Stellus Capital Investment Corp 10-Q

10-Q 1 tm2118654d1_10q.htm FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2021 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-35730 STELLUS CAPITAL INVESTMENT CORPORATION ( Exact Name of Registrant as Specified in Its Charter) Maryland 46-0937320 (State or other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) 4400 Post Oak Parkway, Suite 2200 Houston, Texas 77027 (Address of Principal Executive Offices) (Zip Code) (713) 292-5400 (Registrant’s Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, par value $0.001 per share SCM New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company ¨ Emerging growth company ¨ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x The number of shares of the issuer’s Common Stock, $0.001 par value per share, outstanding as of August 2, 2021 was 19,486,003. STELLUS CAPITAL INVESTMENT CORPORATION TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements 2 Consolidated Statements of Assets and Liabilities as of June 30, 2021 (unaudited) and December 31, 2020 2 Consolidated Statements of Operations for the three and six-month periods ended June 30, 2021 and 2020 (unaudited) 3 Consolidated Statements of Changes in Net Assets for the three and six-month periods ended June 30, 2021 and 2020 (unaudited) 4 Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2021 and 2020 (unaudited) 5 Consolidated Schedules of Investments as of June 30, 2021 (unaudited) and December 31, 2020 6 Notes to Unaudited Consolidated Financial Statements 25 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 58 Item 3. Quantitative and Qualitative Disclosures About Market Risk 77 Item 4. Controls and Procedures 78 PART II. OTHER INFORMATION Item 1. Legal Proceedings 79 Item 1A. Risk Factors 79 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 80 Item 3. Defaults Upon Senior Securities 80 Item 4. Mine Safety Disclosures 80 Item 5. Other Information 80 Item 6. Exhibits 81 SIGNATURES 82 i PART I — FINANCIAL INFORMATION STELLUS CAPITAL INVESTMENT CORPORATION CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES June 30, 2021 December 31, (Unaudited) 2020 ASSETS Non-controlled, non-affiliated investments, at fair value (amortized cost of $785,364,583 and $658,628,966, respectively) $ 781,947,972 $ 653,424,495 Cash and cash equivalents 18,602,775 18,477,602 Receivable for sales and repayments of investments 480,552 215,929 Interest receivable 2,712,220 2,189,448 Other receivables 25,495 25,495 Deferred offering costs — 90,000 Prepaid expenses 301,016 487,188 Total Assets $ 804,070,030 $ 674,910,157 LIABILITIES Notes payable $ 97,877,778 $ 48,307,518 Credit facility payable 190,563,263 171,728,405 SBA-guaranteed debentures 228,969,256 173,167,496 Dividends payable 1,623,187 — Management fees payable 2,278,479 2,825,322 Income incentive fees payable 178,398 681,660 Capital gains incentive fees payable 618,689 521,021 Interest payable 4,534,509 2,144,085 Unearned revenue 513,798 523,424 Administrative services payable 394,075 391,491 Deferred tax liability 339,673 359,590 Income tax payable 362,977 724,765 Other accrued expenses and liabilities 1,649,667 174,731 Total Liabilities $ 529,903,749 $ 401,549,508 Commitments and contingencies (Note 7) Net Assets $ 274,166,281 $ 273,360,649 NET ASSETS Common