What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-04 compared with 2020-03-03 · 797 added, 940 removed, 1153 unchanged (60% of the section changed)

13 unchanged sentences

Opinion on the financial statements

We have audited the accompanying consolidated statements of assets and liabilities of Stellus Capital Investment Corporation (a Maryland corporation) and subsidiaries (the “Company”), including the consolidated schedules of investments as of December 31, 2019 and 2018, the related consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes, schedules, and financial highlights (collectively referred to as the “financial statements”).

We have audited the accompanying consolidated statements of assets and liabilities of Stellus Capital Investment Corporation (a Maryland corporation) and subsidiaries (the “Company”), including the consolidated schedule of investments as of December 31, 2020 and 2019, the related consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”) and financial highlights for each of the five years in the period ended December 31, 2020.

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 and the financial highlights for each of the five years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 2, 2020 expressed an unqualified opinion.

Basis for opinion

1 unchanged sentence

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

2 unchanged sentences

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

Our procedures included verification by confirmation of securities as of December 31, 2019 and 2018, by correspondence with the portfolio companies and custodians, or by other appropriate auditing procedures where replies were not received.

We believe that our audits provide a reasonable basis for our opinion.

Critical audit matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Fair Value of Investments

As described further in Note 6 to the financial statements, the Company has investments in portfolio companies with a fair value of $653,424,495.

Investment values are based on prices or valuation techniques that require inputs that are significant and unobservable.

The determination of fair value also requires management judgement.

As such, we identified fair value of investments as a critical audit matter.

The principal considerations for our determination that the fair value of investments is a critical audit matter are that the assets are valued using unobservable inputs, which are considered level 3 in nature under the valuation hierarchy of US GAAP.

In addition, valuation is material to the financial statements, and

there is a high level of judgement in determining the fair value.

As a result, obtaining sufficient appropriate audit evidence related to the fair value measurement required significant auditor judgement.

Our audit procedures related to the fair value of investments included the following, among others.

Testing the design and operating effectiveness of relevant controls over management’s process relating to the fair value measurement of investments.

With the assistance of internal valuation specialists to evaluate and test management’s process to develop valuation estimates, we performed audit procedures to determine that the data, methods, and assumptions used to determine investment fair value was reasonable.

We also tested the mathematical accuracy of investment valuations.

Certain key inputs/assumptions tested by us included the following:

Discount rate

Credit yields

Market multiples,

Revenue and EBITDA multiples

Weighting between valuation techniques,

In testing the inputs/assumptions above, we considered available third-party market information, current economic conditions, and client specific source information.

/s/ GRANT THORNTON LLP

2 unchanged sentences

March 4, 2021

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Stellus Capital Investment Corporation

Opinion on internal control over financial reporting

We have audited the internal control over financial reporting of Stellus Capital Investment Corporation (a Maryland corporation) and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in the 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control — Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2019, and our report dated March 2, 2020 expressed an unqualified opinion on those financial statements.

Basis for opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and limitations of internal control over financial reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ GRANT THORNTON LLP

Dallas, Texas

March 2, 2020

TABLE OF CONTENTS

2 unchanged sentences

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

Non-controlled, affiliated investments, at fair value (amortized cost of $0

and $52,185, respectively)

Non-controlled, non-affiliated investments, at fair value (amortized cost of $658,628,966 and $642,707,824, respectively)

15 unchanged sentences

Administrative services payable

Deferred tax liability (Note 13)

Deferred tax liability

Income tax payable

8 unchanged sentences

Net Asset Value Per Share

See accompanying notes to these consolidated financial statements.

TABLE OF CONTENTS

9 unchanged sentences

Income incentive fees

Capital gains incentive fees

Capital gains incentive (reversal) fees

Professional fees

5 unchanged sentences

Total Operating Expenses

Loss on extinguishment of debt

Net Investment Income

Net realized gain on non-controlled, non-affiliated investments

Tax provision on realized gain on investments

Net realized (loss) gain on non-controlled, non-affiliated investments

(10,129,859 )

Tax provision on realized gain on investment

Net change in unrealized appreciation (depreciation) on non-controlled, non-affiliated investments

(15,501,951 )

Net change in unrealized appreciation (depreciation) on non-controlled, affiliated investments

Benefit (provision) for taxes on net unrealized gain on investments in taxable subsidiaries

Net Increase in Net Assets Resulting from Operations

Net change in unrealized appreciation on non-controlled, affiliated investments

Provision for taxes on net unrealized gain on investments

Net Increase in Net Assets

Resulting from Operations

Net Investment Income Per Share

Net Increase in Net Assets Resulting from Operations Per Share

Net Increase in Net Assets Resulting from Operations Per

Weighted Average Shares of Common Stock

Distributions Per Share

See accompanying notes to these consolidated financial statements.

TABLE OF CONTENTS

3 unchanged sentences

Net investment income

Net realized gain on non-controlled, non-affiliated investments

Net realized (loss) gain on non-controlled,

non-affiliated investments

(10,129,859 )

Tax provision on realized gain on investments

1 unchanged sentence

(15,501,951 )

Net change in unrealized appreciation (depreciation) on non-controlled, affiliated investments

Benefit (provision) for taxes on unrealized appreciation on investments

Net change in unrealized appreciation on

non-controlled, affiliated investments

Provision for taxes on unrealized appreciation on investments

Net Increase in Net Assets Resulting from Operations

14 unchanged sentences

Partial share transactions

Net Increase in Net Assets Resulting From Capital Share Transactions

Net Increase in Net Assets Resulting From

Capital Share Transactions

Total Increase in Net Assets

1 unchanged sentence

Net Assets at End of Period

See accompanying notes to these consolidated financial statements.

TABLE OF CONTENTS

3 unchanged sentences

Net increase in net assets resulting from operations

Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:

Adjustments to reconcile net increase in net assets from operations to net cash used in operating activities:

Purchases of investments

2 unchanged sentences

(272,927,459 )

Proceeds from sales and repayments of investments

Net change in unrealized depreciation (appreciation) on investments

Proceeds from sales and repayments of

Net change in unrealized (appreciation) depreciation

on investments

Increase in investments due to PIK

4 unchanged sentences

Amortization of loan fees on SBA-guaranteed debentures

Net realized gain on investments

Net realized loss (gain) on investments

(19,565,903 )

Loss on extinguishment of debt

Changes in other assets and liabilities

1 unchanged sentence

Decrease (increase) in other receivable

Decrease (increase) in prepaid expenses

(Increase) decrease in prepaid expenses

Increase in management fees payable

Increase (decrease) in incentive fees payable

Increase in capital gains incentive fees payable

Increase in administrative services payable

Increase in interest payable

Increase in unearned revenue

Increase in income tax payable

Increase (decrease) in other accrued expenses and liabilities

Net Cash Provided by (Used in) Operating Activities

(Decrease) increase in incentive fees payable

(Decrease) increase in capital gains incentive fees payable

(Decrease) increase in administrative services payable

(Decrease) increase in interest payable

(Decrease) Increase in unearned revenue

(Decrease) increase in income tax payable

(Decrease) increase in other accrued expenses and liabilities

Net Cash Used In Operating Activities

(93,286,104 )

4 unchanged sentences

Offering costs paid for common stock

Proceeds from notes issued

Financing costs paid for Notes issued

Repayments on Notes issued

(25,000,000 )

Stockholder distributions paid

2 unchanged sentences

(21,594,863 )

Proceeds from SBA Debentures

Financing costs paid on SBA Debentures

Proceeds from SBA-guaranteed debentures

Financing costs paid on SBA-guaranteed debentures

Borrowings under Credit Facility

5 unchanged sentences

Partial share transactions

Net Cash Provided by (Used in) Financing Activities

Net Increase (Decrease) in Cash and Cash Equivalents

Net Cash Provided by Financing Activities

Net Increase in Cash and Cash Equivalents

Cash and cash equivalents balance at beginning of period

4 unchanged sentences

Shares issued pursuant to Dividend Reinvestment Plan

Increase in distribution payable

(Decrease) increase in dividends payable

Increase (decrease) in deferred offering costs

See accompanying notes to these consolidated financial statements.

TABLE OF CONTENTS

3 unchanged sentences

Headquarters/

Fair Value (1)

Non-controlled, non-affiliated investments

Abrasive Products & Equipment, LLC, et al

Deer Park, TX

Term Loan (SBIC)

Chemicals, Plastics, &

APE Holdings, LLC Class A Common Units

375,000 units

Adams Publishing Group, LLC

1 unchanged sentence

Delayed Draw Term Loan

Advanced Barrier Extrusions,

Advanced Barrier Extrusions, LLC

Rhinelander, WI

Term Loan (SBIC)

Packaging & Glass

GP ABX Holdings Partnership,

250,000 units

Apex Environmental Resources Holdings, LLC

Amsterdam, OH

Environmental

Preferred Units

APG Intermediate Sub 2 Corp.

Castle Rock, CO

Aerospace & Defense

APG Holdings, LLC Class A Preferred Units

1,127,652 units

Atmosphere Aggregator Holdings II,

254,250 units

GP ABX Holdings Partnership, L.P.

APE Holdings, LLC

Deer Park, TX

Class A Common

Atmosphere Aggregator Holdings II, LP

Stratose Aggregator Holdings, LP Common Units

750,000 units

ASC Communications, LLC

Term Loan (SBIC)

Pharmaceuticals

ASC Communications Holdings,

LLC Class A Preferred Units

73,529 shares

ASC Communications Holdings, LLC Class A Preferred Units (SBIC)

BFC Solmetex, LLC

1 unchanged sentence

Environmental

Term Loan (SBIC)

Bonded Filter Co.

LLC, Term Loan (SBIC)

LLC, Term Loan

BW DME Acquisition, LLC

Term Loan (SBIC)

(2)(13)(22)

Pharmaceuticals

BW DME Holdings, LLC, Term

BW DME Holdings, LLC Class A-1 Preferred Units

BW DME Holdings, LLC, Term Loan

BW DME Holdings, LLC Class A-1

Preferred Units

1,000,000 shares

BW DME Holdings, LLC Class A-2 Preferred Units

BW DME Holdings, LLC Class A-2

Preferred Units

937,261 shares

Café Valley, Inc.

Beverage, Food, &

CF Topco LLC, Common

See accompanying notes to these consolidated financial statements.

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2019

Headquarters/

Protection Plus, Inc.

Murrysville, PA

Term Loan (SBIC)

CPP Holdings LLC Class A Common Units

149,828 shares

Food, & Tobacco

CF Topco LLC, Common Units

Colford Capital Holdings, LLC

Preferred Units

Condor Borrower, LLC

Condor Top Holdco Limited Convertible Preferred Shares

500,000 shares

Condor Holdings Limited Preferred Shares, Class B

500,000 shares

CommentSold, LLC

Huntsville, AL

Headquarters/

Fair Value (1)

CompleteCase, LLC

Term Loan (SBIC II)

CompleteCase Holdings, Inc.

Common Units (SBIC II)

CompleteCase Holdings, Inc.

Series A Preferred Units (SBIC II)

Convergence Technologies, Inc.

Indianpolis, IN

Term Loan (SBIC)

Term Loan B (SBIC)

Delayed Draw Term Loan

Tailwind Core Investor, LLC Class A Preferred Units

Data Centrum Communications,

Health Monitor Holdings, LLC

Seires A Preferred Units

Tailwind Core Investor, LLC Class A

Preferred Units

Data Centrum Communications, Inc.

Health Monitor Holdings, LLC Seires

A Preferred Units

1,000,000 shares

1 unchanged sentence

Class A Common Units

Chemicals, Plastics, &

DRS Holdings III, Inc.

Consumer Goods:

DTE Enterprises, LLC

3 unchanged sentences

723,684 shares

Elliott Aviation, LLC

SP EA Holdings, LLC Preferred Shares, Class A

900,000 shares

Empirix Holdings I, Inc.

