487		1,580,487		1,580,487		0.58	%
KidKraft Group Holdings, LLC Preferred B Units	⁽⁴⁾	Equity							4/3/2020			4,000,000 shares			4,000,000		4,000,000		1.46	%
Total														$	5,580,487	$	5,580,487		2.04	%
Lynx FBO Operating, LLC	⁽³¹⁾										Houston, TX
Term Loan	⁽³⁵⁾	First Lien	3M L+5.75%	1.50	%	7.25	%		9/30/2019	9/30/2024	Aerospace & Defense	$	13,612,500		13,397,053		13,612,500		4.98	%
Lynx FBO Investments, LLC Class A-1 Common Units	⁽⁴⁾	Equity							9/30/2019			4,288 shares			593,480		690,000		0.25	%
Total														$	13,990,533	$	14,302,500		5.23	%
Madison Logic, Inc.											New York, NY
Term Loan (SBIC)	^(2)(35)	First Lien	1M L+7.50%	0.50	%	8.00	%		11/30/2016	11/30/2021	Media: Broadcasting & Subscription	$	4,323,985		4,314,586		4,323,985		1.58	%
Madison Logic Holdings, Inc. Common Stock (SBIC)	⁽²⁾⁽⁴⁾	Equity							11/30/2016			5,000 shares			50,000		70,000		0.03	%
Madison Logic Holdings, Inc. Series A Preferred Stock (SBIC)	⁽²⁾⁽⁴⁾	Equity							11/30/2016			4,500 shares			450,000		670,000		0.25	%
Total														$	4,814,586	$	5,063,985		1.86	%
Mobile Acquisition Holdings, LP											Santa Clara, CA
Class A Common Units	⁽⁴⁾	Equity							11/1/2016		Software	750 units			455,385		2,650,000		0.97	%
Munch’s Supply, LLC											New Lenox, IL
Term Loan	⁽³⁵⁾	First Lien	3M L+6.25%	1.00	%	7.25	%		4/11/2019	4/11/2024	Capital Equipment	$	7,229,111		7,178,680		7,229,111		2.64	%
Delayed Draw Term Loan	^(20)(35)	First Lien	3M L+6.25%	1.00	%	7.25	%		4/11/2019	4/11/2024		$	649,111		640,345		649,111		0.24	%
Cool Supply Holdings, LLC Class A Common Units	⁽⁴⁾	Equity							4/11/2019			500,000 units			496,362		710,000		0.26	%
Total														$	8,315,387	$	8,588,222		3.14	%
National Trench Safety, LLC, et al											Houston, TX
Term Loan (SBIC)	⁽²⁾	Second Lien	11.50%			11.50	%		3/31/2017	3/31/2022	Construction & Building	$	10,000,000		9,946,055		10,000,000		3.66	%
NTS Investors, LP Class A Common Units	⁽⁴⁾	Equity							3/31/2017			2,335 units			500,000		750,000		0.27	%
Total														$	10,446,055	$	10,750,000		3.93	%
Naumann/Hobbs Material Handling Corporation II, Inc.	⁽³²⁾										Phoenix, AZ
Term Loan (SBIC II)	^(9)(35)	First Lien	3M L+6.25%	1.50	%	7.75	%		8/30/2019	8/30/2024	Services: Business	$	5,817,693		5,727,857		5,817,693		2.13	%
Term Loan	⁽³⁵⁾	First Lien	3M L+6.25%	1.50	%	7.75	%		8/30/2019	8/30/2024		$	9,225,593		9,083,133		9,225,593		3.37	%
CGC NH, Inc. Common Units	⁽⁴⁾	Equity							8/30/2019			123 shares			440,758		570,000		0.21	%
Total														$	15,251,748	$	15,613,286		5.71	%
NGS US Finco, LLC											Bradford, PA
Term Loan (SBIC)	^(2)(35)	Second Lien	1M L+8.50%	1.00	%	9.50	%		10/1/2018	4/1/2026	Utilities: Oil & Gas	$	10,000,000		9,884,148		9,900,000		3.62	%

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2020

Investments	Footnotes	Security	Coupon	LIBOR floor		Cash		PIK	Investment Date	Maturity	Headquarters/ Industry		Principal Amount/ Shares	Amortized Cost		Fair Value⁽¹⁾		of% Net Assets
NS412, LLC											Dallas, TX
Term Loan	⁽³⁵⁾	Second Lien	3M L+8.50%	1.00	%	9.50	%		5/6/2019	11/6/2025	Services: Consumer	$	7,615,000		7,492,970		7,462,700		2.73	%
NS Group Holding Company, LLC Class A Common Units	⁽⁴⁾	Equity							5/6/2019				750 shares		750,000		550,000		0.20	%
Total														$	8,242,970	$	8,012,700		2.93	%
NuMet Machining Techniques, LLC											Birmingham, UK
Term Loan	^(5)(35)	Second Lien	3M L+9.00%	2.00	%	11.00	%		11/5/2019	5/5/2026	Aerospace & Defense	$	11,700,000		11,495,790		11,056,500		4.04	%
Bromford Industries Limited Term Loan	^(5)(35)	Second Lien	3M L+9.00%	2.00	%	11.00	%		11/5/2019	5/5/2026		$	7,800,000		7,663,860		7,371,000		2.70	%
Bromford Holdings, L.P. Class A Membership Units	⁽⁴⁾⁽⁵⁾	Equity							11/5/2019				1,000,000 shares		1,000,000		300,000		0.11	%
Total														$	20,159,650	$	18,727,500		6.85	%
Nutritional Medicinals, LLC	⁽²⁴⁾										Centerville, OH
Term Loan	⁽³⁵⁾	First Lien	3M L+6.00%	1.00	%	7.00	%		11/15/2018	11/15/2023	Healthcare & Pharmaceuticals	$	13,270,451		13,106,025		13,270,451		4.85	%
Functional Aggregator, LLC Common Units	⁽⁴⁾	Equity							11/15/2018				12,500 shares		1,250,000		1,180,000		0.43	%
Total														$	14,356,025	$	14,450,451		5.28	%
PCP MT Aggregator Holdings, L.P.											Oak Brook, IL
Common LP Units	⁽⁴⁾	Equity							3/29/2019		Finance		750,000 shares		0		1,490,000		0.55	%
PCS Software, Inc.											Shenandoah, TX
Term Loan (SBIC)	^(2)(35)	First Lien	3M L+5.75%	1.50	%	7.25	%		7/1/2019	7/1/2024	Transportation & Logistics	$	1,970,000		1,940,669		1,970,000		0.72	%
Term Loan	⁽³⁵⁾	First Lien	3M L+5.75%	1.50	%	7.25	%		7/1/2019	7/1/2024		$	15,021,250		14,797,600		15,021,250		5.50	%
Delayed Draw Term Loan	⁽³⁵⁾	First Lien	3M L+5.75%	1.50	%	7.25	%		7/1/2019	7/1/2024		$	992,500		992,500		992,500		0.36	%
Revolver	^(35)(11)	First Lien	3M L+5.75%	1.50	%	7.25	%		7/1/2019	7/1/2024		$	571,195		571,195		571,195		0.21	%
PCS Software Holdings, LLC Class A Preferred Units	⁽⁴⁾	Equity							7/1/2019				325,000 shares		325,000		330,000		0.12	%
PCS Software Holdings, LLC Class A-2 Preferred Units	⁽⁴⁾	Equity							11/12/2020				63,312 shares		63,312		60,000		0.02	%
Total														$	18,690,276	$	18,944,945		6.93	%
Pioneer Transformers, L.P.											Franklin, WI
Term Loan (SBIC II)	^(9)(35)	First Lien	6M L+6.00%	1.50	%	7.50	%		11/22/2019	8/16/2024	Capital Equipment	$	4,937,500		4,868,043		4,937,500		1.81	%
Premiere Digital Services, Inc.											Los Angeles, CA
Term Loan (SBIC)	^(2)(13)(22)	First Lien	3M L+5.50%	1.50	%	8.24	%		10/18/2018	10/18/2023	Media: Broadcasting & Subscription	$	9,992,518		9,807,217		9,992,518		3.66	%
Term Loan	^(13)(22)	First Lien	3M L+5.50%	1.50	%	8.24	%		10/18/2018	10/18/2023		$	2,428,772		2,385,098		2,428,772		0.89	%
Premiere Digital Holdings, Inc., Common Stock	⁽⁴⁾	Equity							10/18/2018				5,000 shares		50,000		150,000		0.05	%
Premiere Digital Holdings, Inc., Preferred Stock	⁽⁴⁾	Equity							10/18/2018				4,500 shares		314,550		1,320,000		0.48	%
Total														$	12,556,865	$	13,891,290		5.08	%
Protect America, Inc.											Austin TX
Term Loan (SBIC)	^{(2)(6)(26)(35)}	Second Lien	3M L+7.75%	1.00	%	0.00	%		8/30/2017	10/30/2020	Services: Consumer	$	17,979,749		17,979,749		2,786,861		1.02	%
Sales Benchmark Index, LLC	^(7)(14)										Dallas, TX
Term Loan	⁽³⁵⁾	First Lien	3M L+6.00%	1.75	%	7.75	%		1/7/2020	1/7/2025	Services: Business	$	14,315,976		14,076,964		14,315,976		5.24	%
SBI Holdings Investments, LLC Class A Preferred Units	⁽⁴⁾	Equity							1/7/2020				66,573 units		665,730		590,000		0.22	%
Total														$	14,742,694	$	14,905,976		5.46	%
Skopos Financial, LLC											Irving, TX
Term Loan	⁽⁵⁾	Unsecured	12.00%			12.00	%		1/31/2014	1/31/2021	Finance	$	15,500,000		15,500,000		14,415,000		5.27	%
Skopos Financial Group, LLC Series A Preferred Units	⁽⁴⁾⁽⁵⁾	Equity							1/31/2014				1,120,684 units		1,162,544		320,000		0.12	%
														$	16,662,544	$	14,735,000		5.39	%
SQAD, LLC											Tarrytown, NY
Term Loan (SBIC)	^(2)(35)	First Lien	3M L+6.50%	1.00	%	7.50	%		12/22/2017	12/22/2022	Media: Broadcasting & Subscription	$	14,333,594		14,299,486		14,333,594		5.24	%
SQAD Holdco, Inc. Preferred Shares,Series A (SBIC)	⁽²⁾⁽⁴⁾	Equity							10/31/2013				5,624 shares		156,001		1,010,000		0.37	%

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2020

Investmest	Footnotes	Security	Coupon	LIBOR floor		Cash		PIK			Investment Date	Maturity	Headquarters/ Industry	Principal Amount/ Shares		Amortized Cost		Fair Value⁽¹⁾		% of Net Assets
SQAD Holdco, Inc. Common Shares (SBIC)	⁽²⁾⁽⁴⁾	Equity									10/31/2013				5,800 shares		62,485		120,000	0.04	%
Total																$	14,517,972	$	15,463,594	5.65	%
TechInsights, Inc.													Ottawa, Ontario
Term Loan	^(5)(13)(22)	First Lien	L+6.00%	1.00	%	8.33	%				8/16/2017	10/2/2023	High Tech Industries	$	21,540,925		21,318,659		21,540,925	7.88	%
Time Manufacturing Acquisition, LLC													Waco, TX
Term Loan	⁽⁶⁾	Unsecured	11.50%			10.75	%		0.75	%	2/3/2017	8/3/2023	Capital Equipment	$	6,385,182		6,321,825		6,385,182	2.34	%
Time Manufacturing Investments, LLC Class A Common Units	⁽⁴⁾	Equity									2/3/2017				5,000 units		500,000		770,000	0.28	%
Total																$	6,821,825	$	7,155,182	2.62	%
TFH Reliability, LLC													Houston, TX
Term Loan (SBIC)	^(2)(35)	Second Lien	3M L+10.75%	0.80	%	11.55	%				10/21/2016	9/30/2023	Chemicals, Plastics, & Rubber	$	5,875,000		5,837,336		5,728,125	2.10	%
TFH Reliability Group, LLC Class A-1 Units	⁽⁴⁾	Equity									6/29/2020				27,129 shares		21,511		10,000	0.00	%
TFH Reliability Group, LLC Class A Common Units	⁽⁴⁾	Equity									10/21/2016				250,000 shares		231,521		170,000	0.06	%
Total																$	6,090,368	$	5,908,125	2.16	%
U.S. Auto Sales, Inc.													Lawrenceville, GA
USASF Blocker II, LLC Common	⁽⁴⁾⁽⁵⁾	Equity									6/8/2015		Finance		441 units		441,000		710,000	0.26	%
USASF Blocker III, LLC Series C Preferred Units	⁽⁴⁾⁽⁵⁾	Equity									2/13/2018				125 units		125,000		200,000	0.07	%
USASF Blocker IV, LLC Units	⁽⁴⁾⁽⁵⁾	Equity									5/27/2020				110 units		110,000		180,000	0.07	%
USASF Blocker LLC Common Units	⁽⁴⁾⁽⁵⁾	Equity									6/8/2015				9,000 units		9,000		10,000	0.00	%
Total																$	685,000	$	1,100,000	0.40	%
Venbrook Buyer, LLC													Los Angeles, CA
Term Loan (SBIC)	^(2)(35)	First Lien	3M L+6.50%	1.50	%	8.00	%				3/13/2020	3/13/2026	Services: Business	$	13,084,458		12,851,226		12,953,614	4.74	%
Term Loan	⁽³⁵⁾	First Lien	3M L+6.50%	1.50	%	8.00	%				3/13/2020	3/13/2026		$	148,875		146,221		147,386	0.05	%
Revolver	⁽³⁵⁾	First Lien	6M L+6.50%	1.50	%	8.00	%				3/13/2020	3/13/2026		$	2,222,222		2,222,222		2,200,000	0.80	%
Delayed Draw Term Loan	^(19)(35)	First Lien	1M L+6.50%	1.50	%	8.00	%				3/13/2020	3/13/2026		$	1,333,333		1,320,000		1,320,000
Venbrook Holdings, LLC Common Units	⁽⁴⁾	Equity									3/13/2020				534,959 shares		531,463		480,000	0.18	%
.Total																$	17,071,132	$	17,101,000	5.77	%
Vortex Companies, LLC													Houston, TX
Term Loan (SBIC II)	^(9)(35)	Second Lien	3M L+9.50%	1.00	%	10.50	%				12/21/2020	6/21/2026	Environmental Industries	$	10,000,000		9,800,000		9,800,000	3.59	%
VRI Ultimate Holdings, LLC													Franklin, OH
Class A Preferred Units	⁽⁴⁾	Equity									5/31/2017		Healthcare & Pharmaceuticals		326,797 shares		500,000		580,000	0.21	%
Whisps Acquisiton Corp.													Elgin, IL
Term Loan	⁽³⁵⁾	First Lien	6M L+6.00%	1.00	%	7.00	%				4/26/2019	4/18/2025	Beverage, Food, & Tobacco	$	7,791,667		7,682,302		7,791,667	2.85	%
Whisps Holding LP Class A Common Units	⁽⁴⁾	Equity									4/18/2019				500,000 shares		500,000		710,000	0.26	%
Total																$	8,182,302	$	8,501,667	3.11	%
Wise Parent Company, LLC													Salt Lake City, UT
Membership Units	⁽⁴⁾	Equity									8/27/2018		Beverage, Food, & Tobacco		6 units		0		760,000	0.28	%

Total Non-controlled, non-affiliated investments																$	658,628,966	$	653,424,495	239.03	%
Net Investments																$	658,628,966	$	653,424,495	239.03	%
LIABILITIES IN EXCESS OF OTHER ASSETS																		$	(380,063,846	(139.03	)%
NET ASSETS																		$	273,360,649	100.00	%

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2020

(1)	See Note 1 of the Notes to the Consolidated Financial Statements for a discussion of the methodologies used to value securities in the portfolio.
(2)	Investments held by the SBIC subsidiary (as defined in Note 1), which include $14,750,888 of cash and $228,144,990 of investments (at cost), are excluded from the obligations to the lenders of the Credit Facility (as defined in Note 9). Stellus Capital Investment Corporation’s (“the Company”) obligations to the lenders of the Credit Facility are secured by a first priority security interest in all investments and cash and cash equivalents, except for cash and investments held by the SBIC subsidiaries (as defined in Note 1).
(3)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $2,250,000, with an interest rate of LIBOR plus 6.00% and a maturity of January 31, 2025. This investment is accruing an unused commitment fee of 0.50% per annum.
(4)	Security is non-income producing.
(5)	The investment is not a “qualifying asset” under the Investment Company Act of 1940, as amended. The Company may not acquire any non-qualifying assets unless, at the time of the acquisition, qualifying assets represent at least 70% of the Company’s total assets. Qualifying assets represent approximately 91% of the Company’s total assets as of December 31, 2020.
(6)	Represents a PIK interest security. At the option of the issuer, interest can be paid in cash or cash and PIK interest. The percentage of PIK interest shown is the maximum PIK interest that can be elected by the issuer.
(7)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,331,461, with an interest rate of LIBOR plus 6.00% and a maturity of January 7, 2025. This investment is accruing an unused commitment fee of 0.50% per annum.
(8)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.00% and a maturity of November 20, 2026. This investment is accruing an unused commitment fee of 0.50% per annum.
(9)	Investments held by the SBIC II subsidiary (as defined in Note 1), which include $2,653,295 of cash and $43,391,392 of investments (at cost), are excluded from the obligations to the lenders of the Credit Facility. The Company’s obligations to the lenders of the Credit Facility are secured by a first priority security interest in all investments and cash and cash equivalents, except for cash and investments held by the SBIC subsidiaries.
(10)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $909,091, with an interest rate of LIBOR plus 5.75% and a maturity of November 1, 2025. This investment is accruing an unused commitment fee of 0.50% per annum.
(11)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $746,948, with an interest rate of LIBOR plus 5.75% and a maturity of July 1, 2024. This investment is accruing an unused commitment fee of 0.50% per annum.
(12)	These loans have LIBOR floors which are lower than the applicable LIBOR rates; therefore, the floors are not in effect.
(13)	These loans are last-out term loans with contractual rates higher than the applicable LIBOR rates; therefore, the floors are not in effect.
(14)	Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $3,328,652, with an interest rate of LIBOR plus 6.00% and a maturity of January 7, 2025. This investment is accruing an unused commitment fee of 0.50% per annum.
(15)	Investment has been on non-accrual since October 31, 2017.
(16)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,000,000, with an interest rate of LIBOR plus 6.75% and a maturity of February 5, 2023. This investment is accruing an unused commitment fee of 0.50% per annum.
(17)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $666,667, with an interest rate of LIBOR plus 5.00% and a maturity of June 29, 2022. This investment is accruing an unused commitment fee of 0.50% per annum.
(18)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $750,000, with an interest rate of LIBOR plus 7.50% and a maturity of April 13, 2023. The Company has full discretion to fund the revolver commitment.
(19)	Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $3,111,111, with an interest rate of LIBOR plus 6.50% and a maturity of March 13, 2026. This investment is accruing an unused commitment fee of 0.50% per annum.
(20)	Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $1,511,111, with an interest rate of LIBOR plus 6.25% and a maturity of April 11, 2024. This investment is accruing an unused commitment fee of 1.00% per annum.