stock, par value $0.001 per share (100,000,000 shares authorized; 19,486,003 and 19,486,003 issued and outstanding, respectively) $ 19,486 $ 19,486 Paid-in capital 276,026,667 276,026,667 Accumulated undistributed deficit (1,879,872 ) (2,685,504 ) Net Assets $ 274,166,281 $ 273,360,649 Total Liabilities and Net Assets $ 804,070,030 $ 674,910,157 Net Asset Value Per Share $ 14.07 $ 14.03 2 STELLUS CAPITAL INVESTMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) For the For the For the For the three three six six months ended months ended months ended months ended June 30, June 30, June 30, June 30, 2021 2020 2021 2020 INVESTMENT INCOME Interest income $ 14,846,398 $ 13,635,480 $ 28,359,175 $ 28,485,068 Other income 257,976 205,798 733,063 617,255 Total Investment Income $ 15,104,374 $ 13,841,278 $ 29,092,238 $ 29,102,323 OPERATING EXPENSES Management fees $ 3,278,479 $ 2,743,195 $ 6,242,340 $ 5,462,249 Valuation fees 20,082 19,001 148,435 128,834 Administrative services expenses 463,102 436,594 916,491 903,529 Income incentive fees 55,899 168,749 55,899 1,508,386 Capital gains incentive fees (reversal) 14,387 - 97,668 (880,913 ) Professional fees 236,212 150,514 505,177 537,228 Directors' fees 74,500 110,566 166,000 242,816 Insurance expense 118,813 93,071 236,320 186,142 Interest expense and other fees 4,691,968 4,092,594 9,015,446 8,384,798 Income tax expense 286,276 289,000 526,257 485,795 Other general and administrative expenses 329,641 302,379 586,559 468,382 Total Operating Expenses $ 9,569,359 $ 8,405,663 $ 18,496,592 $ 17,427,246 Net Investment Income $ 5,535,015 $ 5,435,615 $ 10,595,646 $ 11,675,077 Net realized loss on non-controlled, non-affiliated investments $ (1,781,665 ) $ (3,893,249 ) $ (1,319,437 ) $ (2,596,456 ) Loss on debt extinguishment $ - $ - $ (539,250 ) $ - Net change in unrealized appreciation (depreciation) on non-controlled, non-affiliated investments $ 1,665,877 $ 38,329,217 $ 1,787,860 $ (13,175,729 ) Benefit (provision) for taxes on net unrealized gain on investments $ 187,721 $ (58,909 ) $ 19,917 $ (29,950 ) Net Increase (Decrease) in Net Assets Resulting from Operations $ 5,606,948 $ 39,812,674 $ 10,544,736 $ (4,127,058 ) Net Investment Income Per Share $ 0.28 $ 0.28 $ 0.54 $ 0.60 Net Increase (Decrease) in Net Assets Resulting from Operations Per Share $ 0.29 $ 2.04 $ 0.54 $ (0.21 ) Weighted Average Shares of Common Stock Outstanding 19,486,003 19,484,217 19,486,003 19,456,849 Distributions Per Share $ 0.25 $ 0.25 $ 0.50 $ 0.59 3 STELLUS CAPITAL INVESTMENT CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (unaudited) For the For the For the For the three three six six months ended months ended months ended months ended June 30, June 30, June 30, June 30, 2021 2020 2021 2020 Increase (Decrease) in Net Assets Resulting from Operations Net investment income $ 5,535,015 $ 5,435,615 $ 10,595,646 $ 11,675,077 Net realized loss on non-controlled, non-affiliated investments (1,781,665 ) (3,893,249 ) (1,319,437 ) (2,596,456 ) Loss on debt extinguishment — — (539,250 ) Net change in unrealized appreciation (depreciation) on non-controlled, non-affiliated investments 1,665,877 38,329,217 1,787,860 (13,175,729 ) Benefit (provision) for taxes on unrealized appreciation on investments 187,721 (58,909 ) 19,917 (29,950 ) Net Increase (Decrease) in