7 unchanged sentences

Term Loan (SBIC)

SP ELS Holdings LLC, Class A

SP ELS Holdings LLC, Class A Common Units

1,069,143 shares

EOS Fitness Holdings,

EOS Fitness Holdings, LLC

Preferred Units

Hotel, Gaming, &

Class B Common Units

See accompanying notes to these consolidated financial statements.

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2019

Headquarters/

Fair Value (1)

Fast Growing Trees, LLC

Fort Mill, SC

Term Loan (SBIC)

SP FGT Holdings, LLC, Class A

SP FGT Holdings, LLC, Class A Common

1,000,000 shares

1 unchanged sentence

Delayed Draw Term Loan

Furniture Factory Outlet, LLC

Fort Smith, AR

Consumer Goods:

Furniture Factory Holdings, LLC Term Loan

Furniture Factory Ultimate Holding, LP Common

13,445 shares

GK Holdings, Inc.

2 unchanged sentences

GS HVAM Intermediate, LLC

Beverage, Food, &

HV GS Acquisition, LP Class A

Grupo HIMA San Pablo, Inc.,

HV GS Acquisition, LP Class A Interests

Grupo HIMA San Pablo, Inc., et al

Pharmaceuticals

ICD Intermediate Holdco 2, LLC

I2P Holdings, LLC

Cleveland, OH

Series A Preferred

750,000 shares

Ian, Evan & Alexander Corporation

EC Defense Holding, Class B Units (SBIC)

ICD Holdings, LLC

San Francisco, CA

Term Loan (SBIC)

ICD Holdings, LLC, Class A Preferred

Integrated Oncology Network,

Newport Beach, CA

Class A Preferred

Industry Dive, Inc.

Washington, D.C.

Integrated Oncology Network, LLC

Newport Beach,

Pharmaceuticals

Interstate Waste Services, Inc.

Amsterdam, OH

Environmental

Intuitive Health, LLC

1 unchanged sentence

Pharmaceuticals

Legacy Parent, Inc.

Class A Common

Invincible Boat Company, LLC

1 unchanged sentence

Term Loan (SBIC II)

Consumer Goods:

Headquarters/

Fair Value (1)

Invincible Parent Holdco, LLC Class A Common Units

1 unchanged sentence

San Francisco, CA

Consumer Goods:

Term Loan (SBIC)

Watkins Holdings, Inc.

Class A Preferred

See accompanying notes to these consolidated financial statements.

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2019

Headquarters/

Jurassic Acquisiton Corp.

Metals & Mining

Kelleyamerit Holdings, Inc.

Walnut Creek, CA

Term Loan (SBIC)

(2)(13)(22)

KidKraft, Inc.

Consumer Goods:

KidKraft Group Holdings, LLC Preferred B Units

4,000,000 shares

Lynx FBO Operating, LLC

Aerospace & Defense

Lynx FBO Investments, LLC Class A-1 Common Units

Madison Logic, Inc.

Term Loan (SBIC)

Broadcasting &

Madison Logic Holdings, Inc.

7 unchanged sentences

New Lenox, IL

Capital Equipment

Cool Supply Holdings, LLC Class A Common Units

Delayed Draw Term Loan

Cool Supply Holdings, LLC Class A

500,000 units

National Trench Safety, LLC,

Term Loan (SBIC)

Construction & Building

NTS Investors, LP Class A Common Units

Naumann/Hobbs Material Handling

Corporation II, Inc.

National Trench Safety, LLC, et al

Construction &

NTS Investors, LP Class A Common

Naumann/Hobbs Material Handling Corporation II, Inc.

Term Loan (SBIC II)

NGS US Finco, LLC

Term Loan (SBIC)

NS Group Holding Company, LLC Class A Common

NuMet Machining Techniques,

Headquarters/

Fair Value (1)

NS Group Holding Company, LLC Class A Common Units

NuMet Machining Techniques, LLC

Birmingham, UK

Aerospace & Defense

Bromford Industries Limited Term Loan

Bromford Industries Limited Term

Bromford Holdings, L.P.

Membership Units

Class A Membership

1,000,000 shares

4 unchanged sentences

12,500 shares

PCP MT Aggregator Holdings,

PCP MT Aggregator Holdings, L.P.

Oak Brook, IL

Common LP Units

750,000 shares

See accompanying notes to these consolidated financial statements.

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2019

Headquarters/

PCS Software, Inc.

Shenandoah, Tx

Term Loan (SBIC)

Transportation

Delayed Draw Term Loan

PCS Software Holdings, LLC Class A

Preferred Units

325,000 shares

PCS Software Holdings, LLC Class A-2 Preferred Units

2 unchanged sentences

Term Loan (SBIC II)

Capital Equipment

Premiere Digital Services, Inc.

Los Angeles, CA

Term Loan (SBIC)

Premiere Digital Holdings, Inc.,

Preferred Stock

Price for Profit, LLC

Cleveland, OH

Term Loan (SBIC)

I2P Holdings, LLC, Series A Preferred

750,000 shares

(2)(13)(22)

Broadcasting &

Premiere Digital Holdings, Inc., Common Stock

Premiere Digital Holdings, Inc., Preferred Stock

Protect America, Inc.

Term Loan (SBIC)

(2)(6)(26)(35)

Sales Benchmark Index, LLC

SBI Holdings Investments, LLC Class A Preferred Units

Skopos Financial, LLC

Skopos Financial Group, LLC Series A Preferred Units

1,120,684 units

Specified Air Solutions, LLC

Class A Common Units

Construction &

Tarrytown, NY

Term Loan (SBIC)

Broadcasting &

SQAD Holdco, Inc.

Preferred Shares, Series A (SBIC)

Preferred Shares,

Series A (SBIC)

Headquarters/

Fair Value (1)

SQAD Holdco, Inc.

Common Shares (SBIC)

Common Shares

TechInsights, Inc.

Ottawa, Ontario

High Tech Industries

(5)(13)(22)

Time Manufacturing Acquisition, LLC

Capital Equipment

Time Manufacturing Investments, LLC Class A Common Units

TFH Reliability, LLC

Term Loan (SBIC)

Chemicals, Plastics, &

TFH Reliability Group, LLC Class A Common Units

TFH Reliability Group, LLC Class A-1 Units

27,129 shares

TFH Reliability Group, LLC Class A

250,000 shares

Auto Sales, Inc.

Lawrenceville, GA

USASF Blocker II, LLC Common Units

USASF Blocker II, LLC Common

USASF Blocker III, LLC Series C Preferred Units

USASF Blocker LLC Common

See accompanying notes to these consolidated financial statements.

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2019

Headquarters/

VRI Intermediate Holdings, LLC

Term Loan (SBIC)

USASF Blocker IV, LLC Units

USASF Blocker LLC Common Units

Venbrook Buyer, LLC

Los Angeles, CA

Delayed Draw Term Loan

Venbrook Holdings, LLC Common Units

534,959 shares

Vortex Companies, LLC

Term Loan (SBIC II)

Environmental

VRI Ultimate Holdings, LLC

Class A Preferred Units

Pharmaceuticals

VRI Ultimate Holdings, LLC Class A

Preferred Units

326,797 shares

Whisps Acquisiton Corp.

Beverage, Food, &

Whisps Holding LP Class A Common

Whisps Holding LP Class A Common Units

500,000 shares

1 unchanged sentence

Salt Lake City, UT

Membership Units

Beverage, Food, &

Total Non-controlled, non-affiliated investments

Net Investments

LIABILITIES IN EXCESS OF OTHER

LIABILITIES IN EXCESS OF OTHER ASSETS

(380,063,846 )

See Note 1 of the Notes to the Consolidated Financial Statements for a discussion of the methodologies used to value securities in the portfolio.

Investments held by the SBIC subsidiaries (as defined in Note 1), which include $8,445,923 of cash and $222,009,613 of investments (at cost), are excluded from the obligations to the lenders of the Credit Facility as defined in Note 9.

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 investments held by the SBIC subsidiaries.

Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $669,231, with an interest rate of LIBOR plus 7.50% and a maturity of June 30, 2023.

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).

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).

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.

6 unchanged sentences

The percentage of PIK interest shown is the maximum PIK interest that can be elected by the issuer.

Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $666,666, with an interest rate of LIBOR plus 6.25% and a maturity of June 29, 2022.

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.

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 5.75% and a maturity of August 8, 2023.

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.

Investments held by the SBIC II subsidiary (as defined in Note 1), which include $477,392 of cash and $22,498,836 of investments (at cost), are excluded from the obligations to the lenders of the Credit Facility as defined in Note 9.

See accompanying notes to these consolidated financial statements.

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2019

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.

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.

2 unchanged sentences

This investment is accruing an unused commitment fee of 0.50% per annum.

These loans have LIBOR floors that are lower than the applicable LIBOR rates;

These loans have LIBOR floors which are lower than the applicable LIBOR rates;

therefore, the floors are not in effect.

1 unchanged sentence

therefore, the floors are not in effect.

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.

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.

2 unchanged sentences

This investment is accruing an unused commitment fee of 0.50% per annum.

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 6.50% and a maturity of January 31, 2023.

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.

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.

This investment is accruing an unused commitment fee of 0.50% per annum.

Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $488,998, with an interest rate of LIBOR plus 6.50% and a maturity of September 26, 2023.

The Company has full discretion to fund the revolver commitment.

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.

1 unchanged sentence

This investment is accruing an unused commitment fee of 1.00% per annum

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.

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.

This loan is a unitranche investment.

Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $1,662,592, with an interest rate of LIBOR plus 6.50% and a maturity of September 26, 2023.

This investment is not accruing an unused commitment fee.

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.

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.

1 unchanged sentence

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.

This investment is accruing an unused commitment fee of 0.50% per annum.

See accompanying notes to these consolidated financial statements.

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2019

The Company has full discretion to fund the delayed draw term loan commitment.

Investment has been on non-accrual since June 28, 2019.

Maturity date is under on-going negotiations with portfolio company and other lenders, if applicable.

Maturity date is under ongoing negotiations with portfolio company and other lenders.

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.

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.

Excluded from the investment is an undrawn delated 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.

These loans are last-out term loans with contractual rates lower than the applicable LIBOR rates;

therefore, the floors are in effect.

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.

3 unchanged sentences

This investment is accruing an unused commitment fee of 0.50% per annum.

Excluded from the investment is an undrawn delated draw term loan commitment in an amount not to exceed $3,750,000, with an interest rate of LIBOR plus 5.75% and a maturity of March 31, 2020.

This investment is not accruing an unused commitment fee.

Excluded from the investment is an undrawn delated draw term loan commitment in an amount not to exceed $1,590,909, with an interest rate of LIBOR plus 5.75% and a maturity of October 2, 2024.

Investment has been on non-accrual since January 1, 2020.

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.

1 unchanged sentence

therefore, the floors are in effect.

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.

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.

Instrument was restructured into a first lien term loan and preferred equity on April 3, 2021.

Abbreviation Legend

1 unchanged sentence

Euro — Euro Dollar

See accompanying notes to these consolidated financial statements.

Stellus Capital Investment Corporation

2 unchanged sentences

Headquarters/

Non-controlled, affiliated investments

Glori Energy Production Inc.

Glori Energy Production, LLC Class A Common Units

Subtotal Non-controlled, affiliated investments

Non-controlled, non-affiliated

Abrasive Products & Equipment,

Non-controlled, non-affiliated investments

Abrasive Products & Equipment, LLC,

Deer Park, TX

Term Loan (SBIC)

Plastics, & Rubber

APE Holdings, LLC Class A

375,000 units

Adams Publishing Group,

APE Holdings, LLC Class A Common Units

Adams Publishing Group, LLC

Greenville, TN

Delayed Draw Term Loan

Advanced Barrier Extrusions, LLC

1 unchanged sentence

Term Loan (SBIC)

GP ABX Holdings

Partnership, L.P.

250,000 units

Apex Environmental Resources

Holdings, LLC

GP ABX Holdings Partnership, L.P.