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2020

(21)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $66,667 with an interest rate of LIBOR plus 6.50% and a maturity of December 21, 2025. This investment is accruing an unused commitment fee of 0.50% per annum.
(22)	This loan is a unitranche investment.
(23)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,500,000 with an interest rate of LIBOR plus 5.75% and a maturity of February 8, 2024. This investment is accruing an unused commitment fee of 0.50% per annum.
(24)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $2,000,000 with an interest rate of LIBOR plus 6.00% and a maturity of November 15, 2023. This investment is accruing an unused commitment fee of 0.50% per annum.
(25)	Excluded from the investment is an undrawn delayed draw term commitment in an amount not to exceed $4,000,000, with an interest rate of LIBOR plus 5.75% and a maturity of February 8, 2024. The Company has full discretion to fund the delayed draw term loan commitment.
(26)	Investment has been on non-accrual since June 28, 2019.
(27)	Maturity date is under ongoing negotiations with portfolio company and other lenders.
(28)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,136,364, with an interest rate of LIBOR plus 6.50% and a maturity of August 28, 2025. This investment is accruing an unused commitment fee of 0.50% per annum.
(29)	These loans are last-out term loans with contractual rates lower than the applicable LIBOR rates; therefore, the floors are in effect.
(30)	Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $2,767,584, with an interest rate of LIBOR plus 5.50% and a maturity of June 24, 2024. This investment is accruing an unused commitment fee of 1.00% per annum.
(31)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,875,000, with an interest rate of LIBOR plus 5.75% and a maturity of September 30, 2024. This investment is accruing an unused commitment fee of 0.50% per annum.
(32)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,763,033, with an interest rate of LIBOR plus 6.25% and a maturity of August 30, 2024. This investment is accruing an unused commitment fee of 0.50% per annum.
(33)	Investment has been on non-accrual since January 1, 2020.
(34)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $2,651,515, with an interest rate of LIBOR plus 5.75% and a maturity of October 2, 2024. This investment is accruing an unused commitment fee of 0.50% per annum.
(35)	These loans have LIBOR Floors which are higher than the current applicable LIBOR rates; therefore, the floors are in effect.
(36)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 8.50% and a maturity of July 31, 2025. This investment is accruing an unused commitment fee of 0.50% per annum. This undrawn revolver commitment is held by SBIC I.
(37)	Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $50,000, with an interest rate of LIBOR plus 6.75% and a maturity of August 30, 2024. This investment is accruing an unused commitment fee of 0.50% per annum.
(38)	Instrument was restructured into a first lien term loan and preferred equity on April 3, 2021.

Abbreviation Legend

PIK — Payment-In-Kind

L — LIBOR

Euro — Euro Dollar

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

NOTE 1 — NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Stellus Capital Investment Corporation (“we”, “us”, “our” and the “Company”) was formed as a Maryland corporation on May 18, 2012 (“Inception”) and is an externally managed, closed-end, non-diversified investment management company. The Company is applying the guidance of Accounting Standards Codification (“ASC”) Topic 946, Financial Services Investment Companies. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), for U.S. federal income tax purposes. The Company’s investment activities are managed by our investment adviser, Stellus Capital Management, LLC (“Stellus Capital” or the “Advisor”).

As of September 30, 2021, the Company had issued a total of 19,486,003 shares and raised $286,629,818 in gross proceeds since Inception, incurring $9,127,228 in offering expenses and sales load fees for net proceeds from offerings of $277,502,590. The Company’s shares are currently listed on the New York Stock Exchange under the symbol “SCM”. See Note 4 for further details.

The Company has established the following wholly owned subsidiaries: SCIC — Consolidated Blocker, Inc., SCIC – ICD Blocker 1, Inc., SCIC — Invincible Blocker 1, Inc., SCIC — FBO Blocker 1, Inc., SCIC — SKP Blocker 1, Inc., SCIC — APE Blocker 1, Inc., SCIC — Venbrook Blocker, Inc., SCIC — CC Blocker 1, Inc., SCIC — ERC Blocker 1, Inc., and SCIC — Hollander Blocker 1, Inc., which are structured as Delaware entities, to hold equity or equity-like investments in portfolio companies organized as limited liability companies, or LLCs (or other forms of pass-through entities) (collectively, the “Taxable Subsidiaries”). The Taxable Subsidiaries are consolidated for U.S. generally accepted accounting principles (“U.S. GAAP”) reporting purposes, and the portfolio investments held by them are included in the consolidated financial statements.

On June 14, 2013, the Company formed Stellus Capital SBIC, LP (the “SBIC subsidiary”), a Delaware limited partnership, and its general partner, Stellus Capital SBIC GP, LLC, a Delaware limited liability company, as wholly owned subsidiaries of the Company. On June 20, 2014, the SBIC subsidiary received a license from the U.S. Small Business Administration (“SBA”) to operate as a Small Business Investment Company (“SBIC”) under Section 301(c) of the Small Business Investment Company Act of 1958, as amended (the “SBIC Act”). The SBIC subsidiary and its general partner are consolidated for U.S. GAAP reporting purposes, and the portfolio investments held by it are included in the consolidated financial statements.

On November 29, 2018, the Company formed Stellus Capital SBIC II, LP (the “SBIC II subsidiary” and, together with the SBIC subsidiary, the “SBIC subsidiaries”), a Delaware limited partnership. On August 14, 2019, the SBIC II subsidiary received a license from the SBA to operate as an SBIC under Section 301(c) of the SBIC Act. The SBIC II subsidiary and its general partner, Stellus Capital SBIC GP, LLC, are consolidated for U.S. GAAP reporting purposes, and the portfolio investments held by it are included in the consolidated financial statements.

The SBIC licenses allow the SBIC subsidiaries to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with 10-year maturities. The SBA, as a creditor, will have a superior claim to the SBIC subsidiaries’ assets over the Company’s stockholders in the event the Company liquidates one or both of the SBIC subsidiaries or the SBA exercises its remedies under the SBA-guaranteed debentures issued by the SBIC subsidiaries upon an event of default. For the SBIC subsidiary, SBA regulations limit the amount that a single licensee may borrow to a maximum of $150,000,000 when it has at least $75,000,000 in regulatory capital, as such term is defined by the SBA, receives a capital commitment from the SBA and has been through an examination by the SBA subsequent to licensing. For the SBIC II subsidiary, SBA regulations limit these amounts to $175,000,000 of borrowings when it has at least $87,500,000 of regulatory capital.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

As of both September 30, 2021 and December 31, 2020, the SBIC subsidiary had $75,000,000 in regulatory capital. As of September 30, 2021 and December 31, 2020, the SBIC II subsidiary had $87,500,000 and $40,000,000 in regulatory capital, respectively. As of September 30, 2021 and December 31, 2020, $70,000,000 and $20,000,000 has been contributed, respectively.

As of both September 30, 2021 and December 31, 2020, the SBIC subsidiary had $150,000,000 of SBA-guaranteed debentures outstanding. As of September 30, 2021 and December 31, 2020, the SBIC II subsidiary had $100,000,000 and $26,500,000 of SBA-guaranteed debentures outstanding, respectively. See footnote (2) of the Consolidated Schedule of Investments as of September 30, 2021 for additional information regarding the treatment of the SBIC subsidiaries’ investments with respect to the Credit Facility (as defined in Note 9).

As a BDC, the Company is required to comply with certain regulatory requirements. On March 23, 2018, the Small Business Credit Availability Act (the “SBCAA”) was signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The SBCAA included changes to the 1940 Act to allow BDCs to decrease their asset coverage requirement to 150% from 200% under certain circumstances.

On April 4, 2018, the Company’s board of directors (the “Board”), including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. At the Company’s 2018 annual meeting of stockholders, our stockholders also approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the asset coverage ratio test applicable to the Company was decreased from 200% to 150%, effective June 29, 2018. The amount of leverage that we employ at any time depends on our assessment of the market and other factors at the time of any proposed borrowing. As of September 30, 2021, our asset coverage ratio was 195%.

The Company’s 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 $5,000,000 to $50,000,000 of EBITDA (earnings before interest, taxes, depreciation and amortization)) through first lien, second lien, unitranche and unsecured debt financing, oftentimes with a corresponding equity co-investments. The Company sources investments primarily through the extensive network of relationships that the principals of Stellus Capital have developed with financial sponsor firms, financial institutions, middle-market companies, management teams and other professional intermediaries.

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, certain disclosures accompanying the annual financial statements prepared in accordance with U.S. GAAP are omitted. The unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.

In the opinion of management, the unaudited consolidated financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of the financial statements for the interim periods included herein. The results of operations for the three and nine months ended September 30, 2021 and September 30, 2020 are not necessarily indicative of the operating results to be expected for the full year. Also, the unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2020.

In accordance with Regulation S-X under the Exchange Act, the Company does not consolidate portfolio company investments. The accounting records of the Company are maintained in U.S. dollars.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

COVID-19 Developments

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic and recommended containment and mitigation measures worldwide. The COVID-19 pandemic has had a significant impact on the U.S. and global economy. Each portfolio company has been assessed on an individual basis to identify the impact of the COVID-19 pandemic on the valuation of our investments in such company. We believe that any such COVID-19 pandemic impacts have been reflected in the valuation of our investments.

The global impact of the outbreak continues to evolve, and many countries have reacted by instituting quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues. Businesses are also implementing similar precautionary measures. Such measures, as well as the general uncertainty surrounding the dangers and impact of the COVID-19 pandemic, have created significant disruption in supply chains and economic activity. While several countries, as well as certain states in the United States, have begun to lift public health restrictions with the view to reopening their economies, recurring COVID-19 outbreaks have led to the re-introduction of such restrictions in certain states in the United States and globally and could continue to lead to the re-introduction of such restrictions elsewhere. The Federal Food and Drug Administration authorized vaccines produced for emergency use starting in December 2020, and such vaccines have been distributed nationally; however, it remains unclear how quickly the vaccines will continue to be distributed nationwide and globally or when “herd immunity” will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. The delay in distributing the vaccines could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience a recession, and we anticipate our business and operations could be materially adversely affected by a prolonged recession in the United States and other major markets.

As COVID-19 continues to spread, the potential impacts, including a global, regional, or other economic recession, remain uncertain and difficult to assess. The extent of the impact of the COVID-19 pandemic on the financial performance of our current and future investments will depend on future developments, including the duration and spread of the virus, related advisories and restrictions, and the health of the financial markets and economy, all of which are highly uncertain and cannot be predicted. To the extent our portfolio companies are adversely impacted by the effects of the COVID-19 pandemic, it may have a material adverse impact on our future net investment income, the fair value of our portfolio investments and our financial condition.

Portfolio Investment Classification

The Company classifies its portfolio investments in accordance with the requirements of the 1940 Act as follows: (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 nor Affiliate Investments.

Cash and Cash Equivalents

At September 30, 2021, cash balances totaling $102,054 did not exceed FDIC insurance protection levels of $250,000. In addition, at September 30, 2021, the Company held $37,651,564 in cash equivalents, which are carried at cost, which approximates the fair value of the cash equivalents. All of the Company’s cash deposits are held at large established high credit quality financial institutions 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.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Fair Value Measurements

We account for all of our financial instruments at fair value in accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework used to measure fair value, and requires disclosures for fair value measurements, including the categorization of financial instruments into a three-level hierarchy based on the transparency of valuation inputs. ASC Topic 820 requires disclosure of the fair value of financial instruments for which it is practical to estimate such value. We believe that the carrying amounts of our financial instruments such as cash, receivables and payables approximate the fair value of these items due to the short maturity of these instruments. This is considered a Level 1 valuation technique. The carrying values of our Credit Facility and SBA-guaranteed debentures approximate fair value because the interest rates adjust to the market interest rates (Level 3 input). The carrying value of our 2026 Notes approximates fair value. See Note 6 to the consolidated financial statements for further discussion regarding the fair value measurements and hierarchy

The COVID-19 pandemic is an unprecedented circumstance that could materially impact the fair value of the Company’s investments. As a result, the fair value of the Company’s portfolio investments may be further negatively impacted after September 30, 2021, by circumstances and events that are not yet known.

The COVID-19 pandemic may impact the Company’s portfolio companies’ ability to pay their respective contractual obligations, including principal and interest due to the Company, and some portfolio companies could require interest or principal deferrals in order to fulfill short-term liquidity needs in response to COVID-19. The Company is working with each of its portfolio companies, as necessary, to help them access short-term liquidity through potential interest deferrals, funding on unused lines of credit, and other sources of liquidity. For the nine months ended September 30, 2021, no interest deferrals have been made on loans on accrual.

Consolidation

As permitted under Regulation S-X under the Exchange Act and ASC Topic 946, we generally do not consolidate our investment in a portfolio company other than an investment company subsidiary. Accordingly, we consolidated the results of the SBIC subsidiaries and the Taxable Subsidiaries. All intercompany balances have been eliminated upon consolidation.

Use of Estimates

The preparation of the consolidated statements of assets and liabilities in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. 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

Deferred financing costs, prepaid loan fees on SBA-guaranteed debentures and prepaid loan structure fees consist of fees and expenses paid in connection with the closing and maintenance of our Credit Facility, 2022 Notes, 2026 Notes and SBA-guaranteed debentures and are capitalized at the time of payment. These costs are amortized using the straight-line method over the term of the respective instrument and presented as an offset to the corresponding debt on the Consolidated Statement of Assets and Liabilities.

Offering Costs

Deferred offering costs consist of fees and expenses incurred in connection with the offer and sale of the Company’s common stock, including legal, accounting, printing fees and other related expenses, as well as costs incurred in connection with the filing of a shelf registration statement. These costs are capitalized when incurred and recognized as a reduction of offering proceeds when the offering is consummated and shown on the Consolidated Statement of Changes in Net Assets and Liabilities as a reduction to Paid-in-Capital.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Investments

As a BDC, the Company will generally invest in illiquid loans and securities including debt and equity securities of private middle-market companies. Under procedures established by our Board, the Company intends to value investments for which market quotations are readily available. The Company will obtain these market values from an independent pricing service or at the median 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 will be valued at fair value as determined in good faith by our Board. Such determination of fair values may involve subjective judgments and estimates. 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 twice annually.

Investments purchased within approximately 90 days of the valuation date will typically be valued at cost plus accreted discount, or minus amortized premium, which approximates fair value. With respect to unquoted securities, we will value 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, we will use the pricing indicated by the external event to corroborate and/or assist us in our valuation. Because the Company expects that there will not be a readily available market for many of the investments in our portfolio, the Company expects to value most of our portfolio investments at fair value as determined in good faith by the Board 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 will be taken into account in fair value pricing investments will 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 company’s 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.

Revenue Recognition

The Company records interest income on an accrual basis to the extent such interest is deemed collectible. Payment-in-kind (“PIK”) interest, represents contractual interest accrued and added to the loan balance that generally becomes due at maturity. We will not accrue any form of interest on loans and debt securities if there is 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 other income. Dividend income, if any, will be recognized on the declaration date.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

A presentation of the interest income we have received from portfolio companies for the three and nine months ended September 30, 2021 and 2020 is as follows:

	For the three months ended				For the nine months ended
	September 30,		September 30,		September 30,		September 30,
	2021		2020		2021		2020
Loan interest	$	14,812,457	$	12,651,487	$	41,336,827	$	38,986,585
PIK income		247,391		15,783		607,393		568,028
Fee amortization income⁽¹⁾		701,489		597,153		936,083		1,826,982
Fee income acceleration⁽²⁾		699,242		442,920		1,939,451		810,816
Total Interest Income	$	16,460,579	$	13,707,343	$	44,819,754	$	42,192,411

(1)

Includes amortization of fees on unfunded commitments.

(2)

Unamortized loan origination fees recognized upon realization.

To maintain our treatment as a RIC, substantially all of this income must be paid to stockholders in the form of distributions, even if we have not collected any cash.