Apex Environmental Resources Holdings,

Amsterdam, OH

3 unchanged sentences

Castle Rock, CO

APG Holdings, LLC Class A

Preferred Units

Atmosphere Aggregator Holdings II, LP

Atmosphere Aggregator Holdings, LP Common Units

APG Holdings, LLC Class A Preferred Units

Atmosphere Aggregator Holdings II,

Stratose Aggregator Holdings, LP

ASC Communications, LLC

1 unchanged sentence

Pharmaceuticals

ASC Communications Holdings, LLC Class A Preferred Units (SBIC)

73,529 shares

Beneplace, LLC

Term Loan (SBIC)

Beneplace Holdings, LLC Preferred

ASC Communications Holdings, LLC Class A Preferred Units

BFC Solmetex, LLC

4 unchanged sentences

LLC, Term Loan (SBIC)

See accompanying notes to these consolidated financial statements.

Stellus Capital Investment Corporation

Consolidated Schedule of Investments (continued)

December 31, 2018

Headquarters/

BW DME Acquisition, LLC

Term Loan (SBIC)

(2)(13)(22)

Pharmaceuticals

BW DME Holdings, LLC, Term Loan (SBIC)

BW DME Holdings, LLC Class A-1 Preferred

BW DME Holdings, LLC Class A-2 Preferred

Protection Plus,

BW DME Holdings, LLC, Term Loan

BW DME Holdings, LLC Class A-1 Preferred Units

See accompanying notes to these consolidated financial statements.

Headquarters/

BW DME Holdings, LLC Class A-2 Preferred Units

Café Valley, Inc.

CF Topco LLC, Common Units

Protection Plus, Inc.

Murrysville, PA

Term Loan (SBIC)

CPP Holdings LLC Class A

Catapult Learning, Inc.

Delayed Draw Term Loan

Colford Capital Holdings,

CPP Holdings LLC Class A Common Units

Colford Capital Holdings, LLC

Preferred Units

Condor Borrower, LLC

Condor Top Holdco Limited

Convertible Preferred

Condor Holdings Limited Preferred Shares,

Convergence Technologies,

Condor Top Holdco Limited Convertible Preferred Shares

Condor Holdings Limited Preferred Shares, Class B

Convergence Technologies, Inc.

Indianpolis, IN

Term Loan (SBIC)

Tailwind Core Investor, LLC

Class A Preferred Units

Delayed Draw Term Loan

Tailwind Core Investor, LLC Class A Preferred Units

Data Centrum Communications, Inc.

Health Monitor Holdings, LLC Seires A Preferred Units

Douglas Products Group, LP

Class A Common

Chemicals, Plastics, &

Dream II Holdings, LLC

Boca Raton, FL

Class A Common

Class A Common Units

DRS Holdings III, Inc.

DTE Enterprises, LLC

1 unchanged sentence

DTE Holding Company, LLC Preferred Shares, Class AA

Billerica, MA

Empirix Holdings I, Inc.

Common Shares,

Empirix Holdings I, Inc.

Common Shares,

Energy Labs Inc.

Billerica, MA

Common Shares, Class A

Common Shares, Class B

Energy Labs Holding Corp.

See accompanying notes to these consolidated financial statements.

Stellus Capital Investment Corporation

Consolidated Schedule of Investments (continued)

December 31, 2018

Headquarters/

EOS Fitness OPCO Holdings,

Exacta Land Surveyors, LLC

Cleveland, OH

Term Loan (SBIC)

Hotel, Gaming, &

EOS Fitness Holdings, LLC

Class A Preferred Units

SP ELS Holdings LLC, Class A Common Units

EOS Fitness Holdings, LLC

Preferred Units

Class B Common Units

Fast Growing Tree, LLC

Fast Growing Trees, LLC

Fort Mill, SC

1 unchanged sentence

SP FGT Holdings, LLC, Class A Common

Furniture Factory Outlet,

FB Topco, Inc.

Delayed Draw Term Loan

Furniture Factory Outlet, LLC

Fort Smith, AR

Furniture Factory Holdings,

LLC Term Loan

Furniture Factory Ultimate Holdings, LP Common

Furniture Factory Holdings, LLC

Furniture Factory Ultimate Holding, LP Common Units

GK Holdings, Inc.

General LED OPCO, LLC

Good Source Solutions, Inc.

HV GS Acquisition, LLC Class A Preferred Units

HV GS Acquisition, LLC Class B Common Units

28,125 shares

Grupo HIMA San Pablo, Inc.,

San Antonio, TX

GS HVAM Intermediate, LLC

HV GS Acquisition, LP Class A Interests

Grupo HIMA San Pablo, Inc., et al

Pharmaceuticals

ICD Intermediate Holdco 2, LLC

San Francisco,

San Francisco, CA

Term Loan (SBIC)

ICD Holdings, LLC, Class A

ICD Holdings, LLC, Class A Preferred

Integrated Oncology Network, LLC

Pharmaceuticals

Intuitive Health, LLC

Pharmaceuticals

Invincible Boat Company, LLC

Opa Locka, FL

Term Loan (SBIC II)

See accompanying notes to these consolidated financial statements.

Headquarters/

Invincible Parent Holdco, LLC Class A Common Units

San Francisco,

2 unchanged sentences

Class A Preferred

Jurassic Intermediate Holdings

Jurassic Acquisiton Corp.

Kelleyamerit Holdings, Inc.

Walnut Creek,

Walnut Creek, CA

Term Loan (SBIC)

See accompanying notes to these consolidated financial statements.

Stellus Capital Investment Corporation

Consolidated Schedule of Investments (continued)

December 31, 2018

Headquarters/

Keais Records Service, LLC

Keais Holdings, LLC Class A

(2)(13)(22)

KidKraft, Inc.

Livingston International, Inc.

Transportation:

Lynx FBO Operating, LLC

Lynx FBO Investments, LLC Class A-1 Common Units

Madison Logic, Inc.

2 unchanged sentences

Madison Logic Holdings, Inc.

Common Stock (SBIC)

Madison Logic Holdings, Inc.

Series A Preferred Stock (SBIC)

Magdata Intermediate Holdings, LLC

Mobileum, Inc.

Mobile Acquisition Holdings, LP Class A-2 Common Units

MTC Parent, L.P.

Oak Brook, IL

Series A Preferred Stock

Mobile Acquisition Holdings, LP

Santa Clara, CA

Class A Common Units

National Trench Safety, LLC,

Munch’s Supply, LLC

New Lenox, IL

Cool Supply Holdings, LLC Class A Common Units

National Trench Safety, LLC, et al

Term Loan (SBIC)

1 unchanged sentence

NTS Investors, LP Class A Common Units

Naumann/Hobbs Material Handling

Corporation II, Inc.

Term Loan (SBIC II)

NGS US Finco, LLC

Term Loan (SBIC)

NS Group Holding Company, LLC Class A Common Units

See accompanying notes to these consolidated financial statements.

Headquarters/

NuMet Machining Techniques, LLC

Bromford Industries Limited Term

Bromford Holdings, L.P.

Class A Membership Units

Nutritional Medicinals, LLC

1 unchanged sentence

Pharmaceuticals

Functional Aggregator, LLC

OGS Holdings, Inc.

Series A Convertible Preferred Stock

11,521 shares

Premiere Digital Services,

Functional Aggregator, LLC Common

PCP MT Aggregator Holdings, L.P.

Oak Brook, IL

Common LP Units

PCS Software, Inc.

Shenandoah, Tx

Term Loan (SBIC)

Transportation &

PCS Software Holdings, LLC Class A Preferred Units

Pioneer Transformers, L.P.

Term Loan (SBIC II)

Premiere Digital Services, Inc.

Los Angeles, CA

Term Loan (SBIC)

(2)(13)(22)

Broadcasting &

4 unchanged sentences

Term Loan (SBIC)

I2P Holdings, LLC, Series A

See accompanying notes to these consolidated financial statements.

Stellus Capital Investment Corporation

Consolidated Schedule of Investments (continued)

December 31, 2018

Headquarters/

I2P Holdings, LLC, Series A Preferred

Protect America, Inc.

Term Loan (SBIC)

Refac Optical Group, et al

Blackwood, NJ

(2)(6)(12)(26)

(6)(9)(12)(26)

Resolute Industrial, LLC

Resolute Industrial Holdings,

LLC Class A Preferred

Roberts-Gordon, LLC

Skopos Financial, LLC

Skopos Financial Group, LLC Series A Preferred Units

Specified Air Solutions, LLC

1 unchanged sentence

Construction &

Skopos Financial, LLC

Skopos Financial Group, LLC Class A Units

Tarrytown, NY

Term Loan (SBIC)

Broadcasting &

SQAD Holdco, Inc.

Preferred Shares, Series A (SBIC)

Common Shares

SQAD Holdco, Inc.

Common Shares (SBIC)

TechInsights, Inc.

Ottawa, Ontario

(5)(13)(22)

Time Manufacturing Acquisition, LLC

Time Manufacturing

Investments, LLC Class A

TFH Reliability,

TFH Reliability Group, LLC

Class A Common Units

See accompanying notes to these consolidated financial statements.

Headquarters/

Time Manufacturing Investments,

LLC Class A Common Units

TFH Reliability, LLC

Term Loan (SBIC)

TFH Reliability Group, LLC Class A Common Units

Auto Sales, Inc.

1 unchanged sentence

USASF Blocker II, LLC Common

USASF Blocker III, LLC Series C Preferred

USASF Blocker III, LLC Series C

Preferred Units

USASF Blocker LLC Common Units

2 unchanged sentences

Pharmaceuticals

VRI Ultimate Holdings, LLC

Class A Preferred Units

See accompanying notes to these consolidated financial statements.

Stellus Capital Investment Corporation

Consolidated Schedule of Investments (continued)

December 31, 2018

Headquarters/

Wise Holding Corporation

Salt Lake City,

Delayed Draw Term Loan

VRI Ultimate Holdings, LLC Class A Preferred Units

Whisps Acquisiton Corp.

Whisps Holding LP Class A Common Units

Wise Parent Company, LLC

2 unchanged sentences

Net Investments

LIABILITIES IN EXCESS OF

LIABILITIES IN EXCESS OF OTHER ASSETS

(358,376,904 )

See Note 1 of the Notes to the Consolidated Financial Statements for a discussion of the methodologies used to value securities in the portfolio.

Investments held by the SBIC subsidiary, which include $13,410,706 of cash and $214,114,498 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, as defined in Note 9, are secured by a first priority security interest in all investments and cash and cash equivalents, except for investments held by the SBIC Subsidiary.

Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $669,231, with an interest rate of LIBOR plus 7.50% and a maturity of June 30, 2023.

7 unchanged sentences

The percentage of PIK interest shown is the maximum PIK interest that can be elected by the issuer.

See accompanying notes to these consolidated financial statements.

Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $666,666, with an interest rate of LIBOR plus 6.25% and a maturity of June 29, 2022.

2 unchanged sentences

This investment is accruing an unused commitment fee of 0.50% per annum.

Investment has been on non-accrual since November 30, 2018.

Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $3,669,681 with an interest rate of LIBOR plus 5.50% and a maturity of October 18, 2023.

Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $872,727, 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.

Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $520,000, with an interest rate of LIBOR plus 8.00% and a maturity of September 30, 2018.

This investment is not accruing an unused commitment fee.

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 July 1, 2024.

This investment is accruing an unused commitment fee of 0.50% per annum.

These loans have LIBOR floors that are lower than the applicable LIBOR rates;

therefore, the floors are not in effect.

See accompanying notes to these consolidated financial statements.

Stellus Capital Investment Corporation

Consolidated Schedule of Investments (continued)

December 31, 2018

These loans are last-out term loans with contractual rates higher than the applicable LIBOR rates;

therefore, the floors are not in effect.

Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $5,357,143, with an interest rate of LIBOR plus 6.75% and a maturity of August 30, 2024.

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.

Investment has been on non-accrual since November 1, 2017.

Investment has been on non-accrual since October 31, 2017.

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 7.75% and a maturity of February 5, 2023.

6 unchanged sentences

This investment is accruing an unused commitment fee of 0.50% per annum.

Investment has been on non-accrual since March 29, 2018.

Investment has been on non-accrual since October 31, 2018.

Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $2,222,222, 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

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.

This loan is a unitranche investment.

Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $1,662,592, with an interest rate of LIBOR plus 6.50% and a maturity of September 26, 2023.

This investment is accruing an unused commitment fee of 0.50% per annum.

This investment is not accruing an unused commitment fee.

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.

Maturity date is under on-going negotiations with the portfolio company and other lenders, if applicable.

Payments on the Company’s investment in Refac Optical Group are currently past due.

See accompanying notes to these consolidated financial statements.

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.

This investment is accruing an unused commitment fee of 0.50% per annum.

Investment has been on non-accrual since June 28, 2019.

Maturity date is under on-going negotiations with portfolio company and other lenders, if applicable.

Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $852,273, 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.

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.

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.

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.

Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $2,644,550, 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.

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 5.75% and a maturity of March 31, 2020.

This investment is not accruing an unused commitment fee.

Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $1,590,909, 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 1.00% per annum.

These loans have LIBOR Floors which are higher than the current applicable LIBOR rates;

therefore, the floors are in effect.

Abbreviation Legend

10 unchanged sentences

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 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.

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.

3 unchanged sentences

See Note 4 for further details.

The Company has established wholly owned subsidiaries:

SCIC — Consolidated Blocker 1, 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 — 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 Company has established the following wholly owned subsidiaries:

SCIC — Consolidated Blocker 1, 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 1, 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, we 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.

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.

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, we formed Stellus Capital SBIC II, LP (The “SBIC II subsidiary”), a Delaware limited partnership, and its general partner, Stellus Capital SBIC II GP, LLC, a Delaware limited liability company, as wholly owned subsidiaries of the Company.

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 Small Business Investment Company Act of 1958, as amended.

The SBIC II subsidiary and its general partner are consolidated for U.S.

On November 29, 2018, the Company formed Stellus Capital SBIC II, LP (the “SBIC II subsidiary”), 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.

4 unchanged sentences

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

STELLUS CAPITAL INVESTMENT CORPORATION

1 unchanged sentence

December 31, 2020

debentures issued by the SBIC subsidiaries upon an event of default.

by the SBIC subsidiaries upon an event of default.

For the SBIC subsidiary, SBA regulations currently 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.

As of both December 31, 2019 and 2018, the SBIC subsidiary had $75,000,000 of regulatory capital, as such term is defined by the SBA.

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”, as such term is defined by the SBA.

As of both December 31, 2020 and 2019, the SBIC subsidiary had $75,000,000 of regulatory capital.

As of both December 31, 2020 and 2019, the SBIC subsidiary had $150,000,000 of SBA-guaranteed debentures outstanding.

As of December 31, 2019, which was the end of its the first year of operations, the SBIC II subsidiary had $20,000,000 in regulatory capital and $11,000,000 of SBA-guaranteed debentures outstanding.

See footnote (2) of the Consolidated Schedule of Investments for additional information regarding the treatment of investments in the SBIC subsidiaries with respect to the Credit Facility.

As a BDC, we are required to comply with certain regulatory requirements.

Prior to June 28, 2018, we were only allowed to employ leverage to the extent that our asset coverage, as defined in the 1940 Act, was equal to at least 200% after giving effect to such leverage.

As of December 31, 2020 and 2019, the SBIC II subsidiary had $40,000,000 and $20,000,000 in regulatory capital, respectively, and $26,500,000 and $11,000,000 of SBA-guaranteed debentures outstanding, respectively.

See footnote (2) of the Consolidated Schedule of Investments for additional information regarding the treatment of investments in the SBIC subsidiaries with respect to the Credit Facility (as defined in Note 11).

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 Investment Company Act of 1940, as amended (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.

The Board also approved the submission of a proposal to approve the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, which was approved by shareholders at the Company’s 2018 annual meeting of stockholders.

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.

7 unchanged sentences

Basis of Presentation

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with generally accepted accounting principles in the United States of America (“GAAP”) and pursuant to the requirements for reporting on Form 10-K and Article 10 of regulation S-X.

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with generally accepted accounting principles in the U.S.

GAAP and pursuant to the requirements for reporting on Form 10-K 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.

STELLUS CAPITAL INVESTMENT CORPORATION

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Certain reclassifications have been made to certain prior period balances to conform with current presentation.

In accordance with Regulation S-X under the Securities Act of 1933, as amended, and Securities Exchange Act of 1934, as amended, the Company does not consolidate portfolio company investments.

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.

COVID-19 Developments

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic and recommended containment and mitigation measures worldwide.

As of the year ended December 31, 2020, and subsequent to December 31, 2020, 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.

The Company believes that any such known COVID-19 pandemic impacts have been reflected in the valuation of its 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 have also implemented 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.

The impact of the COVID-19 pandemic has led to significant volatility in the global public equity markets and it is uncertain how long this volatility will continue.

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 the Company’s portfolio companies are adversely impacted by the effects of the COVID-19 pandemic, it may have a material adverse impact on the Company’s future net investment income, the fair value of the Company’s portfolio investments and the Company’s financial condition.

Portfolio Investment Classification

The Company classifies its portfolio investments with the requirements of the 1940 Act, (a) “Control Investments” are defined as investments in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation, (b) “Affiliate Investments” are defined as investments in which the Company owns between 5% and 25% of the voting securities and does not have rights to maintain greater than 50% of the board representation, and (c) “Non-controlled, non-affiliate investments” are defined as investments that are neither Control Investments or Affiliate Investments.

The Company classifies its portfolio investments 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 or Affiliate Investments.

Cash and Cash Equivalents

At December 31, 2019, cash balances totaling $151,909 did not exceed FDIC insurance protection levels of $250,000.

In addition, at December 31, 2019, the Company held $15,981,406 in cash equivalents which are carried at cost, which approximates the fair value of the cash equivalents.

At December 31, 2020, cash balances totaling $109,261 did not exceed Federal Deposit Insurance Corporation insurance protection levels of $250,000.

In addition, at December 31, 2020, the Company held $18,368,341 in cash equivalents that 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.

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Treasury Bills and other high-quality, short-term debt securities as cash equivalents.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2020

Fair Value Measurements

We account for substantially all of our financial instruments at fair value in accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC Topic 820”).

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.

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The carrying values of our Credit Facility and SBA-guaranteed debentures approximate fair value because the interest rates adjusts to the market interest rates (Level 3 input).

The carrying value of our 2022 Notes (as defined in Note 11 below) is based on the closing price of the security (level 2 input).

The carrying value of our 2022 Notes (as defined in Note 11) is based on the closing price of the security (level 2 input).

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 December 31, 2020, by circumstances and events that are not yet known.

The COVID-19 pandemic may also 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 to fulfill short-term liquidity needs.

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.

During the year ended December 31, 2020, no interest deferrals have been made;

related to COVID-19 or otherwise.

Consolidation

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All intercompany balances have been eliminated upon consolidation.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2019

Use of Estimates

The preparation of the statement of assets and liabilities in conformity with 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.

The preparation of the statement 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.

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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.

During the year ended December 31, 2018, the Company incurred $18,673 of costs related to the preparation of a registration statement, which were capitalized until the related offering consummated during 2019.

These costs are capitalized when incurred and recognized as a reduction of offering proceeds when the offering is consummated and

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2020

shown on the Consolidated Statement of Changes in Net Assets and Liabilities as a reduction to Paid-in-Capital.

As of December 31, 2020, the Company had incurred $90,000 of costs related to the preparation of a registration statement, which were capitalized until the related offering consummated during January 2021.

There were no such costs on the Consolidated Statement of Assets and Liabilities as of December 31, 2019.

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Investments purchased within approximately 90 days of the valuation date will be valued at cost plus accreted discount, or minus amortized premium, which approximates fair value.

With respect to unquoted securities, our board of directors, 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, the board of directors 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 its portfolio, the Company expects to value most of its portfolio investments at fair value as determined in good faith by the board of directors using a documented valuation policy and a consistently applied valuation process.

With respect to unquoted securities, our Board 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, the Board 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 its portfolio, the Company expects to value most of its 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.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2019

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:

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the principal market and enterprise values.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2020

Revenue Recognition

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We record prepayment premiums on loans and debt securities as other income.

Dividend income, if any, will be recognized on the ex-dividend date.

Dividend income, if any, will be recognized on the declaration date.

A presentation of the interest income we have received from portfolio companies for the years ended December 31, 2020, 2019 and 2018 is as follows:

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Includes amortization of fees on unfunded commitments.

Unamortized loan origination fees recognized upon realization.

Unamortized loan origination fees recognized upon full or partial realization of investment.

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.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2019

We will not accrue interest on loans and debt securities if we have reason to doubt our ability to collect such interest.

Management considers portfolio-specific circumstances as well as other economic factors in determining collectability.

As of December 31, 2019, we had two loans on non-accrual status, which represented approximately 3.6% of our loan portfolio at cost and 0.9% at fair value.

As of December 31, 2018, we had four loans on non-accrual status, which represented approximately 3.9% of our loan portfolio at cost and 2.8% at fair value.

As of December 31, 2019 and 2018, $3,779,593 and $1,856,272 of earned income from investments has not been accrued.

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 December 31, 2019, we had two portfolio companies that were on non-accrual status, which represented approximately 3.6% of our loan portfolio at cost and 0.9% at fair value.

As of December 31, 2020 and 2019, $7,057,415 and $3,779,593 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, we will remove it from non-accrual status.

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

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, without regard to unrealized appreciation or depreciation previously recognized.

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.

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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.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2020

Receivables and Payables for Unsettled Securities Transaction

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Federal Income Taxes

The Company has elected to be treated as a RIC under Subchapter M of the Code, and to operate in a manner so as to qualify for the tax treatment applicable to RICs.

The Company has elected to be treated as a RIC under Subchapter M of the Code, and to operate in a manner to qualify 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.

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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.

The Company, at its discretion, may choose not to distribute all 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.

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As of December 31, 2020, the Company had approximately $21,051,549 of undistributed taxable income that was carried forward toward distributions to be paid in 2021.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2019

Income tax expense of $903,905 and $275,106 for the years ended December 31, 2019 and 2018 is related to state and excise taxes.

Excise taxes for the year ended December 31, 2017 of $42,552 is included in Other general and administrative expense.

The Company evaluates tax positions taken or expected to be taken in the course of preparing its tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority.

Income tax expense for the years ended December 31, 2020, 2019, and 2018 of $771,134, $903,905, and $275,106, respectively, is related to state and excise taxes.

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.

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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 FINANCIAL STATEMENTS

December 31, 2020

The Taxable Subsidiaries use the liability method in accounting for income taxes.

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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 years ended December 31, 2019, 2018 and 2017, the Company recorded deferred income tax benefit (provision) of $ (66,760), $ (67,953) and $ 8,593, respectively, related to the Taxable Subsidiaries.

For the years ended December 31, 2020, 2019 and 2018, the Company recorded deferred income tax provision of $224,877, $66,760 and $67,953, respectively, related to the Taxable Subsidiaries.

As of December 31, 2020 and 2019, the Company had a net deferred tax liability of $359,590 and $134,713, respectively.

See Note 13 for a schedule of the deferred tax asset and valuation allowance reducing the deferred tax asset.

Earnings per Share

Basic per share calculations are computed utilizing the weighted average number of shares of common stock outstanding for the period.

Basic per share calculations are computed utilizing the weighted average number of shares of the Company’s common stock outstanding for the period.

The Company has no common stock equivalents.

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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.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2019

Recently Issued Accounting Standards

In August 2018, the FASB issued ASU No.

2018-13 -- Changes to the Disclosure Requirements for Fair Value Measurement.

ASU 2018-13 is part of the disclosure framework project, which primarily focuses on improving the effectiveness of disclosures in the notes to financial statements.

The amendments in this update remove, modify, and add certain disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement.

The update is effective for annual periods beginning after December 31, 2019.