Management considers portfolio-specific circumstances as well as other economic factors in determining collectability. As of September 30, 2021, we had four loans on non-accrual status, which represented approximately 4.2% of our loan portfolio at cost and 1.1% at fair value. As of December 31, 2020, we had three loans on non-accrual status, which represented approximately 4.3% of our loan portfolio at cost and 1.0% at fair value. As of September 30, 2021 and December 31, 2020, $9,357,278 and $7,057,415 of income from investments on non-accrual has not been accrued. If a loan or debt security’s status significantly improves regarding the debtor’s ability to service the debt or other obligations, or if a loan or debt security is sold or written off, it will be removed from non-accrual status.

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation

Realized gains or losses are measured by the difference between the net proceeds from the repayment, sale or disposition 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.

Investment Transaction Costs

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.

Receivables and Payables for Unsettled Securities Transaction

The Company records all investments on a trade date basis.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

U.S. Federal Income Taxes

The Company has elected to be treated as a RIC under Subchapter M of the Code, and intends to operate in a manner to qualify annually for the tax treatment applicable to RICs. To qualify for tax treatment 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 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 Company’s investors and will not be reflected in the consolidated financial statements of the Company.

To avoid a 4% U.S federal excise tax on undistributed earnings, the Company is required to distribute each calendar year the sum of (i) 98% of its ordinary income for such calendar year (ii) 98.2% of its net capital gains for the one-year period ending December 31 (iii) any income recognized, but not distributed, in preceding years and on which the Company paid no U.S. federal income tax or the Excise Tax Avoidance Requirement. For this purpose, however, any net ordinary income or capital gain net income retained by us that is subject to corporate income tax for the tax year ending in that calendar year will be considered to have been distributed by year end (or earlier if estimated taxes are paid). The Company, at its discretion, may choose not to distribute all of its taxable income for the calendar year and pay a non-deductible 4% excise tax on this income. If the Company chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to stockholders. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes on estimated excess taxable income as taxable income is earned.

Income tax expense of $192,612 and $718,869 for the three and nine months ended September 30, 2021, respectively, was related mostly to excise tax; as was income tax expense of $367,836 and $853,631 for the three and nine months ended September 30, 2020.

In connection with the gain realized from the exit of its equity investment in Fast Growing Trees, LLC, the Company recorded an income tax provision on realized gains of $681,027 which is currently payable for the three and nine months ended September 30, 2021. No income tax provision was recorded on realized gains from the exit of equity investments as of September 30, 2020.

The Company evaluates tax positions taken or expected to be taken while 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.

As of September 30, 2021 and December 31, 2020, the Company had not recorded a liability for any unrecognized tax positions. Management’s 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 Company’s policy is to include interest and penalties related to income taxes, if applicable, in general and administrative expenses. Any expenses for the three and nine months ended September 30, 2021 and 2020 were de minimis.

The Taxable Subsidiaries are direct wholly owned subsidiaries of the Company that have elected to be taxable entities. The Taxable Subsidiaries permit the Company to hold equity investments in portfolio companies that are “pass through” entities for U.S. federal income tax purposes and continue to comply with the “source-of-income” requirements contained in RIC tax provisions of the Code. The Taxable Subsidiaries are not consolidated with the Company for U.S. federal income tax purposes and may generate income tax expense, benefit, and the related tax assets and liabilities, as a result of their ownership of certain portfolio investments. The income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in the Company’s consolidated financial statements.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

The Taxable Subsidiaries use the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory tax rates in effect for the year in which the temporary differences are expected to reverse. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. Taxable income generally excludes net unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized.

For the three and nine months ended September 30, 2021, the Company recorded deferred income tax provision of (606,377) and ($586,460), respectively, related to the Taxable Subsidiaries. For the three and nine months ended September 30, 2020, the Company recorded deferred income tax provision of ($92,749) and ($122,699), respectively, related to the Taxable Subsidiaries. In addition, as of September 30, 2021 and December 31, 2020, the Company had a deferred tax liability of $946,050 and $359,590, respectively.

Earnings per Share

Basic per share calculations are computed utilizing the weighted average number of shares of common stock outstanding for the period. The Company has no common stock equivalents. As a result, there is no difference between diluted earnings per share and basic per share amounts.

Paid In Capital

The Company records the proceeds from the sale of its common stock on a net basis to (i) capital stock and (ii) paid in capital in excess of par value, excluding all commissions and marketing support fees.

Distributable Earnings (Accumulated Undistributed Deficit)

The components that make up distributable earnings (accumulated undistributed deficit) on the Statement of Assets and Liabilities as of September 30, 2021 and December 31, 2020 are as follows:

	September 30,			December 31,
	2021			2020
Accumulated net realized loss from investments,net of cumulative dividends of $24,557,535 for both periods and provision for taxes of $681,027 and $0, respectively	$	(11,006,761	)	$	(16,388,369	)
Net unrealized depreciation on non-controlled non-affiliated investments and cash equivalents, net of provision for taxes of $946,050 and $359,590, respectively		(2,282,058	)		(5,564,061	)
Accumulated undistributed net investment income		12,887,635			19,266,926
Accumulated undistributed deficit	$	(401,184	)	$	(2,685,504	)

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Recently Issued Accounting Standards

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform. The amendments in ASU 2020-04 provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The standard is effective as of March 12, 2020 through December 31, 2022. The Company did not utilize the optional expedients and exceptions provided by ASU 2020-04 during the nine months ended September 30, 2021.

From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. We believe the impact of the recently issued standards and any that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.

NOTE 2 — RELATED PARTY ARRANGEMENTS

Investment Advisory Agreement

The Company has entered into an investment advisory agreement with Stellus Capital pursuant to which Stellus Capital serves as its investment adviser. Pursuant to this agreement, the Company has agreed to pay to Stellus Capital an annual base management 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 incentive fee.

For the three and nine months ended September 30, 2021, the Company recorded an expense for base management fees of $3,473,041 and $9,715,381, respectively. For the three and nine months ended September 30, 2020, the Company recorded an expense for base management fees of $2,796,878 and $8,259,127, respectively. As of September 30, 2021 and December 31, 2020, $5,251,520 and $2,825,322, respectively, were payable to Stellus Capital.

The incentive fee has two components, investment income and capital gains, as follows:

Income Incentive Fee

The investment income component (“Investment Income Incentive Fee”) is calculated, and payable to the Advisor, quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter, subject to a cumulative total return requirement and to deferral of non-cash amounts. The pre-incentive fee net investment income excludes items classified below the Net Investment Income line including realized and unrealized gains and losses, loss on debt extinguishment, and other capital transactions. The pre-incentive fee net investment income, which is expressed as a rate of return on the value of the Company’s net assets attributable to the Company’s common stock, for the immediately preceding calendar quarter, will have a 2.0% (which is 8.0% annualized) hurdle rate (also referred to as the “Hurdle”). Pre-incentive fee net investment income means interest income, dividend income and any other income accrued during the calendar quarter, minus the Company’s operating expenses for the quarter excluding the incentive fee. Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero-coupon securities), accrued income that the Company has not yet received in cash. The Advisor receives no incentive fee for any calendar quarter in which the Company’s pre-incentive fee net investment income does not exceed the Hurdle. Subject to the cumulative total return requirement described below, the Advisor receives 100% of the Company’s pre-incentive fee net investment income for any calendar quarter with respect to that portion of the pre-incentive net investment income for such quarter, if any, that exceeds the Hurdle but is less than 2.5% (which is 10.0% annualized) of net assets (also referred to as the “Catch-up”) and 20.0% of the Company’s pre-incentive fee net investment income for such calendar quarter, if any, greater than 2.5% (10.0% annualized) of net assets.

The foregoing Investment Income Incentive Fee is subject to a total return requirement, which provides that no Investment Income Incentive Fee in respect of the Company’s pre-incentive fee net investment income is payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding calendar quarters exceeds the cumulative Investment Income Incentive Fees accrued and/or paid for the 11 preceding quarters. In other words, any Investment Income Incentive Fee that is payable in a calendar quarter is limited to the lesser of (i) 20% of the amount by which the Company’s pre-incentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, subject to the Catch-up, and (ii) (x) 20% of the cumulative net increase in net assets resulting from operations for the then current and 11 preceding quarters minus (y) the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the amount, if positive, of the sum of pre-incentive fee net investment income, realized gains and losses and unrealized appreciation and depreciation of the Company for the then current and 11 preceding calendar quarters. In addition, the Advisor is not paid the portion of such Investment Income Incentive Fee that is attributable to deferred interest until the Company actually receives such interest in cash.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

For the three and nine months ended September 30, 2021, the Company incurred $1,451,752 and $1,507,651 of Income Incentive Fees, respectively. For the three and nine months ended September 30, 2020, the Company incurred $461,590 and $1,969,976, respectively, of Income Incentive Fees. As of September 30, 2021 and December 31, 2020, $1,630,149 and $681,660, respectively, of such Income Incentive Fees were payable to the Advisor, of which $1,416,839 and $559,161, respectively, were currently payable (as explained below). As of September 30, 2021 and December 31, 2020, $213,310 and $122,499 respectively, of Income Incentive Fees incurred but not paid by the Company were generated from deferred interest (i.e. PIK interest, certain discount accretion and deferred interest) and are not payable until such deferred amounts are received by the Company in cash.

Capital Gains Incentive Fee

The Company also pays the Advisor an incentive fee based on capital gains (the “Capital Gains Incentive Fee”). The Capital Gains Incentive Fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment management agreement, as of the termination date). The Capital Gains Incentive Fee is equal to 20.0% of the Company’s cumulative aggregate realized capital gains from Inception through the end of that calendar year, computed net of the cumulative aggregate realized capital losses and cumulative aggregate unrealized capital depreciation through the end of such year. The aggregate amount of any previously paid Capital Gain Incentive Fees is subtracted from such Capital Gain Incentive Fees when the Capital Gains Incentive Fee is calculated.

U.S. GAAP requires that the Capital Gains Incentive Fee accrual considers the cumulative aggregate realized gains and losses and unrealized capital appreciation or depreciation of investments or other financial instruments in the calculation, as an incentive fee would be payable if such realized gains and losses and unrealized capital appreciation or depreciation were realized, even though such realized gains and losses and unrealized capital appreciation or depreciation is not permitted to be considered in calculating the Capital Gains Incentive Fee actually payable under the investment advisory agreement. There can be no assurance that unrealized appreciation or depreciation will be realized in the future. Accordingly, such fees, as calculated and accrued, may not necessarily be payable under the investment advisory agreement, and may never be paid based upon the computation of incentive fees in subsequent periods. For the three and nine months ended September 30, 2021, the Company accrued $1,742,904 and $1,840,572, respectively, related to the Capital Gains Incentive Fee. The Company accrued $0 and ($880,913) of Capital Gains Incentive Fee for the three and nine months ended September 30, 2020, respectively. As of September 30, 2021 and December 31, 2020, $2,361,593 and $521,021, respectively, of Capital Gains Incentive Fees were accrued but not currently payable to the Advisor.

The following tables summarize the components of the incentive fees discussed above:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Income incentive fees incurred	$	1,451,752	$	461,590	$	1,507,651	$	1,969,976
Capital gains incentive fees incurred		1,742,904		—		1,840,572		(880,913	)
Incentive fee expense	$	3,194,656	$	461,590	$	3,348,223	$	1,089,063

	September 30,		December 31,
	2021		2020
Income incentive fee currently payable	$	1,416,839	$	559,161
Income incentive fee deferred		213,310		122,499
Capital gains incentive fee deferred		2,361,593		521,021
Incentive fee payable	$	3,991,742	$	1,202,681

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Director Fees

For the three and nine months ended September 30, 2021, the Company recorded an expense relating to director fees of $74,500 and $240,500, respectively. For the three and nine months ended September 30, 2020, the Company recorded an expense relating to director fees of $77,500 and $320,316, respectively. As of September 30, 2021 and December 31, 2020, there were no fees payable to the Company’s independent directors.

Co-Investments

On October 23, 2013, the Company received an exemptive order (the “Prior Order”) from the SEC to co-invest with private funds managed by Stellus Capital where doing so is consistent with the Company’s investment strategy as well as applicable law (including the terms and conditions of the exemptive order issued by the SEC). On December 18, 2018, the Company received a new exemptive order (the “Order”) that supersedes the Prior Order and permits the Company greater flexibility to enter into co-investment transactions. The Order expands on the Prior Order and allows the Company to co-invest with additional types of private funds, other BDCs, and registered investment companies managed by Stellus Capital or an adviser that is controlled, controlling, or under common control with Stellus Capital, subject to the conditions included therein. Pursuant to the Order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Company’s independent directors must make certain conclusions in connection with a co-investment transaction, including (1) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to the Company and its stockholders and do not involve overreaching of the Company or its stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of the Company’s stockholders and is consistent with its investment objectives and strategies. The Company co-invests, subject to the conditions in the Order, with private credit funds managed by Stellus Capital that have an investment strategy that is similar or identical to the Company’s investment strategy, and the Company may co-invest with other BDCs and registered investment companies managed by Stellus Capital or an adviser that is controlled, controlling, or under common control with Stellus Capital in the future. The Company believes that such co-investments may afford it additional investment opportunities and an ability to achieve greater diversification.

Administrative Agent

The Company serves as the administrative agent on certain investment transactions, including co-investments with its affiliates under the Order. As of both September 30, 2021 and December 31, 2020, Cash and Cash Equivalents included $0 for both periods, of cash related to an add on funding by other investment funds managed by Stellus Capital Management. Any such amount is included in “Other Accrued Expenses and Liabilities” on the Consolidated Statement of Assets and Liabilities.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

License Agreement

The Company has entered into a license agreement with Stellus Capital under which Stellus Capital has agreed to grant the Company a non-exclusive, royalty-free license to use the name “Stellus Capital.” Under this agreement, the Company has a right to use the “Stellus Capital” name for so long as Stellus Capital or one of its affiliates remains its investment adviser. Other than with respect to this limited license, the Company has 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 is in effect.

Administration Agreement

The Company has entered into an administration agreement with Stellus Capital pursuant to which Stellus Capital will furnish the Company with office facilities and equipment and will provide the Company with the clerical, bookkeeping, recordkeeping and other administrative services necessary to conduct day-to-day operations. Under this administration agreement, Stellus Capital will perform, or oversee the performance of, the administrative services required to be performed for the Company, which include, among other things, being responsible for the financial records which the Company is required to maintain and preparing reports to its stockholders and reports filed with the SEC.

For the three and nine months ended September 30, 2021, the Company recorded expenses of $368,680 and $1,133,308, respectively, relating to the administration agreement with Stellus Capital. For the three and nine months ended September 30, 2020, the Company recorded expenses of $378,409 and $1,167,938, respectively, relating to the administration agreement with Stellus Capital. These amounts are included in administrative service expenses on the Statement of Operations. As of September 30, 2021 and December 31, 2020, $752,259 and $381,690, respectively, remained payable to Stellus Capital relating to the administration agreement.

Indemnifications

The investment advisory agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations under the investment advisory agreement, Stellus Capital and its officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of Stellus Capital’s services under the investment advisory agreement or otherwise as our investment adviser.

The Company has also entered into indemnification agreements with its directors. The indemnification agreements are intended to provide the Company’s directors the maximum indemnification permitted under Maryland law and the 1940 Act. Each indemnification agreement provides that the Company shall indemnify the director who is a party to the agreement (an “Indemnitee”), including the advancement of legal expenses, if, by reason of his or her corporate status, the Indemnitee is, or is threatened to be, made a party to or a witness in any threatened, pending, or completed proceeding, other than a proceeding by or in the right of the Company.

NOTE 3 — DISTRIBUTIONS

Distributions are generally declared by the Company’s Board each calendar quarter and recognized as distribution liabilities on the declaration date. The Company intends to distribute net realized gains (i.e., net capital gains in excess of net capital losses), if any, at least annually. The stockholder distributions, if any, will be determined by the Board. Any distribution to stockholders will be declared out of assets legally available for distribution.

For the three and nine months ended September 30, 2021, the Company has declared distributions of $0.58 and $1.08 per share, respectively, on its common stock. The Company has declared distributions of $11.99 per share on its common stock from Inception through September 30, 2021.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Date Declared	Record Date	Payment Date	Per Share ⁽¹⁾
Fiscal 2012			$	0.18
Fiscal 2013			$	1.36
Fiscal 2014			$	1.42
Fiscal 2015			$	1.36
Fiscal 2016	Various		$	1.36
Fiscal 2017			$	1.36
Fiscal 2018			$	1.36
Fiscal 2019			$	1.36
Fiscal 2020			$	1.15
Fiscal 2021
January 15, 2021	January 29, 2021	February 16, 2021	$	0.0833
January 15, 2021	February 26, 2021	March 15, 2021	$	0.0833
January 15, 2021	March 31, 2021	April 15, 2021	$	0.0833
April 19, 2021	April 30, 2021	May 14, 2021	$	0.0833
April 19, 2021	May 28, 2021	June 15, 2021	$	0.0833
April 19, 2021	June 30, 2021	July 15, 2021	$	0.0833
July 19, 2021	July 30, 2021	August 13, 2021	$	0.1000
July 19, 2021	August 31, 2021	September 15, 2021	$	0.1000
July 19, 2021	September 30, 2021	October 15, 2021	$	0.1000
September 14, 2021	October 29, 2021	November 15, 2021	$	0.0933
September 14, 2021	November 30, 2021	December 15, 2021	$	0.0933
September 14, 2021	December 16, 2021	December 31, 2021	$	0.0933
Total			$	11.99

(1)

Distributions for fiscal years 2012 through 2020 are shown in aggregate amounts

The Company has adopted an “opt out” dividend reinvestment plan (“DRIP”) pursuant to which a stockholder whose shares are held in his own name will receive distributions in shares of the Company’s common stock under the Company’s DRIP unless it elects to receive distributions in cash. Stockholders whose shares are held in the name of a broker or the nominee of a broker may have distributions reinvested only if such service is provided by the broker or the nominee, or if the broker of the nominee permits participation in our DRIP.