Early adoption is allowed and the Company adopted this guidance on January 1, 2019.

No material changes were required to the disclosures in the notes to financial statements.

Securities Exchange Commission (“SEC”) Disclosure Update and Simplification

In August 2018, the SEC adopted the final rule under SEC Release No.

33-10532 (the “Rule”), Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, outdated or superseded.

The Rule is intended to facilitate the disclosure of information to investors and simplify compliance.

The Company has adopted the Rule.

The Rule included amendments to Regulation S-X (the “Amendments”), including revisions to Rule 6-04.17 under Regulation S-X to remove the requirement to separately state the book basis components of net assets on the Consolidated Statement of Assets and Liabilities:

undistributed (over distribution of) net investment income, accumulated undistributed net realized gains (losses), and net unrealized appreciation (depreciation).

Instead, consistent with GAAP, funds are required to disclose total distributable earnings.

The Company records the proceeds from the sale of shares 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 December 31, 2020 and 2019 are as follows:

December 31, 2019

December 31, 2018

Accumulated net realized loss from investments, net of cumulative dividends of $24,557,535 and $9,519,362, respectively

Accumulated net realized loss from investments, net of cumulative

dividends of $24,557,535 for both periods

(16,388,369 )

Net unrealized appreciation (depreciation) on non-controlled non-affiliated investments and cash equivalents, net of provision for taxes of $134,713 and $67,953, respectively

Net unrealized depreciation on non-controlled non-affiliated investments and cash equivalents, net of provision for taxes of $359,590 and $134,713, respectively

(13,894,460 )

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Accumulated undistributed deficit

Additionally, the Amendments remove the requirement to separately state the source of distributions paid and the requirement to parenthetically state the book basis amount of undistributed (over distribution of) net investment income on the Consolidated Statement of Changes in Net Assets.

The Company’s Consolidated Statement of Assets and Liabilities and Consolidated Statement of Changes in Net Assets for the current and comparative reporting period have been modified to conform to the rule.

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.

Management is currently evaluating the impact of the optional guidance on the Company’s consolidated financial statements and disclosures.

The Company did not utilize the optional expedients and exceptions provided by ASU 2020-04 during the year ended December 31, 2020.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2020

Accelerated Filer and Large Accelerated Filer Definitions

The SEC recently adopted a final rule under SEC Release No.

34-88365 (the “Final Rule”), amending the Accelerated Filer and Large Accelerated Filer definitions in Exchange Act Rule 12b-2 to exclude an issuer that is eligible to be a smaller reporting company and had annual revenues of less than $100 million.

The amendments include a provision under which a BDC will be excluded from the “accelerated filer” and “large accelerated filer” definitions if the BDC has (1) less than $700 million in public float, and (2) investment income of less than $100 million.

In addition, BDCs are subject to the same transition provisions for accelerated filer and large accelerated filer status as other issuers, but instead substituting investment income for revenue.

The amendments will reduce the number of issuers required to comply with the auditor attestation on the internal control over financial reporting requirement provided under Section 404(b) of the Sarbanes-Oxley Act of 2002.

The Final Rule became effective as of April 27, 2020.

As a result of the amended definitions, the Company status has changed from being an “accelerated” filer to a “non-accelerated” filer.

The Company meets the requirements during the year ended December 31, 2020 such that no auditor attestation on the internal control over financial reporting is required.

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.

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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

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2019

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.

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 years ended December 31, 2020, 2019 and 2018, the Company recorded an expense for base management fees of $11,084,450, $9,703,706, and $8,154,842 respectively.

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Investment Income Incentive Fee

The income component (“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, 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, has a 2.0% hurdle rate (also referred to as the “Hurdle”).

The investment income component (“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, 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.

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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% 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% of net assets.

The foregoing incentive fee is subject to a total return requirement, which provides that no 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 incentive fees accrued and/or paid for the 11 preceding quarters.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2020

(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 Income Incentive Fee is subject to a total return requirement, which provides that no 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 incentive fees accrued and/or paid for the 11 preceding quarters.

In other words, any 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.

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PIK, certain discount accretion and deferred interest) and are not payable until such amounts are received in cash.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2019

Capital Gains Incentive Fee

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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 years ended December 31, 2019, 2018 and 2017, the Company incurred $799,876, $81,038, and $0, respectively.

As of December 31, 2019 and December 31, 2018, $880,913 and $81,038, respectively of Capital Gains Incentive Fees were payable to the Advisor.

For the years ended December 31, 2020, 2019 and 2018, the Company (reversed) incurred ($359,892), $799,876, and $81,038, respectively.

As of December 31, 2020 and December 31, 2019, $521,021 and $880,913, 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:

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2020

Investment income incentive fee incurred

Capital Gains Incentive Fee Accrued

Capital gains incentive fee (reversed) accrued

Incentive fee expense

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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 Management 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

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2019

“Order”) that supersedes the Prior Order and permits the Company greater flexibility to enter into co-investment transactions.

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 Management or an adviser that is controlled, controlling, or under common control with Stellus Capital Management, subject to the conditions included therein.

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Any such amount would be included in “Other Accrued Expenses and Liabilities” on the Consolidated Statement of Assets and Liabilities.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2020

License Agreement

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Indemnification

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2019

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 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 of directors each calendar quarter, paid monthly and recognized as distribution liabilities on the ex-dividend 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 of directors.

Distributions are generally declared by the Company’s Board each calendar quarter and recognized as distribution liabilities on the declaration date.

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.

The following table reflects the Company’s distributions declared and paid or to be paid on its common stock since Inception:

Date Declared

December 7, 2012

December 21, 2012

December 27, 2012

March 7, 2013

March 21, 2013

March 28, 2013

June 21, 2013

June 28, 2013

August 21, 2013

September 5, 2013

September 27, 2013

November 22, 2013

December 9, 2013

December 23, 2013

December 27, 2013

January 15, 2014

January 24, 2014

January 20, 2014

January 31, 2014

February 14, 2014

January 20, 2014

February 28, 2014

March 14, 2014

January 20, 2014

March 31, 2014

April 15, 2014

April 17, 2014

April 30, 2014

April 17, 2014

June 16, 2014

April 17, 2014

June 30, 2014

July 15, 2014

July 31, 2014

August 15, 2014

August 29, 2014

September 15, 2014

September 30, 2014

October 15, 2014

October 31, 2014

November 14, 2014

October 15, 2014

November 28, 2014

December 15, 2014

October 15, 2014

December 31, 2014

January 15, 2015

January 22, 2015

February 2, 2015

February 13, 2015

January 22, 2015

February 27, 2015

March 13, 2015

January 22, 2015

March 31, 2015

April 15, 2015

April 30, 2015

April 15, 2015

June 15, 2015

April 15, 2015

June 30, 2015

July 15, 2015

The Company has declared distributions of $10.91 per share on its common stock from Inception through December 31, 2020.

The following table reflects the Company’s distributions declared and paid on its common stock since Inception:

STELLUS CAPITAL INVESTMENT CORPORATION

1 unchanged sentence

December 31, 2020

Date Declared

July 31, 2015

August 14, 2015

August 31, 2015

September 15, 2015

September 20, 2015

October 15, 2015

October 14, 2015

October 30, 2015

November 13, 2015

October 14, 2015

November 30, 2015

December 15, 2015

October 14, 2015

December 31, 2015

January 15, 2016

Year/Date Declared

Per Share (1)

January 10, 2020

7 unchanged sentences

April 15, 2020

April 15, 2016

April 29, 2016

April 15, 2016

June 30, 2020

April 15, 2016

June 30, 2016

July 15, 2020

July 31, 2020

August 15, 2016

August 31, 2016

September 15, 2016

September 30, 2016

October 14, 2016

October 7, 2016

October 31, 2016

November 15, 2016

October 7, 2016

November 30, 2016

December 15, 2016

October 7, 2016

December 30, 2016

January 13, 2017

January 31, 2017

February 15, 2017

January 13, 2017

February 28, 2017

March 15, 2017

January 13, 2017

March 31, 2017

April 14, 2017

April 28, 2017

April 14, 2017

June 15, 2017

April 14, 2017

June 30, 2017

July 29, 2020

July 31, 2017

August 15, 2017

August 31, 2017

September 15, 2020

September 30, 2020

October 13, 2017

October 12, 2017

October 31, 2017

November 15, 2017

October 12, 2017

November 30, 2017

December 15, 2017

October 12, 2017

December 29, 2017

January 12, 2018

January 11, 2018

January 31, 2018

February 15, 2018

January 11, 2018

February 28, 2018

March 15, 2018

January 11, 2018

March 29, 2018

April 13, 2018

April 16, 2018

April 30, 2018

April 16, 2018

June 15, 2018

April 16, 2018

June 29, 2018

July 13, 2018

July 12, 2018

July 31, 2018

August 15, 2018

July 12, 2018

August 31, 2018

September 13, 2020

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 15, 2020

Date Declared

July 12, 2018

September 28, 2018

October 15, 2018

October 16, 2018

October 31, 2018

November 15, 2018

October 16, 2018

November 29, 2018

December 29, 2020

October 16, 2018

December 31, 2018

January 15, 2019

January 11, 2019

January 31, 2019

February 15, 2019

January 11, 2019

February 28, 2019

March 15, 2019

January 11, 2019

March 29, 2019

April 15, 2019

April 11, 2019

April 30, 2019

April 11, 2019

June 14, 2019

April 11, 2019

June 28, 2019

July 15, 2019

July 31, 2019

August 15, 2019

August 30, 2019

September 13, 2020

September 30, 2019

October 15, 2019

October 31, 2019

November 15, 2019

October 15, 2019

November 29, 2019

December 15, 2020

October 15, 2019

December 29, 2020

January 15, 2020

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.

The Company has adopted an “opt out” dividend reinvestment plan (“DRIP”) pursuant to which a stockholder whose shares are held in their own name will receive distributions in shares of the Company’s common stock under the Company’s DRIP unless they elect 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.

19 unchanged sentences

Year ended December 31, 2019

Year ended December 31, 2020

Net of partial share redemptions.

Such share redemptions impacted gross proceeds by $94, $757, $(1,051), $(142), $(31) and $(29) in 2020, 2019, 2018, 2017, 2016 and 2015, respectively.

Includes common shares issued under the DRIP of $94,788 during the year ended December 31, 2018, $0 for the years ended 2019, 2017, 2016 and 2015, and $390,505, $930,385, $113,000 for the years ended 2014, 2013, and 2012, respectively.

Net Proceeds per this equity table will differ from the Statement of Assets and Liabilities as of December 31, 2019 in the amount of $366,375, which represents a tax reclassification of stockholders’ equity in accordance with generally accepted accounting principles.

Includes common shares issued under the DRIP of $228,943 and $94,788 during the year ended December 31, 2020 and 2018, respectively;

$0 for the years ended 2019, 2017, 2016 and 2015, and $390,505, $938,385, $113,000 for the years ended 2014, 2013, and 2012, respectively.

Net Proceeds per this equity table will differ from the Statement of Assets and Liabilities as of December 31, 2020 and 2019 in the amount of $1,456,437 and $366,375, respectively, which represents a tax reclassification of stockholders’ equity in accordance with generally accepted accounting principles.

This reclassification reduces paid-in capital and increases distributable earnings (reducing the accumulated undistributed deficit).

The Company issued 332,591 shares during the year ended December 31, 2020 under the At-the-Market (“ATM”) Program, for gross proceeds of $4,794,994 and underwriting and other expenses of $23,850.

The average per share offering price of shares issued in the ATM Program during 2020 was $14.42.

Gross proceeds resulting from the At-the-Market (“ATM”) Program in 2019 totaled $3,262,729 and underwriting and other expenses totaled $240,040.

The average per share offering price of shares issued in the ATM Program during 2019 was $14.45.

The Company issued 2,952,149 shares during the year ended December 31, 2019 in a secondary offering on March 15, 2019 and the underwriters’ exercise of their overallotment option on April 11, 2019.