Although distributions paid in the form of additional shares of the Company’s 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 Company’s DRIP will not receive any corresponding cash distributions with which to pay any such applicable taxes. Any distributions reinvested through the issuance of shares through the Company’s DRIP will increase the Company’s gross assets on which the base management fee and the incentive fee are determined and paid to Stellus Capital. The Company issued no shares through the DRIP during the three and nine months ended September 30, 2021, respectively. The Company issued 0 and 21,666 shares through the DRIP during the three and nine ended September 30, 2020, respectively.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

NOTE 4 — EQUITY OFFERINGS AND RELATED EXPENSES

The table below illustrates the number of common shares the Company issued since Inception through various equity offerings and pursuant to the Company’s DRIP.

											Average
	Number of		Gross		Underwriting		Offering		Net		Offering
Issuance of Common Stock	Shares		Proceeds⁽¹⁾⁽²⁾		fees		Expenses		Proceeds⁽³⁾		Price
Year ended December 31, 2012		12,035,023	$	180,522,093	$	4,959,720	$	835,500	$	174,726,873	$	14.90
Year ended December 31, 2013		63,998		899,964		—		—		899,964		14.06
Year ended December 31, 2014		380,936		5,485,780		75,510		29,904		5,380,366		14.47
Year ended December 31, 2017		3,465,922		48,741,406		1,358,880		307,021		47,075,505		14.06
Year ended December 31, 2018		7,931		93,737		—		—		93,737		11.85
Year ended December 31, 2019		3,177,936		45,862,995		1,015,127		521,715		44,326,153		14.43
Year ended December 31, 2020		354,257		5,023,842		5,681		18,169		4,999,992		14.18
Total		19,486,003	$	286,629,817	$	7,414,918	$	1,712,309	$	277,502,590

(1)

Net of partial share transactions. Such transactions impacted gross proceeds by $(95), $757, $(1,051), $(142), $(31) and $(29) in 2020, 2019, 2018, 2017, 2016 and 2015, respectively.

(2)

Includes proceeds from common shares issued under the DRIP of $0 for the nine months ended September 30, 2021, $228,943 for the year ended December 31, 2020, $0 for the year ended December 31, 2019, $94,788 during the year ended December 31, 2018, $0 for the years ended December 31, 2017, 2016 and 2015, and $398,505, $899,964, $113,000 for the years ended December 31, 2014, 2013, and 2012, respectively.

(3)

Net proceeds per this table will differ from the Statement of Assets and Liabilities as of September 30, 2021 and December 31, 2020 in the amount of $1,456,437, which represents a tax reclassification of stockholder’s equity in accordance with U.S. GAAP. This reclassification reduces paid-in capital and increases distributable earnings (reduces accumulated undistributed deficit).

The Company did not issue any shares during the nine months ended September 30, 2021. During the nine months ended September 30, 2020, the Company issued 332,591 shares in under the At-the-Market (“ATM”) Program. Gross proceeds resulting from the ATM Program totaled $4,794,995 and underwriting and other expenses totaled $23,850. The average per share offering price in the ATM Program during 2020 was $14.42.

The Company issued 0 and 21,666 shares of common stock through the DRIP for the nine months ended September 30, 2021 and 2020, respectively. See Note 3 for further information on distributions.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

NOTE 5 — NET INCREASE IN NET ASSETS FROM OPERATIONS PER COMMON SHARE

The following information sets forth the computation of net increase in net assets resulting from operations per common share for the three and nine months ended September 30, 2021 and September 30, 2020.

	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2021		2020		2021		2020
Net increase in net assets resulting from operations	$	12,778,621	$	7,508,680	$	23,323,357	$	3,381,622
Weighted average common shares		19,486,003		19,486,003		19,486,003		19,466,647
Net increase in net assets from operations per share	$	0.66	$	0.39	$	1.20	$	0.17

NOTE 6 — PORTFOLIO INVESTMENTS AND FAIR VALUE

In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. 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;

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; and

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.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

At September 30, 2021, the Company had investments in 74 portfolio companies. The total fair value and cost of the investments were $785,698,750 and $787,034,758, respectively. The composition of our investments as of September 30, 2021 is as follows:

	Cost		Fair Value
Senior Secured – First Lien⁽¹⁾	$	640,788,167	$	638,474,668
Senior Secured – Second Lien		79,793,715		58,044,145
Unsecured Debt		18,768,588		18,889,424
Equity		47,684,288		70,290,513
Total Investments	$	787,034,758	$	785,698,750

(1) Includes unitranche investments, which account for 10.8% of our portfolio at fair value. Unitranche structures may combine characteristics of first lien senior secured as well as second lien and/or subordinated loans and our unitranche loans will expose us to the risks associated with the second lien and subordinated loans to the extent we invest in the “last-out” tranche.

At December 31, 2020, the Company had investments in 66 portfolio companies. The total cost and fair value of the investments were $658,628,966 and $653,424,495, respectively. The composition of our investments as of December 31, 2020 was as follows:

	Cost		Fair Value
Senior Secured – First Lien⁽¹⁾	$	508,060,059	$	508,673,064
Senior Secured – Second Lien		93,636,285		70,720,186
Unsecured Debt		22,212,888		21,191,245
Equity		34,719,734		52,840,000
Total Investments	$	658,628,966	$	653,424,495

(1) Includes unitranche investments, which account for 13.0% of our portfolio at fair value. Unitranche structures may combine characteristics of first lien senior secured as well as second lien and/or subordinated loans and our unitranche loans will expose us to the risks associated with the second lien and subordinated loans to the extent we invest in the “last-out” tranche.

The Company’s investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require the Company to provide funding when requested by portfolio companies in accordance with the terms and conditions of the underlying loan agreements. As of September 30, 2021 and December 31, 2020, the Company had 25 and 19 such investments with aggregate unfunded commitments of $27,348,021 and $28,865,204, respectively. The Company maintains sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded commitments should the need arise.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

The aggregate gross unrealized appreciation and depreciation and the aggregate cost and fair value of the Company’s portfolio company securities as September 30, 2021 and December 31, 2020 were as follows:

	2021			2020
Aggregate cost of portfolio company securities	$	787,034,758		$	658,628,966
Gross unrealized appreciation of portfolio company securities		33,458,889			28,143,621
Gross unrealized depreciation of portfolio company securities		(34,794,897	)		(33,348,092	)
Aggregate fair value of portfolio company securities	$	785,698,750		$	653,424,495

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 September 30, 2021 are as follows:

	Quoted Prices
	in Active
	Markets		Significant Other		Significant
	for Identical		Observable		Unobservable
	Securities		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Senior Secured – First Lien	$	—	$	—	$	638,474,668	$	638,474,668
Senior Secured – Second Lien		—		—		58,044,145		58,044,145
Unsecured Debt		—		—		18,889,424		18,889,424
Equity		—		—		70,290,513		70,290,513
Total Investments	$	—	$	—	$	785,698,750	$	785,698,750

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, 2020 are as follows:

	Quoted Prices
	in Active
	Markets		Significant Other		Significant
	for Identical		Observable		Unobservable
	Securities		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Senior Secured – First Lien	$	—	$	—	$	508,673,064	$	508,673,064
Senior Secured – Second Lien		—		—		70,720,186		70,720,186
Unsecured Debt		—		—		21,191,245		21,191,245
Equity		—		—		52,840,000		52,840,000
Total Investments	$	—	$	—	$	653,424,495	$	653,424,495

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021
(Unaudited)

The aggregate values of Level 3 portfolio investments changed during the nine months ended September 30, 2021 are as follows:

	Senior Secured Loans-First Lien			Senior Secured Loans-Second Lien			Unsecured Debt			Equity			Total
Fair value at beginning of period	$	508,673,064		$	70,720,186		$	21,191,245		$	52,840,000		$	653,424,495
Purchases of investments		215,895,211			965,250			11,705,915			16,865,142			245,431,518
Payment-in-kind interest		314,285			—			293,109			—			607,394
Sales and redemptions		(85,036,862	)		(13,161,428	)		(15,500,000	)		(12,261,326	)		(125,959,616	)
Realized (losses) gains		—			(1,781,665	)		—			8,360,739			6,579,074
Change in unrealized (depreciation) appreciation included in earnings ⁽¹⁾		(2,926,509	)		1,166,531			1,142,482			4,485,958			3,868,462
Amortization of premium and accretion of discount, net		1,555,479			135,271			56,673			—			1,747,423
Fair value at end of period	$	638,474,668		$	58,044,145		$	18,889,424		$	70,290,513		$	785,698,750

(1)

Includes reversal of positions realized during the nine months ended September 30, 2021.

There were no Level 3 transfers during the nine months ended September 30, 2021.

The aggregate values of Level 3 portfolio investments changed during the year ended December 31, 2020 are as follows:

	Senior Secured Loans-First Lien			Senior Secured Loans-Second Lien			Unsecured Debt			Equity			Total
Fair value at beginning of period	$	455,169,878		$	111,961,013		$	22,137,186		$	39,680,000		$	628,948,077
Purchases of investments		139,571,726			9,800,000			—			8,135,439			157,507,165
Payment-in-kind interest		80,487			506,754			77,751			—			664,992
Sales and Redemptions		(85,804,667	)		(43,642,752	)		—			(4,801,419	)		(134,248,838	)
Realized (losses) gains		(8,599,062	)		(4,003,655	)		(163,423	)		2,665,177			(10,100,963	)
Change in unrealized appreciation (depreciation) included in earnings ⁽¹⁾		6,550,721			(4,276,940	)		(879,310	)		7,160,803			8,555,274
Amortization of premium and accretion of discount, net		1,703,981			375,766			19,041			—			2,098,788
Fair value at end of period	$	508,673,064		$	70,720,186		$	21,191,245		$	52,840,000		$	653,424,495

(1) Includes reversal of positions realized during the twelve months ended December 31, 2020.
There were no Level 3 transfers during the twelve months ended December 31, 2020.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

The following is a summary of geographical concentration of our investment portfolio as of September 30, 2021:

					% of Total
					Investments at
	Cost		Fair Value		Fair Value
California	$	134,934,002	$	140,149,278		17.84	%
Texas		153,685,119		137,561,456		17.51	%
Illinois		70,410,297		71,619,407		9.12	%
Arizona		50,756,093		54,977,354		7.00	%
Pennsylvania		37,478,573		37,440,711		4.77	%
New Jersey		38,098,810		35,942,765		4.57	%
Canada		34,853,727		34,994,775		4.45	%
Ohio		31,969,747		33,689,339		4.29	%
Wisconsin		25,928,215		26,285,445		3.35	%
Washington		22,751,096		22,809,080		2.90	%
New York		18,887,234		20,849,341		2.65	%
United Kingdom		21,307,905		19,818,875		2.53	%
Georgia		11,189,933		18,646,664		2.37	%
Indiana		17,684,153		17,811,311		2.27	%
Maryland		16,871,320		17,018,750		2.17	%
Minnesota		15,868,408		15,807,229		2.01	%
Colorado		15,172,493		15,195,900		1.93	%
Florida		13,126,961		13,449,457		1.71	%
District of Columnbia		11,929,982		12,762,500		1.62	%
Missouri		9,893,021		10,565,000		1.34	%
North Carolina		10,520,082		10,481,000		1.33	%
Massachusetts		10,297,773		10,297,773		1.31	%
Tennessee		4,306,570		4,323,554		0.55	%
Puerto Rico		8,613,244		2,161,786		0.28	%
Virginia		500,000		630,000		0.08	%
Utah		-		410,000		0.05	%
	$	787,034,758	$	785,698,750		100.00	%

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

The following is a summary of geographical concentration of our investment portfolio as of December 31, 2020:

					% of Total
					Investments
	Cost		Fair Value		at fair value
Texas	$	151,640,862	$	135,146,776		20.68	%
California		86,050,467		92,069,851		14.09	%
Illinois		57,330,756		57,535,404		8.81	%
Arizona		50,822,139		52,015,600		7.96	%
New Jersey		38,228,359		37,765,139		5.78	%
Ohio		34,109,657		35,827,682		5.48	%
Wisconsin		22,721,856		22,827,500		3.49	%
Canada		21,318,659		21,540,925		3.30	%
New York		19,527,594		20,547,579		3.14	%
Tennessee		19,832,576		19,959,613		3.05	%
United Kingdom		20,159,650		18,727,500		2.87	%
South Carolina		15,834,471		18,132,490		2.77	%
Indiana		17,741,889		18,026,339		2.76	%
Maryland		16,970,057		17,064,250		2.61	%
Florida		12,404,739		12,299,545		1.88	%
Alabama		12,252,768		12,252,768		1.88	%
Washington		11,803,768		11,801,363		1.81	%
Missouri		9,956,554		10,720,000		1.64	%
Pennsylvania		9,884,148		9,900,000		1.52	%
Virginia		7,505,287		7,759,020		1.19	%
Washington, D.C.		6,937,907		7,030,512		1.08	%
Georgia		685,000		6,420,000		0.98	%
North Carolina		4,979,153		2,925,000		0.45	%
Puerto Rico		8,613,244		2,589,639		0.40	%
Massachusetts		1,317,406		1,780,000		0.27	%
Utah		-		760,000		0.11	%
	$	658,628,966	$	653,424,495		100.00	%

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

The following is a summary of industry concentration of our investment portfolio as of September 30, 2021:

					% of Total
					Investments
	Cost		Fair Value		at Fair Value
Services: Business	$	159,012,118	$	168,449,139		21.44	%
Healthcare & Pharmaceuticals		99,744,266		99,533,534		12.67	%
Aerospace & Defense		81,055,347		79,828,943		10.16	%
Media: Advertising, Printing & Publishing		45,606,217		43,306,492		5.51	%
Capital Equipment		37,102,848		38,713,465		4.93	%
Media: Broadcasting & Subscription		31,303,573		35,080,631		4.46	%
Beverage, Food, & Tobacco		33,878,852		34,401,058		4.38	%
Consumer Goods: Non-durable		29,645,617		29,124,666		3.71	%
Consumer Goods: Durable		28,461,095		28,855,225		3.67	%
Software		21,531,074		23,866,607		3.04	%
Services: Consumer		38,047,798		21,893,601		2.79	%
Education		21,395,007		21,555,671		2.74	%
High Tech Industries		21,414,367		21,540,925		2.74	%
Transportation & Logistics		18,172,123		18,278,855		2.33	%
Containers, Packaging, & Glass		17,587,981		17,828,219		2.27	%
Metals & Mining		16,871,320		17,018,750		2.17	%
FIRE: Real Estate		15,708,184		15,708,184		2.00	%
Chemicals, Plastics, & Rubber		14,688,506		14,681,563		1.87	%
Automotive		11,055,168		11,025,000		1.40	%
Construction & Building		10,504,933		10,516,664		1.34	%
Environmental Industries		10,766,852		10,270,000		1.31	%
Utilities: Oil & Gas		9,897,299		9,850,000		1.25	%
Energy: Oil & Gas		11,077,017		9,531,558		1.21	%
Finance		2,507,196		4,590,000		0.58	%
Hotel, Gaming, & Leisure		-		250,000		0.03	%
	$	787,034,758	$	785,698,750		100.00	%

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

The following is a summary of industry concentration of our investment portfolio as of December 31, 2020:

					% of Total
					Investments
	Cost		Fair Value		at fair value
Services: Business	$	102,005,864	$	109,873,364		16.82	%
Healthcare & Pharmaceuticals		87,198,279		82,945,887		12.69	%
Aerospace & Defense		53,615,886		52,184,338		7.99	%
Beverage, Food, & Tobacco		39,339,090		41,012,620		6.28	%
Media: Broadcasting & Subscription		31,889,423		34,418,869		5.27	%
High Tech Industries		33,571,427		33,793,693		5.17	%
Consumer Goods: Durable		27,802,124		27,780,032		4.25	%
Environmental Industries		25,454,549		24,977,427		3.82	%
Education		26,428,607		24,494,108		3.75	%
Services: Consumer		38,026,487		22,600,924		3.46	%
Media: Advertising, Printing & Publishing		21,903,057		21,348,217		3.27	%
Capital Equipment		20,005,255		20,680,904		3.17	%
Finance		18,016,762		19,435,000		2.97	%
Transportation & Logistics		18,690,276		18,944,945		2.90	%
Retail		15,834,471		18,132,490		2.77	%
Containers, Packaging, & Glass		17,853,813		17,890,000		2.74	%
Metals & Mining		16,970,057		17,064,250		2.61	%
Consumer goods: non-durable		13,272,383		12,930,000		1.98	%
Automotive		11,028,125		11,028,125		1.69	%
Construction & Building		10,446,055		10,750,000		1.65	%
Energy: Oil & Gas		11,015,013		9,991,177		1.53	%
Utilities: Oil & Gas		9,884,148		9,900,000		1.52	%
Chemicals, Plastics, & Rubber		6,605,024		6,808,125		1.04	%
Software		1,772,791		4,430,000		0.66	%
Hotel, Gaming, & Leisure		-		10,000		—	%
	$	658,628,966	$	653,424,495		100.00	%

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

The following provides quantitative information about Level 3 fair value measurements as of September 30, 2021:

Description:

Fair Value

Valuation Technique

Unobservable Inputs

Range (Average)⁽¹⁾⁽³⁾

HY credit spreads,

-4.04 to 0.42% (-0.32%)

Income/Market

Risk free rates

-2.78% to 0.56% (-0.84%)

First lien debt

638,474,668

approach ⁽²⁾

Market multiples

5x to 45x (14x)⁽⁴⁾

HY credit spreads,

-3.29% to 0.42% (-0.75%)

Income/Market

Risk free rates

-2.14% to 0.58% (-0.69%)

Second lien debt

58,044,145

approach ⁽²⁾

Market multiples

9x to 19x (16x)⁽⁴⁾

HY credit spreads,

-0.50% to 0.07% (-0.29%)

Income/Market

Risk free rates

-1.77% to 0.43% (-0.96%)

Unsecured debt

18,889,424

approach ⁽²⁾

Market multiples

15x to 24x (18x)⁽⁴⁾

Underwriting multiple/

Equity investments

70,290,513

Market approach ⁽⁵⁾

EBITDA Multiple

2x to 25x (12x)

Total Long Term Level 3 Investments

785,698,750

(1)

Weighted average based on fair value as of September 30, 2021.