1 unchanged sentence

The per share offering price for the secondary offering was $14.43.

The Company issued 225,787 shares under the At-the-Market (“ATM”) Program in 2019, for gross proceeds of $3,262,729 and underwriting and other expenses of $240,040.

The average per share offering price of shares issued in the ATM Program during 2019 was $14.45.

The Company issued 7,931 shares through the DRIP during the year ended December 31, 2018.

No new shares were issued in connection with the DRIP during the year ended December 31, 2019.

The Company issued 21,666 and 0 shares of common stock through the DRIP for the year ended December 31, 2020 and 2019, respectively.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2020

NOTE 5 — NET INCREASE IN NET ASSETS PER COMMON SHARE

The following information sets forth the computation of net increase in net assets resulting from operations per common share for the years ended December 31, 2020, 2019 and 2018.

For the year ended

Net increase in net assets resulting from operations

1 unchanged sentence

Basic and diluted earnings per common share

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2019

NOTE 6 — PORTFOLIO INVESTMENTS AND FAIR VALUE

In accordance with the authoritative guidance on fair value measurements and disclosures under GAAP, the Company discloses the fair value of its investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.

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).

15 unchanged sentences

Total Investments

Includes unitranche investments, which account for 14.4% 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.

STELLUS CAPITAL INVESTMENT CORPORATION

1 unchanged sentence

December 31, 2020

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.

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, 2019, the Company had investments in 63 portfolio companies.

8 unchanged sentences

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 of the underlying loan agreements.

As of December 31, 2019 and December 31, 2018, the Company had seventeen and eleven such investments with aggregate unfunded commitments of $37,517,784 and $21,213,962, respectively.

As of December 31, 2020 and December 31, 2019, the Company had 19 and 17 such investments with aggregate unfunded commitments of $28,865,204 and $37,517,784, respectively.

The Company maintains sufficient liquidity to fund such unfunded loan commitments should the need arise.

2 unchanged sentences

for Identical

Significant Other

Senior Secured – First Lien

3 unchanged sentences

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, 2019 are as follows:

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2020

Quoted Prices

for Identical

Significant Other

Senior Secured – First Lien

2 unchanged sentences

Total Investments

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2019

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

8 unchanged sentences

(134,248,838 )

(128,274,623 )

Realized Gains

Change in unrealized

appreciation (depreciation) included in earnings

(12,917,767 )

Realized (Losses) Gains

(10,100,963 )

Change in unrealized appreciation (depreciation) included in earnings (1)

Amortization of premium and accretion of discount, net

Fair value at end of period

Includes reversal of positions 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 FINANCIAL STATEMENTS

December 31, 2020

The aggregate values of Level 3 portfolio investments changed during the year ended December 31, 2019 are as follows:

1 unchanged sentence

Senior Secured

Fair value at beginning of year

Fair value at beginning of period

Purchases of investments

4 unchanged sentences

(22,594,613 )

(128,274,623 )

Realized Gains

Change in unrealized appreciation

(depreciation)

Change in unrealized appreciation (depreciation) included in earnings

(12,917,767 )

(15,499,766 )

Amortization of premium and accretion of discount, net

Fair value at end of year

Fair value at end of period

There were no Level 3 transfers during the twelve months ended December 31, 2019.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2019

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

at fair value

Investments at

United Kingdom

South Carolina

North Carolina

Massachusetts

STELLUS CAPITAL INVESTMENT CORPORATION

1 unchanged sentence

December 31, 2020

Investments at

Washington, D.C.

North Carolina

Massachusetts

The following is a summary of geographical concentration of our investment portfolio as of December 31, 2019:

Investments at

United Kingdom

South Carolina

5 unchanged sentences

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

at fair value

Investments at

Healthcare & Pharmaceuticals

Aerospace & Defense

Consumer Goods:

Beverage, Food, & Tobacco

Broadcasting & Subscription

Advertising, Printing & Publishing

High Tech Industries

Consumer Goods:

Environmental Industries

Advertising, Printing & Publishing

Capital Equipment

Metals & Mining

Transportation & Logistics

Containers, Packaging, & Glass

Environmental Industries

Chemicals, Plastics, & Rubber

Metals & Mining

Consumer goods:

Construction & Building

Chemicals, Plastics, & Rubber

Hotel, Gaming, & Leisure

The following is a summary of industry concentration of our investment portfolio as of December 31, 2019:

Investments at

Healthcare & Pharmaceuticals

Aerospace & Defense

Consumer Goods:

Beverage, Food, & Tobacco

STELLUS CAPITAL INVESTMENT CORPORATION

1 unchanged sentence

December 31, 2020

The following is a summary of industry concentration of our investment portfolio as of December 31, 2018:

Healthcare & Pharmaceuticals

Investments at

Broadcasting & Subscription

Consumer Goods:

Advertising, Printing & Publishing

High Tech Industries

Beverage, Food, & Tobacco

Capital Equipment

Metals & Mining

Consumer goods:

Transportation & Logistics

Containers, Packaging, & Glass

Environmental Industries

Chemicals, Plastics, & Rubber

Containers, Packaging, & Glass

Aerospace & Defense

Consumer goods:

Construction & Building

Capital Equipment

Advertising, Printing & Publishing

Transportation:

Hotel, Gaming, & Leisure

Certain portfolio company classifications were updated to more adequately align to the risks of the portfolio investments with other companies in such industries.

Industry classification for the prior year financial statements included above were reclassified to the current presentation.

The following changes and their December 31, 2018 cost and fair value, respectively, were made:

1) Consumer Goods:

Durable to Metals & Mining;

$17,237,500 for both cost and fair value, 2) Media:

Broadcasting & Subscription to Media:

Advertising, Printing & Publishing;

$7,058,675 and $6,875,625, 3) Services:

Business to Aerospace & Defense;

$10,777,822 for both cost and value, 4) Services:

Business to Environmental Industries;

$13,058,543 and $12,505,509, 5) Services:

Business to Software;

$14,005,369 and $13,432,500.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2019

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

27 unchanged sentences

Equity investments

Market approach (5)

EBITDA Multiple

2 unchanged sentences

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

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2020

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.

10 unchanged sentences

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 FINANCIAL STATEMENTS

December 31, 2019

The following provides quantitative information about Level 3 fair value measurements as of December 31, 2019:

28 unchanged sentences

Market approach (5)

Underwriting multiple/

EBITDA multiple

2x to 17x (10x)

Total Long Term Level 3 Investments

Total Long Term Level 3

Weighted average based on fair value as of December 31, 2019.

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.

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

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2020

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:

12 unchanged sentences

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.

As of December 31, 2020, the Company had $28,865,202 of unfunded commitments to provide debt financing to nineteen existing portfolio companies.

As of December 31, 2019 the Company had $37,517,784 of unfunded commitments to provide debt financing to seventeen existing portfolio companies.

As of December 31, 2020, 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.

STELLUS CAPITAL INVESTMENT CORPORATION

1 unchanged sentence

December 31, 2020

As of December 31, 2019, the Company had $37,517,784 of unfunded commitments to provide debt financing to seventeen existing portfolio companies.

As of December 31, 2018 the Company had $21,213,961 of unfunded commitments to provide debt financing to eleven existing portfolio companies.

As of December 31, 2019, the Company had sufficient liquidity to fund such unfunded loan commitments should the need arise.

NOTE 8 — FINANCIAL HIGHLIGHTS

2 unchanged sentences

Net investment income

Net change in unrealized appreciation

(depreciation) on investments

Net realized gain (loss) on investments

Tax provision on realized gain on investments

Benefit (provision) for taxes on net unrealized gain on investments in taxable subsidiaries

Change in unrealized appreciation (depreciation)

Realized gain (loss)

Provision for taxes on realized gains

(Provision) benefit for taxes on unrealized appreciation

Total from investment operations

6 unchanged sentences

Total return based on market value (4)

Weighted average shares outstanding at the end of period

Weighted average shares outstanding at the end

Ratio/Supplemental Data:

1 unchanged sentence

Weighted average net assets

Annualized ratio of gross operating expenses to net assets (7)(8)

Annualized ratio of net operating expenses to net

assets (7)(8)

Annualized ratio of operating expenses to net assets (7)(8)

Annualized ratio of interest expense and other fees to net assets (2)

Annualized ratio of net investment income before

fee waiver to net assets (7)(8)

Annualized ratio of net investment income to net

assets (7)(8)

Annualized ratio of net investment income to net assets (7)(8)

Portfolio Turnover (5)

15 unchanged sentences

SBA-guaranteed debentures are excluded from the numerator and denominator.

These ratios include the impact of the benefit (provision) for income taxes related to net unrealized loss (gain) on certain investments of $(66,760), $(67,953), and $8,593 for the years ended December 31, 2019, 2018 and 2017 respectively, which are not reflected in net investment income, gross operating expenses or net operating expenses.

The benefit (provision) for income taxes related to net realized loss or unrealized loss (gain) on investments at taxable subsidiaries to net assets for the years ended December 31, 2019, 2018 and 2017 is less than (0.03)%, (0.03)% and (0.01)%, respectively.

These ratios include the impact of the (provision) benefit for income taxes related to net unrealized (gain) loss on certain investments of $(224,877), $(66,760), and $(67,953) for the years ended December 31, 2020, 2019 and 2018 respectively, which are not reflected in net investment income, gross operating expenses or net operating expenses.

The (provision) benefit for income taxes related to net realized loss or unrealized loss (gain) on investments at taxable subsidiaries to net assets for the years ended December 31, 2020, 2019 and 2018 is less than (0.09)%, (0.03)% and (0.03)%, respectively.

Deferred offering costs of $261,761 for the year ended December 31, 2016 are not annualized.

NOTE 9 — CREDIT FACILITY

On November 7, 2012, the Company entered into a revolving credit facility (the “Original Facility”) with various lenders.

SunTrust Bank, one of the lenders, served as administrative agent under the Original Facility.

The Company terminated the Original Facility on October 11, 2017, in conjunction with securing and entering into a new senior secured revolving credit agreement, dated as of October 10, 2017, as amended on March 28, 2018, August 2, 2018, September 13, 2019, and December 27, 2019 with ZB, N.A., dba Amegy Bank and various other lenders (the “Credit Facility”).

The Credit Facility, as amended, provides for borrowings up to a maximum of $220,000,000 on a committed basis with an accordion feature that allows the Company to increase the aggregate commitments up to $250,000,000, 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 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 no 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, Federal Funds Rate plus 0.5% or one month LIBOR plus 1.0%.

The Company pays unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility.

Interest is payable quarterly in arrears.

The commitment to fund the revolver expires on October 10, 2020, after which the Company may no longer borrow under the Credit Facility.

The Company must begin repaying principal equal to 1/12 of the aggregate amount outstanding under the Credit Facility beginning October 15, 2020.

Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on October 10, 2021.

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 key changes in the amended and restated Credit Facility are as follows:

Prior agreement

As amended and restated

Maturity Date

October 10, 2021

September 18, 2025

Commitment termination date

March 10, 2021

September 18, 2024

Prime rate floor

Asset coverage ratio

Minimum of 1.75 to 1.00 (maximum leverage of 1.33x)

Minimum of 1.67 to 1.00 (maximum leverage of 1.5x)

Refinancing of 2022 Notes (1)

Required by March 15, 2022

See Note 14 for discussion about 2022 Notes subsequent to December 31, 2020

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.

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

STELLUS CAPITAL INVESTMENT CORPORATION

1 unchanged sentence

December 31, 2020

rate based on the highest of the Prime Rate, Federal Funds Rate plus 0.5% or one month LIBOR plus 1.0%.

The Company pays unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility.

Interest is payable quarterly in arrears.

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.

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 1.75 to 1.0, and (iii) maintaining a minimum shareholder’s equity.

(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 December 31, 2020, the Company was in compliance with these covenants.

1 unchanged sentence

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 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 determined in accordance with ASC 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 has incurred costs of $3,636,707 in connection with the current Credit Facility, which are being amortized over the life of the facility.