(2)

Included but not limited to (a) the market approach which is used to determine sufficient enterprise value, and (b) the income approach which is based on discounting future cash flows using an appropriate market yield.

(3)

The Company calculates the price of the loan by discounting future cash flows, which include forecasted future LIBOR rates based on the published forward LIBOR curve at the valuation date, 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, 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 could result in a significantly lower or 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 between the date a loan closed and the valuation date ranged from -4.04% (-404 basis points) to 0.42% (42 basis points). The average of all changes was -0.32% (-32 basis points).

(4)

Median of LTM (last twelve months) EBITDA multiples of comparable companies.

(5)

The primary significant unobservable input used in the fair value measurement of the Company’s equity investments is the EBITDA multiple (the “Multiple”). Significant increases (decreases) in the Multiple in isolation could 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.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

The following provides quantitative information about Level 3 fair value measurements as of December 31, 2020:

Description:

Fair Value

Valuation Technique

Unobservable Inputs

Range (Average) ⁽¹⁾⁽³⁾

First lien debt

508,673,064

Income/Market⁽²⁾
approach

HY credit spreads,
Risk free rates
Market multiples

-3.78% to 1.84% (-0.15%)
-2.95% to 0.14% (-1.68%)
7x to 48x (13x)⁽⁴⁾

Second lien debt

70,720,186

Income/Market⁽²⁾
approach

HY credit spreads,
Risk free rates

Market multiples

-1.71% to 3.83% (0.54%)
-2.65% to 0.08% (-1.44%)
8x to 14x (11x)⁽⁴⁾

Unsecured debt

21,191,245

Income/Market
approach ⁽²⁾

HY credit spreads,
Risk free rates
Market multiples

-0.25% to 0.34% (-0.03%)
-1.92% to -1.62% (-1.78%)
1x to 24x (6x)⁽⁴⁾

Equity investments

52,840,000

Market approach ⁽⁵⁾

Underwriting

1x to 24x (12x)

Total Long Term Level 3 Investments

653,424,495

EBITDA Multiple

(1)

Weighted average based on fair value as of December 31, 2020.

(2)

Inclusive of but not limited to (a) the market approach which is used to determine sufficient enterprise value, and (b) the income approach which is based on discounting future cash flows using an appropriate market yield.

(3)

The Company calculates the price of the loan by discounting future cash flows, which include forecasted future LIBOR rates based on the published forward LIBOR curve at the valuation date, 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, 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 or higher fair value measurement. As an example, the “Range (Average)” for a first lien debt instruments in the table above indicates that the change in the HY spreads between the date a loan closed and the valuation date ranged from -3.78% (-378 basis points) to 1.84% (184 basis points). The average of all changes was -0.15%.

(4)

Median of LTM (last twelve months) EBITDA multiples of comparable companies.

(5)

The primary significant unobservable input used in the fair value measurement of the Company’s equity investments is the EBITDA multiple (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.

NOTE 7 — COMMITMENTS AND CONTINGENCIES

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.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

As of September 30, 2021, the Company had $27,348,021 of unfunded commitments to provide debt financing to 25 existing portfolio companies. As of December 31, 2020, the Company had $28,865,202 of unfunded commitments to provide debt to 19 existing portfolio companies. As of September 30, 2021, the Company had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded loan commitments should the need arise.

NOTE 8 — FINANCIAL HIGHLIGHTS

	For the			For the
	nine months			nine months
	ended			ended
	September 30, 2021			September 30, 2020
	(unaudited)			(unaudited)
Per Share Data: ⁽¹⁾
Net asset value at beginning of period	$	14.03		$	14.14
Net investment income		0.75			0.87
Change in unrealized appreciation (depreciation)		0.20			(0.57	)
Net realized gain (loss)		0.34			(0.13	)
Loss on debt extinguishment		(0.03	)		—
Provision for taxes on unrealized depreciation on investments		(0.03	)		—
Provision for taxes on realized gain on investments		(0.03	)		—
Total from investment operations	$	1.20		$	0.17

Stockholder distributions from:
Net investment income		(1.08	)		(1.15	)
Other⁽⁶⁾		—			0.01
Net asset value at end of period	$	14.15		$	13.17

Per share market value at end of period	$	13.06		$	8.70
Total return based on market value⁽²⁾		25.85	%		(32.9	)%
Weighted average shares outstanding		19,486,003			19,466,647

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

	For the			For the
	nine months			nine months
	ended			ended
	September 30, 2021			September 30, 2020
	(unaudited)			(unaudited)
Ratio/Supplemental Data:
Net assets at end of period	$	275,644,969		$	256,549,827
Weighted Average net assets	$	273,663,257		$	251,792,913
Annualized ratio of gross operating expenses to net assets⁽⁵⁾		15.59	%		13.86	%
Annualized ratio of interest expense and other fees to net assets		6.78	%		6.48	%
Annualized ratio of net investment income to net assets⁽⁵⁾		6.95	%		8.95	%
Portfolio Turnover⁽³⁾		17.17	%		14.05	%
Notes payable	$	100,000,000		$	48,875,000
Credit Facility payable	$	189,800,000		$	187,000,000
SBA Debentures	$	250,000,000		$	161,000,000
Asset coverage ratio⁽⁴⁾		1.95	x		2.09	x

(1) Financial highlights are based on weighted average shares outstanding as of period end.

(2)

Total return on market value is based on the change in market price per share since the end of the prior year and assumes enrollment in the Company’s DRIP. The total returns are not annualized.

(3)

Portfolio turnover is calculated as the lesser of purchases or paydowns divided by average portfolio balance and is not annualized.

(4)

Asset coverage ratio is equal to total assets less all liabilities and indebtedness not represented by senior securities over the aggregate amount of the senior securities. SBA-guaranteed debentures are deducted from the numerator and excluded from the denominator.

(5)

These ratios include the impact of the provision for income taxes related to unrealized gain on investments in Taxable Subsidiaries of ($586,460) and ($122,699), respectively, for the nine months ended September 30, 2021 and September 30, 2020, which are not reflected in net investment income, gross operating expenses or net operating expenses. The provision for income taxes related to unrealized gain or loss on investments to net assets for the nine months ended September 30, 2021 and 2020 is 0.29% and 0.06%, respectively.

(6)

Includes the impact of different share amounts as a result of calculating certain per share data based on weighted average shares outstanding during the period and certain per share data based on shares outstanding as of the period end.

NOTE 9 — CREDIT FACILITY

On October 11, 2017, the Company entered into a senior secured revolving credit agreement, as amended, dated as of October 10, 2017, that was amended and restated on September 18, 2020 with ZB, N.A., dba Amegy Bank and various other lenders (the “Credit Facility”). The Company entered the Credit Facility, as amended and restated, provides for borrowings up to a maximum of $230,000,000 on a committed basis with an accordion feature that allows the Company to increase the aggregate commitments up to $280,000,000, subject to new or existing lenders agreeing to participate in the increase and other customary conditions.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Borrowings under the Credit Facility bear interest, subject to the Company’s election, on a per annum basis equal to (i) LIBOR plus 2.50% (or 2.75% during certain periods in which the Company’s asset coverage ratio is equal to or below 1.90 to 1.00) with a 0.25% LIBOR floor, or (ii) 1.50% (or 1.75% during certain periods in which the Company’s asset coverage ratio is equal to or below 1.90 to 1.00) plus an alternate base rate based on the highest of the prime rate (subject to a 3% floor), 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 monthly or quarterly in arrears. The commitment to fund the revolver expires on September 18, 2024, after which the Company may no longer borrow under the Credit Facility and must begin repaying principal equal to 1/12 of the aggregate amount outstanding under the Credit Facility each month. Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on September 18, 2025.

The Company’s obligations to the lenders are secured by a first priority security interest in its portfolio of securities and cash not held at the SBIC subsidiaries, but excluding short term investments. The Credit Facility contains certain covenants, including but not limited to: (i) maintaining a minimum liquidity test of at least $10,000,000, including cash, liquid investments and undrawn availability, (ii) maintaining an asset coverage ratio of at least 1.67 to 1.0, (iii) maintaining a minimum shareholder’s equity, and (iv) maintaining a minimum interest coverage ratio of at least 2.00 to 1.00. As of September 30, 2021, the Company was in compliance with these covenants.

As of September 30, 2021 and December 31, 2020, the outstanding balance under the Credit Facility was $189,800,000 and $174,000,000, respectively. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value. The fair value of the Credit Facility is determined in accordance with ASC Topic 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Credit Facility is estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. The Company incurred costs of $3,676,549 in connection with the Credit Facility, which are being amortized over the life of the facility. Additionally, $341,979 of costs from a prior credit facility will continue to be amortized over the remaining life of the Credit Facility. As of September 30, 2021 and December 31, 2020, $1,921,139 and $2,271,595 of such prepaid loan structure fees and administration fees had yet to be amortized, respectively. These prepaid loan fees are presented on our consolidated statement of assets and liabilities as a deduction from the debt liability.

The following is a summary of the Credit Facility, net of prepaid loan structure fees:

	September 30,		December 31,
	2021		2020
Credit Facility payable	$	189,800,000	$	174,000,000
Prepaid loan structure fees		1,921,139		2,271,595
Credit facility payable, net of prepaid loan structure fees	$	187,878,861	$	171,728,405

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

Interest is paid monthly or quarterly in arrears. The following table summarizes the interest expense and amortized loan fees on the Credit Facility for the three and nine months ended September 30, 2021 and 2020:

	For the three months ended						For the nine months ended
	September 30,			September 30,			September 30,			September 30,
	2021			2020			2021			2020
Interest expense	$	1,354,429		$	1,273,878		$	3,653,547		$	4,666,949
Loan fee amortization		119,834			199,233			356,066			499,867
Commitment fees on unused portion		51,694			63,031			220,003			144,907
Administration fees		30,764			9,047			34,232			26,451
Total interest and financing expenses	$	1,556,721		$	1,545,189		$	4,263,848		$	5,338,174

Weighted average interest rate		2.8	%		2.8	%		2.8	%		3.3	%
Effective interest rate (including fee amortization)		3.2	%		3.4	%		3.3	%		3.8	%
Weighted average debt outstanding	$	191,891,304		$	181,141,304		$	174,057,143		$	187,178,467

Cash paid for interest and unused fees	$	1,415,901		$	1,330,262		$	3,904,908		$	4,979,585

NOTE 10 — SBA-GUARANTEED DEBENTURES

Due to the SBIC subsidiaries’ status as licensed SBICs, the Company can issue debentures guaranteed by the SBA at favorable interest rates. Under the regulations applicable to SBIC funds, a single licensee can have outstanding debentures guaranteed by the SBA subject to a regulatory leverage limit, up to two times the amount of “regulatory capital”, as such term is defined by the SBA. As of both September 30, 2021 and December 31, 2020, the SBIC subsidiary had $75,000,000 in regulatory capital, as such term is defined by the SBA, and $150,000,000 of SBA-guaranteed debentures outstanding.

As of September 30, 2021 and December 31, 2020, the SBIC II subsidiary had $87,500,000 and $40,000,000 in regulatory capital and $100,000,000 and $26,500,000 of SBA-guaranteed debentures outstanding, respectively.

On August 12, 2014, the Company obtained exemptive relief from the SEC to permit it to exclude the debt of the SBIC subsidiaries guaranteed by the SBA from its asset coverage test under the 1940 Act. The exemptive relief provides the Company with increased flexibility under the asset coverage test by permitting it to borrow up to $325,000,000 more than it would otherwise be able to absent the receipt of this exemptive relief.

On a stand-alone basis, the SBIC subsidiaries held $403,209,435 and $277,440,338 in assets at September 30, 2021 and December 31, 2020, respectively, which accounted for approximately 48.8% and 41.1% of the Company’s total consolidated assets, respectively.

Debentures guaranteed by the SBA have fixed interest rates that equal prevailing 10-year U.S. Treasury Note rates plus a market spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the debentures is not required to be paid before maturity but may be pre-paid at any time with no prepayment penalty. SBA-guaranteed debentures drawn before October 1, 2019 incur upfront fees of 3.425%, which consists of a 1.00% commitment fee and a 2.425% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. SBA-guaranteed debentures drawn after October 1, 2019 incur upfront fees of 3.435%, which consists of a 1.00% commitment fee and a 2.435% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. Once pooled, which occurs in March and September of each applicable year, the SBA-guaranteed debentures bear interest at a fixed rate that is set to the current 10-year U.S. Treasury Note rate plus a spread at each pooling date.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

The following table summarizes the SBIC subsidiaries’ SBA-guaranteed debentures as of September 30, 2021:

SBIC I SBA-guaranteed Debentures

Issuance Date	Licensee		Maturity Date		Debenture Amount		Interest Rate			SBA Annual Charge
October 14, 2014		SBIC I		March 1, 2025	$	6,500,000		2.52	%		0.36	%
October 17, 2014		SBIC I		March 1, 2025		6,500,000		2.52	%		0.36	%
December 24, 2014		SBIC I		March 1, 2025		3,250,000		2.52	%		0.36	%
June 29, 2015		SBIC I		September 1, 2025		9,750,000		2.83	%		0.36	%
October 22, 2015		SBIC I		March 1, 2026		6,500,000		2.51	%		0.36	%
October 22, 2015		SBIC I		March 1, 2026		1,500,000		2.51	%		0.74	%
November 10, 2015		SBIC I		March 1, 2026		8,800,000		2.51	%		0.74	%
November 18, 2015		SBIC I		March 1, 2026		1,500,000		2.51	%		0.74	%
November 25, 2015		SBIC I		March 1, 2026		8,800,000		2.51	%		0.74	%
December 16, 2015		SBIC I		March 1, 2026		2,200,000		2.51	%		0.74	%
December 29, 2015		SBIC I		March 1, 2026		9,700,000		2.51	%		0.74	%
November 28, 2017		SBIC I		March 1, 2028		25,000,000		3.19	%		0.22	%
April 27, 2018		SBIC I		September 1, 2028		40,000,000		3.55	%		0.22	%
July 30, 2018		SBIC I		September 1, 2028		17,500,000		3.55	%		0.22	%
September 25, 2018		SBIC I		March 1, 2029		2,500,000		3.11	%		0.22	%
Total SBIC I SBA-guaranteed Debentures					$	150,000,000

SBIC II SBA-guaranteed Debentures

Issuance Date	Licensee		Maturity Date		Debenture Amount		Interest Rate			SBA Annual Charge
October 17, 2019		SBIC II		March 1, 2030	$	6,000,000		2.08	%		0.09	%
November 15, 2019		SBIC II		March 1, 2030		5,000,000		2.08	%		0.09	%
December 17, 2020		SBIC II		March 1, 2031		9,000,000		1.67	%		0.09	%
December 17, 2020		SBIC II		March 1, 2031		6,500,000		1.67	%		0.27	%
February 16, 2021		SBIC II		March 1, 2031		13,500,000		1.67	%		0.27	%
February 26, 2021		SBIC II		March 1, 2031		10,000,000		1.67	%		0.27	%
March 2, 2021		SBIC II		March 1, 2031		10,000,000		1.67	%		0.27	%
April 21, 2021		SBIC II		September 1, 2031		10,000,000		1.30	%		0.27	%
May 14, 2021		SBIC II		September 1, 2031		6,700,000		1.30	%		0.27	%
May 28, 2021		SBIC II		September 1, 2031		7,300,000		1.30	%		0.27	%
July 23, 2021		SBIC II		September 1, 2031		16,000,000		1.30	%		0.27	%
Total SBIC II SBA-guaranteed Debentures					$	100,000,000
Total SBA-guaranteed Debentures					$	250,000,000

As of September 30, 2021 and December 31, 2020, the carrying amount of the SBA-guaranteed debentures approximated their fair value. The fair values of the SBA-guaranteed debentures are determined in accordance with ASC Topic 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the SBA-guaranteed debentures are estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. At September 30, 2021 and December 31, 2020, the SBA-guaranteed debentures would be deemed to be Level 3 (as defined in Note 6).

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

As of September 30, 2021, the Company has incurred $9,332,500, in financing costs related to the SBA-guaranteed debentures since the SBIC subsidiaries received their licenses, which were recorded as prepaid loan fees. As of September 30, 2021 and December 31, 2020, $5,670,970 and $3,332,504 of prepaid financing costs had yet to be amortized, respectively. These prepaid loan fees are presented on the consolidated statement of assets and liabilities as a deduction from the debt liability.