Additionally, $341,979 of costs from the Original Facility will continue to be amortized over the remaining life of the Credit Facility.

Additionally, $341,979 of costs from a prior credit facility will continue to be amortized over the life of the Credit Facility.

As of December 31, 2020 and 2019, $2,271,595 and $1,039,367 of such prepaid loan structure fees and administration fees had yet to be amortized, respectively.

4 unchanged sentences

Credit facility payable, net of prepaid loan structure fees

Interest is paid quarterly in arrears.

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 years ended December 31, 2020, 2019, and 2018:

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2020

For the years ended

3 unchanged sentences

Administration fees

Total interest expense and other fees

Loss on extinguishment of debt

Total interest and financing expenses

Weighted average interest rate

Effective interest rate (including fee amortization)

Effective interest rate (including fee

amortization)

Average debt outstanding

Cash paid for interest and unused fees

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2019

NOTE 10 — SBA-GUARANTEED DEBENTURES

Due to the SBIC subsidiaries’ status as licensed SBICs, the Company has 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 December 31, 2019 and 2018, 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 December 31, 2019, which was the end of the first year of operations of the SBIC II subsidiary, it had $20,000,000 in regulatory capital and $11,000,000 of SBA-guaranteed debentures outstanding.

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.

As of both December 31, 2020 and 2019, the SBIC subsidiary had $75,000,000 in regulatory capital and $150,000,000 of SBA-guaranteed debentures outstanding.

As of December 31, 2020 and 2019, the SBIC II subsidiary had $40,000,000 and $20,000,000 in regulatory capital and $26,500,000 and $11,000,000 of SBA-guaranteed debentures outstanding, respectively.

On August 12, 2014, the Company obtained exemptive relief from the SEC to permit it to exclude the SBA-guaranteed debentures 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 $240,109,144 and $225,525,663 in assets at December 31, 2019 and 2018, respectively, which accounted for approximately 37.0% and 42.9% of our total consolidated assets at December 31, 2019 and 2018, respectively.

Debentures guaranteed by the SBA have fixed interest rates that equal prevailing 10-year 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.

As of December 31, 2019 and 2018, the SBIC subsidiaries had $161,000,000 and $150,000,000 of the SBA-guaranteed Debentures outstanding, respectively.

On a stand-alone basis, the SBIC subsidiaries collectively held $277,440,338 and $240,109,144 in assets at December 31, 2020 and 2019, respectively, which accounted for approximately 41.1% and 37.0% of our total consolidated assets at December 31, 2020 and 2019, 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 SBA-guaranteed 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 each 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.

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

4 unchanged sentences

Maturity Date

Debenture Amount

Interest Rate

SBA Annual Charge

October 14, 2014

32 unchanged sentences

March 1, 2030

December 17, 2020

March 1, 2031

December 17, 2020

March 1, 2031

Total SBA-guaranteed debentures

Debenture interest rate will be set as determined by the SBA when pooled on March 25, 2020

Interest rate of the SBA-guaranteed debentures will be set as determined by the SBA when pooled on March 24, 2021.

As of December 31, 2020 and 2019, 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 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.

The fair values 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 December 31, 2020 and 2019, the SBA-guaranteed debentures would be deemed to be Level 3, as defined in Note 6.

3 unchanged sentences

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

SBA-guaranteed debentures payable

Prepaid loan fees

SBA-guaranteed debentures, net of prepaid loan fees

STELLUS CAPITAL INVESTMENT CORPORATION

1 unchanged sentence

December 31, 2020

SBA- guaranteed debentures payable

Prepaid loan fees

SBA-guaranteed debentures, net of prepaid loan fees

The following table summarizes the interest expense and amortized fees on the SBA-guaranteed debentures for the years ended December 31, 2020, 2019 and 2018:

2 unchanged sentences

Debenture fee amortization

Total interest expense and other fees

Total interest and financing expenses

Weighted average interest rate

Effective interest rate (including fee amortization)

Effective interest rate (including fee

amortization)

Average debt outstanding

1 unchanged sentence

NOTE 11 — NOTES

On May 5, 2014, the Company closed a public offering of $25,000,000 in aggregate principal amount of 6.50% notes (the “2019 Notes”), due on April 30, 2019.

The Company redeemed all $25,000,000 in aggregate principal amount of the 2019 Notes on September 20, 2017 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 the extinguishment of debt of $302,732 for the year ended December 31, 2017, due to the write off of the remaining deferred financing costs on the 2019 Notes.

The following table summarizes the interest expense and deferred financing costs on the 2019 Notes for the years ended December 31, 2019, 2018, and 2017:

For the year ended

Interest expense

Deferred financing costs

Administration fees

Total interest expense and other fees

Loss on extinguishment of debt

Weighted average interest rate

Effective interest rate (including fee amortization)

Average debt outstanding

Cash paid for interest

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.

The 2022 Notes will mature on September 15, 2022, and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after September 15, 2019 at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest.

The 2022 Notes will mature with a balance of $48,875,000 on September 15, 2022 and may be redeemed in whole or in part at any time or from time to time at the Company’s option at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest.

Interest is payable quarterly.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2019

The Company used all of the net proceeds from this offering to fully redeem the 2019 Notes and a portion of the amount outstanding under the Original Facility.

As of both December 31, 2020 and 2019, the aggregate carrying amount of all Notes was $48,875,000 and the fair value of the Notes was approximately $49,168,250 and $49,715,650, respectively.

4 unchanged sentences

The following table summarizes the interest expense and deferred financing costs on the 2022 Notes for the years ended December 31, 2020, 2019, 2018:

For the year ended

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2020

Interest expense

1 unchanged sentence

Administration fees

Total interest expense and other fees

Total interest and financing expenses

Weighted average interest rate

2 unchanged sentences

Cash paid for interest

averages for period outstanding in 2017

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

3 unchanged sentences

The indenture and supplements thereto relating to the 2022 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.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2019

NOTE 12 — SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

3 unchanged sentences

Net Investment Income

Net Increase in Net Assets from Operations

Net (Decrease) Increase in Net Assets from operations

(43,939,732 )

Total Investment Income per share (1)

Net Investment Income per share (1)

Net Increase in Net Assets from Operations per

Net (Decrease) Increase in Net Assets from Operations per share (1)

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2020

Total Investment Income

3 unchanged sentences

Net Investment Income per share (1)

Net Increase in Net Assets from Operations per share (1)

Net Increase in Net Assets from Operations per

Total Investment Income

3 unchanged sentences

Net Investment Income per share (1)

Net Increase in Net Assets from Operations per share (1)

Net Increase in Net Assets from Operations per

Per share amounts are calculated using weighted average shares outstanding during the period.

2 unchanged sentences

(1) Undistributed capital gains were $0 and $2,053,494 for the periods ended December 31, 2020 and December 31, 2019, respectively.

Undistributed qualified

The Company’s taxable income for each period is an estimate and will not be finally determined until the Company files its tax return for each year.

Therefore, final taxable income earned in each period, and the undistributed ordinary income and capital gains for each period carried forward for distribution in the following period, may be different than this estimate.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2019

dividends were $0 and $31,504 for the years ended December 31, 2019 and 2018, respectively.

All of the undistributed ordinary income as of December 31, 2020 will have been distributed within the required period of time such that the Company will not have to pay corporate-level U.S.

7 unchanged sentences

The tax character (2) of distributions paid in the years ended December 31, 2020 and 2019 was as follows:

December 31, 2019

December 31, 2018

Ordinary income

2 unchanged sentences

Total distributions accrued or paid to common stockholders

The Company’s taxable income for each period is an estimate and will not be finally determined until

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2020

the Company files its tax return for each year.

Distributions of long-term capital gains of $2,248,435 as of December 31, 2020 differ from distributions of net capital gains on the Consolidated Statement of Changes in Net Assets because it represents the completion of distribution of long-term capital gains recognized in 2019 for tax purposes.

The qualified dividend amount in 2019 is derived from qualified dividends received by the Company from a portfolio company.

Additional differences arise because certain prepayment gains are characterized differently for tax reporting purposes.

Listed below is a reconciliation of “Net increase in net assets resulting from operations” to taxable income and total distributions declared to common stockholders for the years ended December 31, 2020, 2019 and 2018:

Net increase in net assets resulting from operations (includes NII, realized gain/loss, unrealized gain/loss and taxes)

Net change in unrealized depreciation (appreciation)

Income tax provision (benefit)

Net change in unrealized (appreciation) depreciation

Income tax provision

Pre-tax (income) expense, (gain) loss reported at Taxable Subsidiaries, not consolidated for tax purposes

Book income and tax income differences, including debt

origination, interest accrual, income from pass-through

investments, dividends, realized gains (losses) and changes in

Long term capital loss carryover

Book income and tax income differences, including debt origination, interest accrual, income from pass-through investments, dividends, realized gains (losses) and changes in estimates

Estimated taxable income

Taxable income earned in prior year and carried forward for distribution in current year

Adjustment for cumulative effect of distributions carried forward

Taxable income earned prior to period end and carried forward for distribution next period

(21,051,549 )

Distributions of long-term capital gains of $14,935,093 as of December 31, 2019 differs from distributions of net capital gains on the Consolidated Statement of Changes in Net Assets because certain long-term capital gains were recognized in Taxable Subsidiaries.

The qualified dividend amount in 2019 and 2018 are derived from qualified dividends received by the Company from a portfolio company.

Additional differences arise because certain prepayment gains are characterized differently for tax reporting purposes.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2019

(24,602,435 )

Distribution payable as of period end and paid in following period

Total distributions accrued or paid to common

The aggregate gross unrealized appreciation and depreciation, the net unrealized appreciation, and the aggregate cost of the Company’s portfolio company securities for federal income tax purposes as of December 31, 2019 and December 31, 2018 were as follows:

The aggregate gross unrealized appreciation and depreciation, the net unrealized appreciation, and the aggregate cost of the Company’s portfolio company securities for U.S.

federal income tax purposes as of December 31, 2020 and December 31, 2019 were as follows:

Aggregate cost of portfolio securities for federal income tax purposes

3 unchanged sentences

(31,347,731 )

Net unrealized appreciation (depreciation) of portfolio company securities

Net unrealized appreciation of portfolio company securities

(13,759,747 )

As of December 31, 2019, the Taxable Subsidiaries had unrealized losses in investments, net operating loss (“NOL”) carryovers, and capital loss carryovers creating a net deferred tax asset equal to $146,797, as reflected below.

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2020

As of December 31, 2020, the Taxable Subsidiaries had unrealized losses in investments, net operating loss (“NOL”) carryovers, and capital loss carryovers creating a net deferred tax liability equal to $12,779 as reflected below.

As of December 31, 2020, for U.S.

federal income tax purposes, the Taxable Subsidiaries had capital loss capital forward of $1,103,401, which, if unused, will expire in the taxable year 2021.

federal income tax purposes, the Taxable Subsidiaries had capital loss carry forward of $1,382,978, which, if unused, will expire in the taxable year 2021.

As of December 31, 2020, for U.S.

4 unchanged sentences

Deferred tax liability

Total Deferred Tax Asset before valuation allowance

Total deferred tax asset (liability) before valuation allowance

Deferred tax valuation allowance

Net Deferred Tax Liability

The Company has recorded a tax reclassification of stockholders’ equity in accordance with U.S.

GAAP to reduce paid-in capital and increases distributable earnings (reducing the accumulated undistributed deficit) for book to tax differences that it has determined to be permanent.

For the years ended December 31, 2020 and 2019, this reclassification was $1,090,062 and $366,375, respectively.

The total adjustment on the Statement of Assets and Liabilities as of December 31, 2020 and 2019 was $1,456,437 and $366,375, respectively.

Although the Company files federal and state tax returns, its major tax jurisdiction is federal.

The 2017, 2018 and 2019 federal tax years for the Company remain subject to examination by the Internal Revenue Service.

NOTE 14 — SUBSEQUENT EVENTS

Investment Portfolio

On January 3, 2020, the Company received full repayment on the first lien term loan of APG Intermediate Sub 2 Corp.

for total proceeds of $10,066,786, including a $141,785 prepayment fee.

The Company also received $2,424,445 in full realization on the equity of APG Holdings, resulting in a $1,296,793 gain.

NOTE 14 — SENIOR SECURITIES

Information about the Company’s senior securities is shown in the following table for the fiscal years ended December 31, 2012 through 2020.

Class and Year

Securities (1)

(In thousands, except per unit amounts)

SBA-guaranteed debentures

Original Credit Facility (7)

STELLUS CAPITAL INVESTMENT CORPORATION

1 unchanged sentence

December 31, 2020

On January 7, 2020, the Company invested $14,424,157 in the first lien term loan of Sales Benchmark Index, LLC, $1,331,461 in the unfunded revolver, and $3,328,652 in the unfunded delayed draw term loan of Sales Benchmark, LLC, a provider of revenue growth management consulting services for private equity-owned and large enterprise clients.

Additionally, the Company invested $665,730 in the preferred equity of the company.

On January 15, 2020, Apex Environmental Resources Holdings, LLC was merged with a provider of non-hazardous waste management, collection, and recycling services, creating Interstate Waste Services, Inc.

The Company's common and preferred ownership positions in Apex Environmental Resources Holdings, LLC was rolled into the combined entity.

On January 31, 2020, the Company invested $18,900,000 in the first lien term loan and $2,700,000 in the unfunded revolver of Elliott Aviation, LLC, a provider of maintenance, repair, and overhaul and fixed-base operator services to the business aviation sector.

Additionally, the Company invested $900,000 in the preferred equity of the company.

Class and Year

Securities (1)

(In thousands, except per unit amounts)

Credit Facility

The outstanding balance under the Credit Facility as of February 28, 2020 was $175,250,000.

Since December 31, 2019, the Company issued 332,591 shares under the At-the-Market (“ATM”) Program, for gross proceeds of $4,794,995 and underwriting expenses of $5,684.

The average per share offering price of shares issued in the ATM Program was $14.42.

SBA-guaranteed Debentures

The outstanding balance of SBA-guaranteed Debentures as of February 28, 2020 was $161,000,000.

Dividend Declared

On January 10, 2020, the Company’s board of directors declared a regular monthly dividend for each of January, February and March 2020 as follows:

Ex-Dividend Date

Amount per Share

5.75% Notes due 2022

6.50% Notes due 2019 (8)

Short-Term Loan (5)

Total amount of senior securities outstanding at the end of the period presented.

Asset coverage per unit is the ratio of the carrying value of the Company’s total assets, less all liabilities and indebtedness not represented by senior securities, in relation to the aggregate amount of senior securities representing indebtedness.

Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.

The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it.

The “— “ indicates information which the SEC expressly does not require to be disclosed for certain types of senior securities.

Average market value per unit for the 2022 Notes and the 6.50% Notes due 2019 represents the average of the daily closing prices as reported on the NYSE during the period presented.

Average market value per unit for our SBA-guaranteed debentures, the Original Credit Facility and the Credit Facility are not applicable because these are not registered for public trading.

Refers to short-term loans that the Company obtained from Raymond James & Associates, Inc.

and repaid in full on January 2, 2013 and January 2, 2014, respectively.

The Company has excluded its SBA-guaranteed debentures from the asset coverage calculation as of December 31, 2020, 2019, 2018, 2017, 2016, 2015 and 2014 pursuant to the exemptive relief granted by the SEC in August 2014 that permits it to exclude such SBA-guaranteed debentures from the definition of senior securities in the 150% asset coverage ratio we are required to maintain under the 1940 Act.

STELLUS CAPITAL INVESTMENT CORPORATION

1 unchanged sentence

December 31, 2020

On November 13, 2012, the Company entered into a senior secured revolving credit agreement, by and among us, as the borrower, SunTrust Bank, as the administrative agent, various lenders that are parties thereto from time to time (the “Original Credit Facility”).

The Company terminated the Original Credit Facility on October 11, 2017.

On September 20, 2017, the Company redeemed all of the issued and outstanding 6.50% Notes due 2019.

NOTE 15 — SUBSEQUENT EVENTS

Investment Portfolio

On January 14, 2021, the Company received full repayment on the first lien term loan and revolver of BFC Solmetex, LLC.

for total proceeds of $13,613,967.

The Company also received full repayment on the first lien term loan of Bonded Filter Co.

LLC, a subsidiary of BFC Solmetex, LLC, for total proceeds of $1,193,460.

On January 29, 2021, the Company invested $11,250,000 in the first lien term loan of NuSource Financial, LLC, a provider of technology integration and installation of Automated Teller Machines / Integrated Teller Machines (“ATM” / “ITM”), maintenance services, and security solutions.

Additionally, the Company invested $4,750,000 in the subordinated debt and warrants of the company.

On February 1, 2021, the Company invested $41,018 in the equity of Tailwind Core Investor, LLC, an existing portfolio company.

On February 11, 2021, the Company invested $7,194,811 in the first lien term loan of Time Manufacturing Acquisition, LLC, an existing portfolio company.

Additionally, the Company invested $53,600 in the equity of the company.

On February 19, 2021, the Company invested $13,500,000 in the first lien term loan and committed $100,000 in the unfunded revolver of CEATI International, Inc., a provider of intellectual content, technical trade programs, research groups, and conferences for utility companies.

Additionally, the Company invested $250,000 in the equity of the company.

On March 1, 2021, the Company invested $10,787,208 in the first lien term loan and committed $100,000 in the unfunded revolver of TAC LifePort Purchaser, LLC, a provider of aerospace products for the U.S.

military / government, air medical, and high-end VIP aircraft end markets.

Additionally, the Company invested $500,000 in the equity of the company.

On March 2, 2021, the Company invested $10,000,000 in the first lien term loan and $100,000 in the unfunded revolver of TradePending, LLC, a provider of vehicle trade-in and merchandising intelligence solutions for auto dealerships, primarily flagship dealerships.

Additionally, we invested $750,000 in the equity of the company.

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 is payable semi-annually beginning September 30, 2021.

The Company used all of the net proceeds from this offering to fully redeem the 2022 Notes and repay a portion of the outstanding amount under the Credit Facility.

STELLUS CAPITAL INVESTMENT CORPORATION

Consolidated Schedule of Investments in and Advances to Affiliates

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2020

(dollars in thousands)

Investment (1)

Additions (3)

Reductions (4)

Non-control Investments

Affiliate investments

Glori Energy Production Inc.

Total Non-Control/Affiliate investments

This schedule should be read in conjunction with Stellus’s consolidated financial statements, including the consolidated schedule of investments and notes to the consolidated financial statements.

The principal amount and ownership detail for equity investments is included in the consolidated schedule of investments.

Represents the total amount of interest, fees and dividends credited to income for the portion of the period for which an investment was included in Control or Affiliate categories, respectively.

For investments transferred between Control and Affiliate categories during the period, any income or investment balances related to the time period it was in the category other than the one shown at period end is included in “Amounts from investments transferred from other 1940 Act classifications during the period.”

Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on investments and accrued PIK interest, and the exchange of one or more existing securities for one or more new securities.

Gross additions also include the movement of an existing portfolio company into this category and out of a different category.

Gross reductions include decreases in the cost basis of investments resulting from principal repayments or sales and the exchange of one or more existing securities for one or more new securities.

Gross reductions also include the movement of an existing portfolio company out of this category and into a different category.

Redemption of 2022 Notes

On February 12, 2021, the Company redeemed all $48,875,000 in aggregate principal amount of the 2022 Notes.

The 2022 Notes were redeemed at 100% of their principal amount, plus the accrued and unpaid interest thereon through the redemption date.

Credit Facility

The outstanding balance under the Credit Facility as of March 3, 2021 was $164,500,000.

SBA-guaranteed Debentures

The outstanding balance of SBA-guaranteed debentures as of March 3, 2021 was $210,000,000.

SBIC II Subsidiary

On January 21, 2021, the Company contributed $15,000,000 to the SBIC II subsidiary, bringing the total contributed capital to $35,000.000.

On January 25, 2021, the Company increased committed capital to $60,000,000.

Distributions Declared

On January 15, 2021, the Company’s Board changed the frequency of distributions from quarterly to monthly and declared a regular monthly distribution for each of January, February and March 2021 as follows:

Ex-Dividend Date

Amount per Share

TABLE OF CONTENTS

Changes in and Disagreements with Independent Registered Public Accounting Firm on Accounting and Financial Disclosure

Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

As of December 31, 2020 (the end of the period covered by this report), we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the 1934 Act).

Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b) Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f), and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2020.

Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations;

and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2020 based upon the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

Based on our assessment, management determined that our internal control over financial reporting was effective as of December 31, 2020.

There have been no changes in our internal control over financing reporting that occurred during the fourth fiscal quarter of 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

TABLE OF CONTENTS

Other Information.

We will file with the Securities and Exchange Commission (the “SEC”) a definitive Proxy Statement for Stellus Capital Investment Corporation’s (“we”, “us”, “our” and the “Company”) 2021 Annual Meeting of Stockholders, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year.

Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to the Annual Report on Form 10-K.

Only those sections of our definitive Proxy Statement that specifically address the items set forth herein are incorporated by reference.

Directors, Executive Officers and Corporate Governance

The information required by Item 10 is hereby incorporated by reference from the Company’s definitive Proxy Statement relating to the Company’s 2021 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of the Company’s fiscal year.

We have adopted a code of business conduct and ethics that applies to our directors, officers and employees.

This code of ethics is published on our website at www.stelluscapital.com .

We intend to disclose any future amendments to, or waivers from, this code of conduct within four business days of the waiver or amendment through a website posting.

Executive Compensation

The information required by Item 11 is hereby incorporated by reference from the Company’s definitive Proxy Statement relating to the Company’s 2021 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of the Company’s fiscal year.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by Item 12 is hereby incorporated by reference from the Company’s definitive Proxy Statement relating to the Company’s 2021 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of the Company’s fiscal year.

Certain Relationships and Related Transactions, and Director Independence

The information required by Item 13 is hereby incorporated by reference from the Company’s definitive Proxy Statement relating to the Company’s 2021 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of the Company’s fiscal year.

Principal Accountant Fees and Services

The information required by Item 14 is hereby incorporated by reference from the Company’s definitive Proxy Statement relating to the Company’s 2021 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of the Company’s fiscal year.

TABLE OF CONTENTS

Exhibits, Financial Statement Schedules

Documents Filed as Part of this Report

The following financial statements are set forth in Item 8:

Report of Independent Registered Public Accounting Firm

Statements of Assets and Liabilities as of December 31, 2020 and December 31, 2019

Statements of Operations for the years ended December 31, 2020, 2019, and 2018

Statements of Changes in Net Assets for the years ended December 31, 2020, 2019, and 2018

Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018

Schedule of Investments as of December 31, 2020 and December 31, 2019

Notes to Financial Statements

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

Articles of Amendment and Restatement (Incorporated by reference to Exhibit (a)(1) to the Registrant’s Registration Statement on Form N-2 (File No.

333-184195), filed on October 23, 2012).

Bylaws (Incorporated by reference to Exhibit (b)(1) to the Registrant’s Registration Statement on Form N-2 (File No.

333-184195), filed on October 23, 2012).

Form of Stock Certificate (Incorporated by reference to Exhibit (d) to the Registrant’s Registration Statement on Form N-2 (File No.

333-184195), filed on October 23, 2012).

Form of Indenture (Incorporated by reference to Exhibit (d)(2) to the Registrant’s Registration Statement on Form N-2 (File No.

333-189938, filed January 29, 2014).

Second Supplemental Indenture between the Registrant and U.S.

Bank National Association, date August 21, 2017, (Incorporated by reference on exhibit (d)(6) to the Registrant’s Registration Statement on Form N-2 (File No.

333-216138), filed on August 23, 2017).

Third Supplemental Indenture between the Registrant and U.S.

Bank National Association, date January 14

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data