The following is a summary of the SBA-guaranteed debentures, net of prepaid loan fees:

	September 30,		December 31,
	2021		2020
SBA debentures payable	$	250,000,000	$	176,500,000
Prepaid loan fees		5,670,970		3,332,504
SBA-guaranteed debentures, net of prepaid loan fees	$	244,329,030	$	173,167,496

The following table summarizes the interest expense and amortized fees on the SBA-guaranteed debentures for the three and nine months ended September 30, 2021 and 2020:

	For the three months ended						For the nine months ended
	September 30,			September 30,			September 30,			September 30,
	2021			2020			2021			2020
Interest expense	$	1,661,946		$	1,351,364		$	4,644,014		$	4,029,722
Debenture fee amortization		299,373			173,157			801,258			515,707
Total interest and financing expenses	$	1,961,319		$	1,524,521		$	5,445,272		$	4,545,429
Weighted average interest rate		2.7	%		3.3	%		2.8	%		3.3	%
Effective interest rate (including fee amortization)		3.2	%		3.8	%		3.3	%		3.8	%
Average debt outstanding	$	246,173,913		$	161,000,000		$	220,354,579		$	161,000,000
Cash paid for interest	$	3,201,057		$	2,687,018		$	5,907,676		$	5,346,231

NOTE 11 — NOTES

On August 21, 2017, the Company issued $42,500,000 in aggregate principal amount of 5.75% fixed-rate notes due September 15, 2022 (the “2022 Notes”). On September 8, 2017, the Company issued an additional $6,375,000 in aggregate principal amount of the 2022 Notes pursuant to a full exercise of the underwriters’ overallotment option. On January 13, 2021, the Company caused notices to be issued to the holders of its 2022 Notes regarding the Company’s exercise of its option to redeem all of the issued and outstanding 2022 Notes, pursuant to the Second Supplemental Indenture dated as of August 21, 2017, between the Company and U.S. Bank National Association, as trustee. The Company redeemed all $48,875,000 in aggregate principal amount of the 2022 Notes on February 12, 2021. The 2022 Notes were redeemed at 100% of their principal amount, plus the accrued and unpaid interest thereon through the redemption date. As a result of the redemption, the Company recognized a loss on debt extinguishment of $539,250 due to the write off of the remaining deferred financing costs on the 2022 Notes. This loss is included in the Consolidated Statement of Operations for the nine months ended September 30, 2021.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

The following table summarizes the interest expense and deferred financing costs on the 2022 Notes for the three and nine months ended September 30, 2021 and 2020:

	For the three months ended						For the nine months ended
	September 30,			September 30,			September 30,			September 30,
	2021			2020			2021			2020
Interest expense	$	—		$	702,578		$	320,063		$	2,107,734
Deferred financing costs		—			88,784			28,232			254,532
Administration Fees		—			—			9,000			—
Total interest and financing expenses	$	—		$	791,362		$	357,295		$	2,362,266
Loss on debt extinguishment⁽¹⁾								539,250
Weighted average interest rate ⁽²⁾		0.0	%		5.7	%		5.7	%		5.7	%
Effective interest rate (including fee amortization)⁽²⁾		0.0	%		6.4	%		6.4	%		6.4	%
Average debt outstanding ⁽³⁾	$	—		$	48,875,000		$	48,875,000		$	48,875,000
Cash paid for interest	$	—		$	702,578		$	453,966		$	2,107,734

⁽¹⁾

The loss on debt extinguishment is not included in interest expense or net investment income

⁽²⁾

Excludes the loss on debt extinguishment

⁽³⁾

For the nine months ended September 30, 2021, the average is calculated for the period January 1, 2021 through February 12, 2021; the repayment date of the 2022 Notes

On January 14, 2021, the Company issued $100,000,000 in aggregate principal amount of 4.875% fixed-rate notes due 2026 (the “2026 Notes”). The 2026 Notes will mature on March 30, 2026, and may be redeemed in whole or in part at any time or from time to time at our option on or after December 31, 2025 at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest on the 2026 Notes is payable semi-annually beginning September 30, 2021.

The Company used the net proceeds from the 2026 Notes offering to fully redeem the 2022 Notes and repay a portion of the amount outstanding under the Credit Facility. As of September 30, 2021, the aggregate carrying amount of the 2026 Notes was approximately $100,000,000.

Prior to their redemption on February 12, 2021, the 2022 Notes were listed on New York Stock Exchange under the trading symbol “SCA”. As of December 31, 2020, the fair value of the 2022 Notes was $49,168,250. The 2026 Notes are institutional, non-traded notes. As these notes were recently issued, the 2026 Notes are carried at cost, which approximates fair value.

In connection with the issuance and maintenance of the 2026 Notes, the Company incurred $2,328,155 of fees, which are being amortized over the term of the 2026 Notes, of which $2,009,945 remains to be amortized as of September 30, 2021. These financing costs are presented on the consolidated statement of assets and liabilities as a deduction from the debt liability.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

The following is a summary of the 2026 Notes Payable, net of deferred financing costs:

	September 30,		December 31,
	2021		2020
Notes payable	$	100,000,000	$	—
Deferred financing costs		2,009,625		—
Notes payable, net of deferred financing costs	$	97,990,375	$	—

The following table summarizes the interest expense and deferred financing costs on the 2026 Notes for the three and nine months ended September 30, 2021 and 2020:

	For the three months ended						For the nine months ended
	September 30,			September 30,			September 30,			September 30,
	2021			2020			2021			2020
Interest expense	$	1,218,750		$	—		$	3,480,208		$	—
Deferred financing costs		112,598			—			318,211			—
Administration Fees		5,000			—			5,000			—
Total interest and financing expenses	$	1,336,348		$	—		$	3,803,419		$	—
Weighted average interest rate		4.8	%		0.0	%		4.9	%		0.0	%
Effective interest rate (including fee amortization)		5.3	%		0.0	%		5.3	%		0.0	%
Average debt outstanding	$	100,000,000		$	—		$	100,000,000	⁽¹⁾	$	—
Cash paid for interest	$	3,466,667		$	—		$	3,466,667		$	—

⁽¹⁾

Calculated for the period from January 14, 2021, the date of the 2026 Notes offering, through September 30, 2021.

The indenture and supplements thereto relating to the 2026 Notes contain certain covenants, including but not limited to (i) a requirement that the Company comply with the asset coverage requirements of the 1940 Act or any successor provisions, and (ii) a requirement to provide financial information to the holders of the notes and the trustee under the indenture if the Company should no longer be subject to the reporting requirements under the Exchange Act. As of September 30, 2021, the Company was in compliance with these covenants.

NOTE 12 — SUBSEQUENT EVENTS

Credit Facility

The outstanding balance under the Credit Facility as of October 27, 2021 was $185,850,000.

SBA-guaranteed Debentures

The total consolidated balance of SBA-guaranteed debentures outstanding as of October 27, 2021 was $250,000,000.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

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, related to the current COVID-19 pandemic and otherwise, 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 (“Stellus Capital” or the “Advisor);

•

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 to locate suitable investments for us and to monitor and administer our investments;

• the ability of Stellus Capital to attract and retain highly talented professionals;

• our ability to 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. 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 Securities and Exchange Commission (“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.

Overview

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.

We are an externally managed, non-diversified, closed-end investment company that has elected to be regulated as a BDC under the 1940 Act. Our investment activities are managed by our investment adviser, Stellus Capital.

As a BDC, we are required to comply with certain regulatory requirements. For instance, as a BDC, we may 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. Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and certain public operating 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 and with their principal of business in the United States.

We have elected to be treated for U.S. federal tax purposes as a RIC under Subchapter M of the Code and intend to operate in a manner to qualify annually for a tax treatment applicable to RICs. To maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. As of September 30, 2021, we were in compliance with the RIC requirements. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any income we distribute to our stockholders.

On March 23, 2018, the Small Business Credit Availability Act (the “SBCAA”) was signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The SBCAA included changes to the 1940 Act to allow BDCs to decrease their asset coverage requirement to 150% from 200% under certain circumstances

On April 4, 2018, the Board, including a required majority (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. At our 2018 annual meeting of stockholders our stockholders also approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the asset coverage ratio applicable to us was decreased from 200% to 150%, effective June 29, 2018. As of September 30, 2021, our asset coverage ratio was 195%. The amount of leverage that we employ at any time depends on our assessment of the market and other factors at the time of any proposed borrowing.

COVID-19 Developments

The global impact of the outbreak continues to evolve, and many countries have reacted by instituting quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues. Businesses are also implementing similar precautionary measures. Such measures, as well as the general uncertainty surrounding the dangers and impact of the COVID-19 pandemic, have created significant disruption in supply chains and economic activity. While several countries, as well as certain states in the United States, have begun to lift public health restrictions with the view to reopening their economies, recurring COVID-19 outbreaks have led to the re-introduction of such restrictions in certain states in the United States and globally and could continue to lead to the re-introduction of such restrictions elsewhere. The Federal Food and Drug Administration authorized vaccines produced for emergency use starting in December 2020, and such vaccines have been distributed nationally; however, it remains unclear how quickly the vaccines will continue to be be distributed nationwide and globally or when “herd immunity” will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. The delay in distributing the vaccines could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience a recession, and we anticipate our business and operations could be materially adversely affected by a prolonged recession in the United States and other major markets.

Economic outlook

The Federal Food and Drug Administration authorized vaccines produced for emergency use starting in December 2020, it remains unclear how quickly the vaccines will be distributed nationwide and globally or when “herd immunity” will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. The delay in distributing the vaccines could lead people to continue to self- isolate and not participate in the economy at pre-pandemic levels for a prolonged period. The COVID-19 pandemic could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The COVID-19 pandemic presents material uncertainty and risks with respect to the underlying value of our portfolio companies and with respect to our business, financial condition, results of operations, and cash flows, such as the potential negative impact to financing arrangements, increased costs of operations, changes in law and/or regulation, and uncertainty regarding government and regulatory policy.

Our COVID-19 response

Since the onset of the COVID-19 pandemic, we have been in regular contact with all of our portfolio companies and/or their sponsors to assess among other things their ability to function in the new environment. Discussions have addressed the portfolio companies’ liquidity position, expected covenant compliance, and the health of their workforce and customers.

Financial impact

We will continue to closely monitor the financial condition of our portfolio companies as part of our efforts to mitigate the impact of the COVID-19 pandemic. Historical information may be relatively less significant.

Portfolio Composition and Investment Activity

Portfolio Composition

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 (including unitranche), second lien, and unsecured debt financing, often times with a corresponding equity investment.

As of September 30, 2021, we had $785.7 million (at fair value) invested in 74 portfolio companies. As of September 30, 2021, our portfolio included approximately 81% of first lien debt, 7% of second lien debt, 3% of unsecured debt and 9% of equity investments at fair value. The composition of our investments at cost and fair value as of September 30, 2021 was as follows:

	Cost		Fair Value
Senior Secured – First Lien⁽¹⁾	$	640,788,167	$	638,474,668
Senior Secured – Second Lien		79,793,715		58,044,145
Unsecured Debt		18,768,588		18,889,424
Equity		47,684,288		70,290,513
Total Investments	$	787,034,758	$	785,698,750

(1) Includes unitranche investments, which account for 10.8% of our portfolio at fair value. Unitranche structures may combine characteristics of first lien senior secured as well as second lien and/or subordinated loans and our unitranche loans will expose us to the risks associated with second lien and subordinated loans to the extent we invest in the “last-out” tranche.

As of December 31, 2020, we had $653.4 million (at fair value) invested in 66 portfolio companies. As of December 31, 2020, our portfolio included approximately 78% of first lien debt, 11% of second lien debt, 3% of unsecured debt and 8% of equity investments at fair value. The composition of our investments at cost and fair value as of December 31, 2020 was as follows:

	Cost		Fair Value
Senior Secured – First Lien⁽¹⁾	$	508,060,059	$	508,673,064
Senior Secured – Second Lien		93,636,285		70,720,186
Unsecured Debt		22,212,888		21,191,245
Equity		34,719,734		52,840,000
Total Investments	$	658,628,966	$	653,424,495

(1) Includes unitranche investments, which account for 13.0% of our portfolio at December 31, 2020 at fair value. Unitranche structures may combine characteristics of first lien senior secured as well as second lien and/or subordinated loans and our unitranche loans will expose us to the risks associated with second lien and subordinated loans to the extent we invest in the “last-out” tranche.

Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms and conditions of the underlying loan agreements. As of September 30, 2021 and December 31, 2020, we had unfunded commitments of $27.3 million and $28.9 million, respectively, to provide debt financing for 25 and 19 portfolio companies, respectively. As of September 30, 2021, we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded commitments should the need arise.

The following is a summary of geographical concentration of our investment portfolio as of September 30, 2021:

					% of Total
					Investments at
	Cost		Fair Value		Fair Value
California	$	134,934,002	$	140,149,278		17.84	%
Texas		153,685,119		137,561,456		17.51	%
Illinois		70,410,297		71,619,407		9.12	%
Arizona		50,756,093		54,977,354		7.00	%
Pennsylvania		37,478,573		37,440,711		4.77	%
New Jersey		38,098,810		35,942,765		4.57	%
Canada		34,853,727		34,994,775		4.45	%
Ohio		31,969,747		33,689,339		4.29	%
Wisconsin		25,928,215		26,285,445		3.35	%
Washington		22,751,096		22,809,080		2.90	%
New York		18,887,234		20,849,341		2.65	%
United Kingdom		21,307,905		19,818,875		2.53	%
Georgia		11,189,933		18,646,664		2.37	%
Indiana		17,684,153		17,811,311		2.27	%
Maryland		16,871,320		17,018,750		2.17	%
Minnesota		15,868,408		15,807,229		2.01	%
Colorado		15,172,493		15,195,900		1.93	%
Florida		13,126,961		13,449,457		1.71	%
District of Columnbia		11,929,982		12,762,500		1.62	%
Missouri		9,893,021		10,565,000		1.34	%
North Carolina		10,520,082		10,481,000		1.33	%
Massachusetts		10,297,773		10,297,773		1.31	%
Tennessee		4,306,570		4,323,554		0.55	%
Puerto Rico		8,613,244		2,161,786		0.28	%
Virginia		500,000		630,000		0.08	%
Utah		-		410,000		0.05	%
	$	787,034,758	$	785,698,750		100.00	%

The following is a summary of geographical concentration of our investment portfolio as of December 31, 2020:

					% of Total
					Investments
	Cost		Fair Value		at fair value
Texas	$	151,640,862	$	135,146,776		20.68	%
California		86,050,467		92,069,851		14.09	%
Illinois		57,330,756		57,535,404		8.81	%
Arizona		50,822,139		52,015,600		7.96	%
New Jersey		38,228,359		37,765,139		5.78	%
Ohio		34,109,657		35,827,682		5.48	%
Wisconsin		22,721,856		22,827,500		3.49	%
Canada		21,318,659		21,540,925		3.30	%
New York		19,527,594		20,547,579		3.14	%
Tennessee		19,832,576		19,959,613		3.05	%
United Kingdom		20,159,650		18,727,500		2.87	%
South Carolina		15,834,471		18,132,490		2.77	%
Indiana		17,741,889		18,026,339		2.76	%
Maryland		16,970,057		17,064,250		2.61	%
Florida		12,404,739		12,299,545		1.88	%
Alabama		12,252,768		12,252,768		1.88	%
Washington		11,803,768		11,801,363		1.81	%
Missouri		9,956,554		10,720,000		1.64	%
Pennsylvania		9,884,148		9,900,000		1.52	%
Virginia		7,505,287		7,759,020		1.19	%
Washington, D.C.		6,937,907		7,030,512		1.08	%
Georgia		685,000		6,420,000		0.98	%
North Carolina		4,979,153		2,925,000		0.45	%
Puerto Rico		8,613,244		2,589,639		0.40	%
Massachusetts		1,317,406		1,780,000		0.27	%
Utah		-		760,000		0.11	%
	$	658,628,966	$	653,424,495		100.00	%

The following is a summary of industry concentration of our investment portfolio as of September 30, 2021:

					% of Total
					Investments
	Cost		Fair Value		at Fair Value
Services: Business	$	159,012,118	$	168,449,139		21.44	%
Healthcare & Pharmaceuticals		99,744,266		99,533,534		12.67	%
Aerospace & Defense		81,055,347		79,828,943		10.16	%
Media: Advertising, Printing & Publishing		45,606,217		43,306,492		5.51	%
Capital Equipment		37,102,848		38,713,465		4.93	%
Media: Broadcasting & Subscription		31,303,573		35,080,631		4.46	%
Beverage, Food, & Tobacco		33,878,852		34,401,058		4.38	%
Consumer Goods: Non-durable		29,645,617		29,124,666		3.71	%
Consumer Goods: Durable		28,461,095		28,855,225		3.67	%
Software		21,531,074		23,866,607		3.04	%
Services: Consumer		38,047,798		21,893,601		2.79	%
Education		21,395,007		21,555,671		2.74	%
High Tech Industries		21,414,367		21,540,925		2.74	%
Transportation & Logistics		18,172,123		18,278,855		2.33	%
Containers, Packaging, & Glass		17,587,981		17,828,219		2.27	%
Metals & Mining		16,871,320		17,018,750		2.17	%
FIRE: Real Estate		15,708,184		15,708,184		2.00	%
Chemicals, Plastics, & Rubber		14,688,506		14,681,563		1.87	%
Automotive		11,055,168		11,025,000		1.40	%
Construction & Building		10,504,933		10,516,664		1.34	%
Environmental Industries		10,766,852		10,270,000		1.31	%
Utilities: Oil & Gas		9,897,299		9,850,000		1.25	%
Energy: Oil & Gas		11,077,017		9,531,558		1.21	%
Finance		2,507,196		4,590,000		0.58	%
Hotel, Gaming, & Leisure		-		250,000		0.03	%
	$	787,034,758	$	785,698,750		100.00	%

The following is a summary of industry concentration of our investment portfolio as of December 31, 2020:

					% of Total
					Investments
	Cost		Fair Value		at fair value
Services: Business	$	102,005,864	$	109,873,364		16.82	%
Healthcare & Pharmaceuticals		87,198,279		82,945,887		12.69	%
Aerospace & Defense		53,615,886		52,184,338		7.99	%
Beverage, Food, & Tobacco		39,339,090		41,012,620		6.28	%
Media: Broadcasting & Subscription		31,889,423		34,418,869		5.27	%
High Tech Industries		33,571,427		33,793,693		5.17	%
Consumer Goods: Durable		27,802,124		27,780,032		4.25	%
Environmental Industries		25,454,549		24,977,427		3.82	%
Education		26,428,607		24,494,108		3.75	%
Services: Consumer		38,026,487		22,600,924		3.46	%
Media: Advertising, Printing & Publishing		21,903,057		21,348,217		3.27	%
Capital Equipment		20,005,255		20,680,904		3.17	%
Finance		18,016,762		19,435,000		2.97	%
Transportation & Logistics		18,690,276		18,944,945		2.90	%
Retail		15,834,471		18,132,490		2.77	%
Containers, Packaging, & Glass		17,853,813		17,890,000		2.74	%
Metals & Mining		16,970,057		17,064,250		2.61	%
Consumer goods: non-durable		13,272,383		12,930,000		1.98	%
Automotive		11,028,125		11,028,125		1.69	%
Construction & Building		10,446,055		10,750,000		1.65	%
Energy: Oil & Gas		11,015,013		9,991,177		1.53	%
Utilities: Oil & Gas		9,884,148		9,900,000		1.52	%
Chemicals, Plastics, & Rubber		6,605,024		6,808,125		1.04	%
Software		1,772,791		4,430,000		0.66	%
Hotel, Gaming, & Leisure		-		10,000		—	%
	$	658,628,966	$	653,424,495		100.00	%

At September 30, 2021, our average portfolio company investment at both amortized cost and fair value was approximately $10.6 million, and our largest portfolio company investment at amortized cost and fair value was $21.4 million and $23.0 million, respectively. At December 31, 2020, our average portfolio company investment at amortized cost and fair value was approximately $10.0 million and $9.9 million, respectively, and our largest portfolio company investment at amortized cost and fair value was approximately $21.4 million and $21.6 million, respectively.

At September 30, 2021, 95% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 5% bore interest at fixed rates. At December 31, 2020, 93% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 7% bore interest at fixed rates.

The weighted average yield on all of our debt investments as of September 30, 2021 and December 31, 2020 was 8.3% and 8.3%, respectively. The weighted average yield on all of our investments, including non-income producing equity positions, investments as of September 30, 2021 and December 31, 2020 was approximately 7.8% and 7.9%, respectively. The weighted average yield was computed using the effective interest rates for all of our debt investments, including accretion of original issue discount. The weighted average yield of our debt investments is not the same as a return on investment for our stockholder, but, rather relates to a portion of our investment portfolio and is calculated before the payment of all of our and our subsidiaries’ fees and expenses.

As of September 30, 2021 and December 31, 2020, we had cash and cash equivalents of $37.8 million and $18.5 million, respectively.

Investment Activity

During the nine months ended September 30, 2021, we made an aggregate of $243.3 million (net of fees) of investments in 18 new portfolio companies and 24 existing portfolio companies. During the nine months ended September 30, 2021, we received an aggregate of $123.6 million in proceeds from repayments of our 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 required by 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.

Asset Quality

In addition to various risk management and monitoring tools, Stellus Capital uses an investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in our investment portfolio. This investment rating system uses a five-level numeric scale. The following is a description of the conditions associated with each investment category:

•

Investment Category 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 Category 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 Category 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 Category 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 Category 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.

	As of September 30, 2021							As of December 31, 2020
	(dollars in millions)							(dollars in millions)
						Number of							Number of
			% of Total			Portfolio				% of Total			Portfolio
Investment Category	Fair Value		Portfolio			Companies		Fair Value		Portfolio			Companies
1	$	181.4		23	%		19	$	87.3		14	%		12
2		501.3		64	%		45		496.5		76	%		45
3		95.1		12	%		7		61.3		9	%		6
4		3.7		0	%		1		—		—	%		—
5		4.3		1	%		2		8.3		1	%		3
Total	$	785.7		100	%		74	$	653.4		100	%		66

Loans and Debt Securities on Non-Accrual Status

We will not accrue interest on loans and debt securities if we have reason to doubt our ability to collect such interest. As of September 30, 2021, we had four loans on non-accrual status, which represented approximately 4.2% of our loan portfolio at cost and 1.1% at fair value. As of December 31, 2020, we had three loans on non-accrual status that represented approximately 4.3% of our loan portfolio at cost and 1.0% at fair value. As of September 30, 2021 and December 31, 2020, $8.4 million and $7.1 million of income from investments on non-accrual has not been accrued, respectively.

Results of Operations

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 portfolio investments and their amortized cost. Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio.

Comparison of the Three Months and Nine Months Ended September 30, 2021 and 2020

Revenues

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 primarily floating rates. 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 interest. 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 total dollar amount of interest and any dividend income that we earn will 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.

The following shows the breakdown of investment income for the three and nine months ended September 30, 2021 and 2020.

	Three months ended				Nine months ended
	September 30,				September 30,
	(dollars in millions)				(dollars in millions)
	2021		2020		2021		2020
Interest income⁽¹⁾	$	16.2	$	13.7	$	44.2	$	41.6
PIK interest		0.2		-		0.6		0.6
Miscellaneous fees⁽¹⁾		0.6		0.3		1.3		0.9
Total	$	17.0	$	14.0	$	46.1	$	43.1

(1)

For the three and nine months ended September 30, 2021, we recognized $0.8 million and $1.3 million, respectively, of non-recurring income related to early repayments, and amendments to specific loan positions. For the three and nine months ended September 30, 2020, we recognized $0.5 million and $1.5 million, respectively, of non-recurring income related to early repayments, amendments to specific loan positions, and the recognition of previously reserved income from a prior period.

The increase in total income for the three and nine months ended September 30, 2021 is due to the growth in the overall investment portfolio.

Expenses

Our primary operating expenses include the payment of fees to Stellus Capital 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:

•

organization and offering;

•

calculating our net asset value (including the cost and expenses of any independent valuation firm);

•

fees and expenses payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments;

•

interest payable on debt, if any, incurred to finance our investments and expenses related to unsuccessful portfolio acquisition efforts;

•

base management and incentive fees;

•

administration fees and expenses, if any, payable under the administration agreement (including our allocable portion of Stellus Capital’s overhead in performing its obligations under the administration agreement, including rent and the allocable portion of the cost of our Chief Compliance Officer and Chief Financial Officer and their respective staff);

•

transfer agent, dividend paying agent and custodial fees and expenses;

•

U.S. federal and state registration fees;

•

all costs of registration and listing our securities on any securities exchange;

•

U.S. federal, state and local taxes;

•

independent directors’ fees and expenses;

•

costs of preparing and filing reports or other documents required by the SEC or other regulators;

•

costs of distributing any reports, proxy statements or other notices to stockholders, including printing costs;

•

costs and fees associated with any fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;

•

direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs;

•

proxy voting expenses; and

•

all other expenses incurred by us or Stellus Capital in connection with administering our business.

The following shows the breakdown of operating expenses for the three and nine months ended September 30, 2021 and 2020.

	Three months ended				Nine months ended
	September 30,				September 30,
	(dollars in millions)				(dollars in millions)
	2021		2020		2021		2020
Operating Expenses
Management fees	$	3.5	$	2.8	$	9.7	$	8.3
Valuation Fees		0.1		0.1		0.3		0.2
Administrative services expenses		0.4		0.4		1.4		1.3
Income incentive fees		1.5		0.5		1.5		2.0
Capital gain incentive fees		1.7		-		1.8		(0.9	)
Professional fees		0.3		0.2		0.8		0.8
Directors’ fees		0.1		0.1		0.2		0.3
Insurance expense		0.1		0.1		0.4		0.3
Interest expense and other fees		4.9		3.9		13.9		12.2
Income tax expense		0.2		0.4		0.7		0.9
Other general and administrative		0.2		0.2		0.8		0.7
Total Operating Expenses	$	13.0	$	8.7	$	31.5	$	26.1

The increase in operating expenses for the three months ended September 30, 2021 and nine months ended September 30, 2021, was due to (1) higher interest expense as a result of higher outstanding balances on our SBA-guaranteed debentures and Notes, (2) higher management fees due to a larger investment portfolio, and (3) higher incentive fees due to portfolio performance.

Net Investment Income

For the three months ended September 30, 2021, net investment income was $4.1 million, or $0.21 per common share (based on 19,486,003 weighted-average common shares outstanding at September 30, 2021).

For the three months ended September 30, 2020, net investment income was $5.3 million, or $0.27 per common share (based on 19,486,003 weighted-average common shares outstanding at September 30, 2020).

For the nine months ended September 30, 2021, net investment income was $14.7 million, or $0.75 per common share (based on 19,486,003 weighted-average common shares outstanding at September 30, 2021).

For the nine months ended September 30, 2020, net investment income was $17.0 million, or $0.87 per common share (based on 19,466,647 weighted-average common shares outstanding at September 30, 2020).

Net investment income for the three months ended September 30, 2021 decreased slightly from the three months ended September 30, 2020 as a result of increased operating expenses, as discussed above. Net investment income for the nine months ended September 30, 2021 increased from the nine months ended September 30, 2021 as a result of portfolio growth.

Net Realized Gains and Losses

We measure realized gains or losses by the difference between the net proceeds from the repayment, sale or disposition and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized.

Repayments and sales of investments and amortization of other certain investments for the three months ended September 30, 2021 totaled $67.6 ($123.6 Q3 YTD - $56.0 Q2 YTD from Q2 10-Q) million, and net realized gains totaled $7.9 million, primarily attributable to realizations of our equity investments in a few portfolio companies.

Repayments and sales of investments and amortization of other certain investments for the three months ended September 30, 2020 totaled $40.1 million, and net realized gains totaled $0.2 million.

Repayments and sales of investments and amortization of other certain investments for the nine months ended September 30, 2021 totaled $123.6 million, and net realized gains totaled $6.6 million, primarily attributable to realizations of our equity investments in a few portfolio companies.

Repayments and sales of investments and amortization of other certain investments for the nine months ended September 30, 2020 totaled $82.4 million, and net realized losses totaled ($2.4) million, primarily attributable to a loss on conversion of debt from a specific investment..

Net Change in Unrealized Appreciation (Depreciation) of Investments

Net change in unrealized appreciation (depreciation) 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 appreciation on investments and cash equivalents for the three months ended September 30, 2021 and 2020 totaled $2.1 million and $2.1 million, respectively.

Net change in unrealized appreciation (depreciation) on investments and cash equivalents for the nine months ended September 30, 2021 and 2020 totaled $3.9 million and ($11.1) million, respectively.

The change in unrealized appreciation for the three and nine months ended September 30, 2021 was due primarily to the accounting reversal upon realization of one portfolio company.

Provision for Taxes on Unrealized Appreciation on Investments

We have direct wholly owned subsidiaries that have elected to be taxable entities (the “Taxable Subsidiaries”). The Taxable Subsidiaries permit us to hold equity investments in portfolio companies which are “pass through” entities for U.S. federal income tax purposes and continue to comply with the “source income” requirements contained in RIC tax provisions of the Code. The Taxable Subsidiaries are not consolidated with us for U.S. federal income tax purposes and may generate U.S. federal income tax expense, benefit, and the related tax assets and liabilities, as a result of their ownership of certain portfolio investments. The income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in our consolidated financial statements. For the three months ended September 30, 2021 and 2020, we recognized a benefit (provision) for income tax on unrealized investments of ($606.4) thousand and ($92.7) thousand, respectively, for the Taxable Subsidiaries. For the nine months ended September 30, 2021 and 2020, we recognized a benefit (provision) for income tax on unrealized investments of ($586.5) thousand and ($122.7) thousand, respectively. As of September 30, 2021 and December 31, 2020, there was a deferred tax liability of $946.1 thousand and $359.6 thousand on the Consolidated Statement of Assets and Liabilities, respectively.

Net Increase in Net Assets Resulting from Operations

For the three months ended September 30, 2021, net increase in net assets resulting from operations totaled $12.8 million, or $0.66 per common share (based on 19,486,003 weighted-average common shares outstanding at September 30, 2021).

For the three months ended September 30, 2020, net increase in net assets resulting from operations totaled $7.5 million, or $0.39 per common share (based on 19,486,003 weighted-average common shares outstanding at September 30, 2020).

For the nine months ended September 30, 2021, net increase in net assets resulting from operations totaled $23.3 million, or $1.20 per common share (based on 19,486,003 weighted-average common shares outstanding at September 30, 2021).

For the nine months ended September 30, 2020, net decrease in net assets resulting from operations totaled $3.4 million, or $0.17 per common share (based on 19,466,647 weighted-average common shares outstanding at September 30, 2020).

The increase in net assets resulting from operations for the three months ended September 30, 2021 was higher than the increase in net assets resulting from operations for the three months ended September 30, 2020 primarily due to higher realized gains in the current period as compared to the prior period.

The increase in net assets resulting from operations for the nine months ended September 30, 2021 was higher than the increase in net assets resulting from operations for the nine months ended September 30, 2020 primarily due to higher realized gains and unrealized appreciation on investments, as compared to the prior period.

Financial condition, liquidity and capital resources

Cash Flows from Operating and Financing Activities

Our operating activities used net cash of ($102.1) million for the nine months ended September 30, 2021, primarily in connection with the purchase and origination of new portfolio investments, some of which was offset by repayment of portfolio investments. Our financing activities for the nine months ended September 30, 2021 provided cash of $121.4 million due to the issuance of our 2026 Notes offset by the repayment of our 2022 Notes, issuance of additional SBA-guaranteed debentures, and net repayments on our Credit Facility.

Our operating activities provided net cash of $12.4 million for the nine months ended September 30, 2020, primarily in connection with the unrealized appreciation of portfolio investments. Our financing activities for the nine months ended September 30, 2020 provided cash of $10.1 million due net borrowings under our Credit Facility.

Liquidity and Capital Resources

Our liquidity and capital resources are derived from the Credit Facility, 2026 Notes, SBA-guaranteed debentures 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 makes certain determinations in connection therewith. A proposal, approved by our stockholders at our 2021 annual stockholders meeting, authorizes us to sell up to 25% of our outstanding common shares at a price equal to or below the then current net asset value per share in one or more offerings. This authorization will expire on June 24, 2022, the one-year anniversary of our 2021 annual stockholders meeting. 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 BDC, we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, over the aggregate amount of the senior securities, which include all of our borrowings and any outstanding preferred stock, of at least 150% effective June 29, 2018 (at least 200% prior to June 28, 2018). This requirement limits the amount that we may borrow. We have received exemptive relief from the SEC to permit us to exclude the debt of the SBIC subsidiaries guaranteed by the SBA from the definition of senior securities in the asset coverage test under the 1940 Act. We were in compliance with the asset coverage ratios at all times. As of September 30, 2021 and December 31, 2020, our asset coverage ratio was 195% and 223%, 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 September 30, 2021 and December 31, 2020, we had cash and cash equivalents of $37.8 million and $18.5 million, respectively. Cash held within the SBIC subsidiaries is generally restricted to the origination of new SBIC-eligible loans and the payment of SBA debentures, related interest expense and fund-expenses. Distributions from positive retained earnings available for distribution are made to the BDC as provided in the SBICs’ limited partnership agreements.

Credit Facility

On October 11, 2017, we entered a senior secured revolving credit agreement, dated as of October 10, 2017, as amended, that was amended and restated on September 18, 2020 with ZB, N.A., dba Amegy Bank and various other lenders (the “Credit Facility”).

The Credit Facility, as amended and restated, provides for borrowings up to a maximum of $230.0 million on a committed basis with an accordion feature that allows us to increase the aggregate commitments up to $280.0 million, subject to new or existing lenders agreeing to participate in the increase and other customary conditions.

Borrowings under the Credit Facility bear interest, subject to our election, on a per annum basis equal to (i) LIBOR plus 2.50% (or 2.75% during certain periods in which our asset coverage ratio is equal to or below 1.90 to 1.00) with a 0.25% LIBOR floor, or (ii) 1.50% (or 1.75% during certain periods in which our asset coverage ratio is equal to or below 1.90 to 1.00) plus an alternate base rate based on the highest of the Prime Rate (subject to a 3% floor), Federal Funds Rate plus 0.5% or one month LIBOR plus 1.0%. We pay unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility. Interest is payable monthly or quarterly in arrears. The commitment to fund the revolver expires on September 18, 2024, after which we may no longer borrow under the Credit Facility and must begin repaying principal equal to 1/12 of the aggregate amount outstanding under the Credit Facility each month. Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on September 18, 2025.

Our obligations to the lenders are secured by a first priority security interest in our portfolio of securities and cash not held at the SBIC subsidiaries, but excluding short term investments. The Credit Facility contains certain covenants, including but not limited to: (i) maintaining a minimum liquidity test of at least $10,000,000, including cash, liquid investments and undrawn availability, (ii) maintaining an asset coverage ratio of at least 1.67 to 1.0, (iii) maintaining a minimum shareholder’s equity, and (iv) maintaining a minimum interest coverage ratio of at least 2.00 to 1.00. As of September 30, 2021, we were in compliance with these covenants.

As of September 30, 2021 and December 31, 2020, the outstanding balance under the Credit Facility was $189.8 million and $174.0 million, respectively. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value. The fair values of the Credit Facility is determined in accordance with ASC Topic 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Credit Facility is estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. We incurred costs of $3.7 million in connection with the Credit Facility, which are being amortized over the life of the facility. Additionally, $0.3 million of costs from a prior credit facility will continue to be amortized over the remaining life of the Credit Facility. As of September 30, 2021 and December 31, 2020, $1.9 million and $2.3 million of such prepaid loan structure fees and administration fees had yet to be amortized, respectively. These prepaid loan fees are presented on our consolidated statement of assets and liabilities as a deduction from the debt liability.

Interest is payable monthly or quarterly in arrears. The following table summarizes the interest expense and amortized loan fees on the Credit Facility for the three and nine months ended September 30, 2021 and 2020 (in millions):

	For the three months ended						For the nine months ended
	September 30,			September 30,			September 30,			September 30,
	2021			2020			2021			2020
Interest expense	$	1.4		$	1.3		$	3.7		$	4.7
Loan fee amortization		0.1			0.2			0.4			0.5
Commitment fees on unused portion		0.1			-			0.2			0.1
Total interest and financing expenses	$	1.6		$	1.5		$	4.3		$	5.3

Weighted average interest rate		2.8	%		2.8	%		2.8	%		3.3	%
Effective interest rate (including fee amortization)		3.2	%		3.4	%		3.3	%		3.8	%
Average debt outstanding	$	191.9		$	181.1		$	174.1		$	187.2

Cash paid for interest and unused fees	$	1.4		$	1.3		$	3.9		$	5.0

SBA-Guaranteed Debentures

Due to the SBIC subsidiaries’ status as licensed SBICs, we have the ability to issue debentures guaranteed by the SBA at favorable interest rates. Under the regulations applicable to SBIC funds, a single licensee can have outstanding debentures guaranteed by the SBA subject to a regulatory leverage limit, up to two times the amount of regulatory capital. As of both September 30, 2021 and December 31, 2020, the SBIC subsidiary had $75.0 million in regulatory capital, as such term is defined by the SBA, and $150.0 million of SBA-guaranteed debentures outstanding.

As of September 30, 2021 and December 31, 2020, the SBIC II subsidiary had $87.5 million and $40.0 million in regulatory capital and $100.0 million and $26.5 million of SBA-guaranteed debentures outstanding, respectively. See Note 10 to the Consolidated Financial Statements for further detail on the SBA-guaranteed debentures outstanding.

On August 12, 2014, we obtained exemptive relief from the SEC to permit us to exclude the debt of the SBIC subsidiaries guaranteed by the SBA from our 200% asset coverage test under the 1940 Act. The exemptive relief provides us with increased flexibility under the 200% asset coverage test by permitting us to borrow up to $325.0 million more than we would otherwise be able to absent the receipt of this exemptive relief.

On a stand-alone basis, the SBIC subsidiaries held $403.2 million and $277.4 million in assets at September 30, 2021 and December 31, 2020, respectively, which accounted for approximately 48.8% and 41.1% of our total consolidated assets at September 30, 2021 and December 31, 2020, respectively.

SBA-guaranteed debentures have fixed interest rates that equal prevailing 10-year U.S. Treasury Note rates plus a market spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the debentures is not required to be paid before maturity but may be pre-paid at any time with no prepayment penalty. SBA-guaranteed debentures drawn before October 1, 2019 incurred upfront fees of 3.425%, which consisted of a 1.00% commitment fee and a 2.425% issuance discount, which are being amortized over the life of the SBA-guaranteed debentures. SBA-guaranteed debentures drawn after October 1, 2019 incur upfront fees of 3.435%, which consists of a 1.00% commitment fee and a 2.435% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. Once pooled, which occurs in March and September of each applicable year, the SBA-guaranteed debentures bear interest at a fixed rate that is set to the current 10-year treasury rate plus a spread at each pooling date.

As of September 30, 2021 and December 31, 2020, the carrying amount of the SBA-guaranteed debentures approximated their fair value. The fair values of the SBA-guaranteed debentures are determined in accordance with ASC Topic 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the SBA-guaranteed debentures are estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. At September 30, 2021 and December 31, 2020 the SBA-guaranteed debentures would be deemed to be Level 3 as defined in Note 6 to the Consolidated Financial Statements).

As of September 30, 2021, we have incurred $9.3 million in financing costs related to the SBA-guaranteed debentures since the SBIC subsidiaries received their licenses, which were recorded as prepaid loan fees. As of September 30, 2021 and December 31, 2020, $5.7 million and $3.3 million of prepaid financing costs had yet to be amortized, respectively. These prepaid financing costs are presented on the consolidated statement of assets and liabilities as a deduction from the debt liability.

The following table summarizes the interest expense and amortized fees on the SBA-guaranteed debentures for the three and nine months ended September 30, 2021 and 2020 (in millions):

	For the three months ended						For the nine months ended
	September 30,			September 30,			September 30,			September 30,
	2021			2020			2021			2020
Interest expense	$	1.7		$	1.3		$	4.6		$	4.0
Debenture fee amortization		0.3			0.2			0.8			0.5
Total interest and financing expenses	$	2.0		$	1.5		$	5.4		$	4.5

Weighted average interest rate		2.7	%		3.3	%		2.8	%		3.3	%
Effective interest rate (including fee amortization)		3.2	%		3.8	%		3.3	%		3.8	%
Average debt outstanding	$	246.2		$	161.0		$	220.4		$	161.0

Cash paid for interest	$	3.2		$	2.7		$	5.9		$	5.3

Notes Offering

On August 21, 2017, we issued $42.5 million in aggregate principal amount of 5.75% fixed-rate notes due September 15, 2022 (the “2022 Notes”). On September 8, 2017, we issued an additional $6.38 million in aggregate principal amount of the 2022 Notes pursuant to a full exercise of the underwriters’ overallotment option. On January 13, 2021, we caused notices to be issued to the holders of its 2022 Notes regarding the Company’s exercise of its option to redeem all of the issued and outstanding 2022 Notes, pursuant to the Second Supplemental Indenture dated as of August 21, 2017, between the Company and U.S. Bank National Association, as trustee. We redeemed all $48.875 million in aggregate principal amount of the 2022 Notes on February 12, 2021. The 2022 Notes were redeemed at 100% of their principal amount, plus the accrued and unpaid interest thereon through the redemption date. As a result of the redemption, we recognized a loss on debt extinguishment of $0.5 million due to the write off of the remaining deferred financing costs on the 2022 Notes. This loss is included in the Consolidated Statement of Operations for the nine months ended September 30, 2021.

The following table summarizes the interest expense and deferred financing costs on the 2022 Notes for the three and nine months ended September 30, 2021 and 2020 (dollars in millions):

	For the three months ended						For the nine months ended
	September 30,			September 30,			September 30,			September 30,
	2021			2020			2021			2020
Interest expense	$	-		$	0.7		$	0.3		$	2.1
Deferred financing costs		-			0.1			0.1			0.3
Total interest and financing expenses	$	-		$	0.8		$	0.4		$	2.4
Loss on extinguishment of debt ⁽¹⁾		-			-			0.5			-

Weighted average interest rate ⁽²⁾		0.0	%		5.7	%		5.7	%		5.7	%
Effective interest rate (including fee amortization) ⁽²⁾		0.0	%		6.4	%		6.4	%		6.4	%
Average debt outstanding ⁽³⁾	$	-		$	48.9		$	48.9		$	48.9
Cash paid for interest	$	-		$	0.7		$	0.5		$	2.1

(1)

The loss on debt extinguishment is not included in interest expense or net investment income

(2)

Excludes the loss on debt extinguishment

(3)

For the nine months ended September 30, 2021, the average is calculated for the period January 1, 2021 through February 12, 2021; the repayment date of the 2022 Notes

On January 14, 2021, we issued $100.0 million in aggregate principal amount of 4.875% fixed-rate notes due 2026 (the “2026 Notes”). The 2026 Notes will mature on March 30, 2026, and may be redeemed in whole or in part at any time or from time to time at our option on or after December 31, 2025 at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest is payable semi-annually beginning September 30, 2021

We used the net proceeds from this offering to fully redeem the 2022 Notes and repay a portion of the amount outstanding under the Credit Facility. As of September 30, 2021, the aggregate carrying amount of the 2026 Notes were approximately $100.0 million.

Prior to their redemption on February 12, 2021, the 2022 Notes were listed on New York Stock Exchange under the trading symbol “SCA”. As of December 31, 2020, the fair value of the 2022 Notes was $49.2 million. The 2026 Notes are institutional, non-traded notes. The carrying value of the 2026 Notes approximates fair value.

In connection with the issuance of the 2026 Notes, we have incurred $2.3 million of fees which are being amortized over the term of the 2026 Notes, of which $2.0 million remains to be amortized as of September 30, 2021. These financing costs are presented on the consolidated statement of assets and liabilities as a deduction from the debt liability.

The following table summarizes the interest expense and deferred financing costs on the 2026 Notes for the three and nine months ended September 30, 2021 and 2020 (dollars in millions):

	For the three months ended						For the nine months ended
	September 30,			September 30,			September 30,			September 30,
	2021			2020			2021			2020
Interest expense	$	1.2		$	-		$	3.5		$	-
Deferred financing costs		0.1			-			0.3			-
Total interest and financing expenses	$	1.3		$	-		$	3.8		$	-

Weighted average interest rate		4.8	%		0.0	%		4.9	%		0.0	%
Effective interest rate (including fee amortization)		5.3	%		0.0	%		5.3	%		0.0	%
Average debt outstanding ⁽¹⁾	$	100.0		$	-		$	100.0		$	-
Cash paid for interest	$	3.5		$	-		$	3.5		$	-

(1) Calculated for the period from January 14, 2021, the date of the 2026 Notes offering, through September 30, 2021.

Off-Balance Sheet Arrangements

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 September 30, 2021 and December 31, 2020, our off-balance sheet arrangements consisted of $27.3 million and $28.9 million, respectively, of unfunded commitments to provide debt financing to 25 and 19 of our portfolio companies, respectively. As of September 30, 2021, we had sufficient liquidity to fund such unfunded commitments (through cash on hand and available borrowings under the Credit Facility) should the need arise.

Regulated Investment Company Status and Dividends

We have elected to be treated as a RIC under Subchapter M of the Code and intend to operate in a manner to qualify annually for the tax treatment applicable to RICs. So long as we maintain our qualification 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 as dividends 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. Distributions 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.

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 maintain our qualification as a RIC, we must also satisfy certain distribution requirements each calendar year in order to avoid a U.S. federal excise tax on our undistributed earnings of a RIC. As of December 31, 2020, the Company had $21,051,549 of undistributed taxable income that was carried forward toward distributions paid during the year ending December 31, 2021.

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 the Credit Facility. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.

In accordance with certain applicable U.S. Treasury regulations and private letter rulings issued by the Internal Revenue Service (the “IRS”), 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, except as described below.

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 U.S. Treasury regulations or private letter rulings. However, we continue to monitor the Company’s liquidity position and the overall economy and will continue to assess whether it would be in the best interests of the Company and its shareholders’ to take advantage of the IRS rulings.

Recent Accounting Pronouncements

See Note 1 to the Consolidated Financial Statements contained herein for a description of recent accounting pronouncements, if any, including the expected dates of adoption and the anticipated impact on the financial statements.

Critical Accounting Policies

See Note 1 to the Consolidated Financial Statements contained herein for a description of critical accounting policies.

Subsequent Events

Credit Facility

The outstanding balance under the Credit Facility as of October 27, 2021 was $185.9 million.

SBA-guaranteed Debentures

The total consolidated balance of SBA-guaranteed debentures outstanding as of October 27, 2021 was $250.0 million.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. As of September 30, 2021 and December 31, 2020, 95% and 93% of the loans in our portfolio bore interest at floating rates, respectively. These floating rate loans typically bear interest in reference to LIBOR, and are indexed to 30-day, 90-day or 120-day LIBOR rates, subject to an interest rate floor. As of September 30, 2021 and December 31, 2020, the weighted average interest rate floor on our floating rate loans was 1.18% and 1.21%, respectively.

Assuming that the Statement of Assets and Liabilities as of September 30, 2021 were to remain constant and no actions were taken to alter the existing interest rate sensitivity, the following table shows the annual impact on net income of changes in interest rates:

(dollars in millions)
Change in Basis Points⁽²⁾	Interest Income		Interest Expense ⁽³⁾			Net Interest Income ⁽¹⁾
Up 200 basis points	$	7.4		(3.8	)	$	3.6
Up 150 basis points		4.1		(2.8	)		1.3
Up 100 basis points		1.5		(1.9	)		(0.4	)
Up 50 basis points		0.5		(0.9	)		(0.4	)

⁽¹⁾Excludes the impact of incentive fees based on pre-incentive fee net investment income. See Note 2 to the Consolidated Financial Statements for more information on the incentive fee.

⁽²⁾The three month LIBOR rate at September 30, 2021 was 13 basis points. This table assumes LIBOR would not fall below zero.

⁽³⁾ Includes the impact of the 25 basis points LIBOR floor in place on the Credit Facility.

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. 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 the three and nine months ended September 30, 2021 and 2020, we did not engage in hedging activities.

Item 4.

Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures

The Company’s management, under the supervision and with the participation of various members of management, including its Chief Executive Officer and its Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Securities and Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report.

(b)

Changes in Internal Control Over Financial Reporting

The Company’s management did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2021 that has materially affected, or is reasonable likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1.

Legal Proceedings

We and our subsidiaries are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us or our subsidiaries. From time to time, we, or our subsidiaries 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

Other than as set forth below, there have been no material changes in the information provided under the heading “Risk Factors” in our Annual Report on Form 10-K as of December 31, 2020. 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.

The COVID-19 pandemic has caused severe disruptions in the global economy, which has had, and may continue to have, a negative impact on our portfolio companies and our business and operations.

As of the filing date of this Quarterly Report, there is a continued outbreak of the COVID-19 pandemic, for which the World Health Organization has declared a global pandemic and the United States has declared a national emergency. Many states, including those in which we and our portfolio companies operate, have issued orders requiring the closure of, or certain restrictions on the operation of, non-essential businesses and/or requiring residents to stay at home. The COVID-19 pandemic and restrictive measures taken to contain or mitigate its spread have caused, and are continuing to cause, business shutdowns, or the re-introduction of business shutdowns, cancellations of events and restrictions on travel, significant reductions in demand for certain goods and services, reductions in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability both globally and in the United States. Such effects will likely continue for the duration of the pandemic, which is uncertain, and for some period thereafter. While several countries, as well as certain states, counties and cities in the United States, began to relax the early public health restrictions with a view to partially or fully reopening their economies, many cities, both globally and in the United States, have since experienced a surge in the reported number of cases, hospitalizations and deaths related to the COVID-19 pandemic. This recent increase in cases led to the re-introduction of restrictions and business shutdowns in certain states, counties and cities in the United States and globally and could continue to lead to such restrictions elsewhere. Beginning in December 2020, the U.S. Food and Drug Administration authorized certain vaccines for emergency use. However, it remains unclear how quickly the vaccines will be distributed or when “herd immunity” will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. Delays in distributing the vaccines or an actual or perceived failure to achieve “herd immunity” could lead people to continue to refrain from participating in the economy at pre-pandemic levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience a recession, and our business and operations, as well as the business and operations of our portfolio companies, could be materially adversely affected by a prolonged recession in the U.S. and other major markets.

The COVID-19 pandemic (including the restrictive measures taken in response thereto) has to date (i) created significant business disruption issues for certain of our portfolio companies, and (ii) materially and adversely impacted the value and performance of certain of our portfolio companies. The COVID-19 pandemic is having a particularly adverse impact on industries in which certain of our portfolio companies operate, including energy, hospitality, travel, retail and restaurants. Certain of our portfolio companies in other industries have also been significantly impacted. The COVID-19 pandemic is continuing as of the filing date of this Quarterly Report, and its extended duration may have further adverse impacts on our portfolio companies after September 30, 2021, including for the reasons described below. Although the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020, which contains provisions intended to mitigate the adverse economic effects of the COVID-19 pandemic, and a second and third stimulus package on December 27, 2020 and March 11, 2021, respectively, which provided $900 billion and $1.9 trillion, respectively, in resources to small businesses and individuals as well as certain industries and state and local governments that have been adversely affected by the COVID-19 pandemic, it is uncertain whether, or how much, our portfolio companies have benefited or may benefit from such legislation or any other subsequent legislation intended to provide financial relief or assistance. As a result of this disruption and the pressures on their liquidity, certain of our portfolio companies have drawn, particularly in the beginning of the COVID-19 pandemic, on a higher percentage of the available revolving loans made available by us. While the levels of draw on available revolving loans have generally returned to pre-COVID-19 pandemic levels, some of our portfolio companies with such available revolving loans may draw or continue to draw on such loans at a higher level than before the COVID-19 pandemic, subject to availability under the terms of such loans.

Our investments in the aerospace & defense industry are subject to unique risks relating to technological developments, regulatory changes and global economic conditions.

Our investments in portfolio companies that operate in the aerospace & defense industry represent 10.16% of our total portfolio as of September 30, 2021. Portfolio companies in the aerospace & defense sector are subject to many risks, including the negative impact of regulation, changing technology, a competitive marketplace and difficulty in obtaining financing. Any of these factors could materially and adversely affect the operations of a portfolio company in this industry and, in turn, impair our ability to timely collect principal and interest payments owed to us.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6. EXHIBITS.

The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits filed with the SEC:

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

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: October 28, 2021	STELLUS CAPITAL INVESTMENT CORPORATION

	By:	/s/ Robert T. Ladd
	Name: Robert T. Ladd
	Title: Chief Executive Officer and President

	By:	/s/ W. Todd Huskinson
	Name: W. Todd Huskinson
	Title: Chief Financial Officer