Net Assets Resulting from Operations $ 5,606,948 $ 39,812,674 $ 10,544,736 $ (4,127,058 ) Stockholder Distributions From: Net investment income $ (4,869,552 ) $ (4,871,501 ) $ (9,739,104 ) $ (11,490,798 ) Total Distributions $ (4,869,552 ) $ (4,871,501 ) $ (9,739,104 ) $ (11,490,798 ) Capital Share Transactions Issuance of common stock $ — $ 93,470 $ — $ 5,023,937 Sales load — — — (5,681 ) Offering costs — — — (18,169 ) Partial share transactions — — — (96 ) Net Increase in Net Assets Resulting From Capital Share Transactions $ — $ 93,470 $ — $ 4,999,991 Total Increase (Decrease) in Net Assets $ 737,396 $ 35,034,643 $ 805,632 $ (10,617,865 ) Net Assets at Beginning of Period $ 273,428,885 $ 224,918,665 $ 273,360,649 $ 270,571,173 Net Assets at End of Period $ 274,166,281 $ 259,953,308 $ 274,166,281 $ 259,953,308 4 STELLUS CAPITAL INVESTMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For the For the six six months ended months ended June 30, June 30, 2021 2020 Cash flows from operating activities Net increase (decrease) in net assets resulting from operations $ 10,544,736 $ (4,127,058 ) Adjustments to reconcile net increase (decrease) in net assets from operations to net cash used in operating activities: Purchases of investments (182,822,853 ) (68,247,468 ) Proceeds from sales and repayments of investments 55,963,858 42,341,340 Net change in unrealized (appreciation) depreciation on investments (1,787,860 ) 13,175,729 Increase in investments due to PIK (360,003 ) (552,245 ) Amortization of premium and accretion of discount, net (1,107,347 ) (1,069,969 ) Deferred tax (benefit) provision (19,917 ) 29,951 Amortization of loan structure fees 239,700 318,039 Amortization of deferred financing costs 233,846 165,748 Amortization of loan fees on SBA-guaranteed debentures 501,885 342,550 Net realized loss on investments 1,326,105 2,596,456 Loss on debt extinguishment 539,250 — Changes in other assets and liabilities (Increase) decrease in interest receivable (522,772 ) 588,854 Decrease in prepaid expenses 186,172 101,378 (Decrease) increase in management fees payable (546,843 ) 2,766,468 (Decrease) increase in incentive fees payable (503,262 ) 42,353 Increase (decrease) in capital gains incentive fees payable 97,668 (880,913 ) Increase in administrative services payable 2,584 383,490 Increase (decrease) in interest payable 2,390,424 (155,230 ) Increase in director fees payable — 9,000 (Decrease) increase in unearned revenue (9,626 ) 86,232 Decrease in income tax payable (361,788 ) (461,000 ) Increase in other accrued expenses and liabilities 1,474,936 163,207 Net Cash Used in Operating Activities $ (114,541,107 ) $ (12,383,088 ) Cash flows from Financing Activities Proceeds from the issuance of common stock $ — $ 4,794,994 Sales load for commons stock issued — (5,681 ) Offering costs paid for common stock issued — (18,169 ) Stockholder distributions paid (8,115,917 ) (8,557,981 ) Repayment of Notes Payable (48,875,000 ) — Proceeds from issuance of Notes 100,000,000 — Financing costs from bond issuance (2,237,835 ) — Proceeds from SBA Debentures 57,500,000 — Financing costs paid on SBA Debentures (2,200,125 ) — Financing costs paid on Credit facility (4,843 ) (203,353 ) Borrowings under Credit Facility 161,800,000 86,450,000 Repayments of Credit Facility (143,200,000 ) (63,000,000 ) Partial Share Redemption — (96 ) Net Cash Provided by Financing Activities $ 114,666,280 $ 19,459,714 Net Increase in Cash and Cash Equivalents $ 125,173 $ 7,076,626 Cash and cash equivalents balance at beginning of period 18,477,602 16,133,315 Cash and Cash Equivalents Balance at End of Period $ 18,602,775 $ 23,209,941 Supplemental and Non-Cash Activities Cash paid for interest expense $ 5,649,592 $ 7,713,693 Excise tax paid 870,000 940,000 Shares issued pursuant to Dividend Reinvestment Plan — 228,943 Increase in dividends payable 1,623,187 2,703,874 Decrease in deferred offering costs for Notes Payable offering (90,000 ) — Gain on conversion of equity investment 6,668 — 5 Stellus Capital Investment Corporation Consolidated Schedule of Investments (unaudited) June 30, 2021 Investments Footnotes Security Coupon LIBOR floor Cash PIK Investment Date Maturity Headquarters/ Industry Principal Amount/ Shares Amortized Cost Fair Value (1) % of Net Assets Non-controlled, non-affiliated investments (2)(9) Adams Publishing Group, LLC Greenville, TN Term Loan (35) First Lien 1M L+7.00% 1.75 % 8.75 % 8/3/2018 6/30/2023 Media: Advertising, Printing & Publishing $ 4,371,629 4,351,567 4,371,629 1.59 % Delayed Draw Term Loan (35) First Lien 1M L+7.00 % 1.75 % 8.75 % 8/3/2018 6/30/2023 $ 144,329 144,329 144,329 0.05 % Total $ 4,495,896 $ 4,515,958 1.64 % Ad.Net Acquisition, LLC Los Angeles, CA Term Loan (SBIC II) (9)(35) First Lien 3M L+6.00 % 1.00 % 7.00 % 5/7/2021 5/7/2026 Services: Business $ 15,588,235 15,360,776 15,360,776 5.60 % Revolver (19)(35) First Lien 3M L+6.00 % 1.00 % 7.00 % 5/7/2021 5/7/2026 $ 220,833 220,833 217,611 0.08 % Ad.Net Holdings, Inc. Series A Common Stock (SBIC II) (4)(9) Equity 5/7/2021 7,794 shares 77,941 77,941 0.03 % Ad.Net Holdings, Inc. Series A Preferred Stock (SBIC II) (4)(9) Equity 5/7/2021 7,015 shares 701,471 701,471 0.26 % Total $ 16,361,021 $ 16,357,799 5.97 % ADS Group Opco, LLC Los Angeles, CA Term Loan (SBIC II) (9)(35) First Lien 3M L+6.75 % 1.00 % 7.75 % 6/4/2021 6/4/2026 Aerospace & Defense $ 15,000,000 14,703,977 14,703,977 5.36 % Revolver (33)(35) First Lien 3M L+6.75 % 1.00 % 7.75 % 6/4/2021 6/4/2026 $ 10,000 10,000 9,803 0.00 % Pluto Aggregator, LLC Class A Units (4) Equity 6/4/2021 77,626 units 288,691 288,691 0.11 % Pluto Aggregator, LLC Class B Units (4) Equity 6/4/2021 56,819 units 211,309 211,309 0.08 % Total $ 15,213,977 $ 15,213,780 5.55 % Advanced Barrier Extrusions, LLC Rhinelander, WI Term Loan B (SBIC) (2)(35) First Lien 1M L+6.50 % 1.00 % 7.50 % 11/30/2020 11/30/2026 Containers, Packaging & Glass $ 17,412,500 17,091,339 17,151,313 6.27 % GP ABX Holdings Partnership, L.P. Common Stock (4) Equity 8/8/2018 644,737 units 700,000 860,000 0.31 % Total $ 17,791,339 $ 18,011,313 6.58 % Anne Lewis Strategies, LLC (20) Washington, D.C Term Loan (SBIC II) (9)(35) First Lien 3M L+6.75 % 1.00 % 7.75 % 3/5/2021 3/5/2026 Services: Business $ 11,356,250 11,141,294 11,129,125 4.06 % SG AL Investment, LLC Common Units (4) Equity 3/5/2021 1,000 units 978,371 1,200,000 0.44 % Total $ 12,119,665 $ 12,329,125 4.50 % APE Holdings, LLC Deer Park, TX Class A Common Units (4) Equity 9/5/2014 Chemicals, Plastics, & Rubber 375,000 units 375,000 20,000 0.01 % Atmosphere Aggregator Holdings II, LP Common Units (4) Equity 1/26/2016 Atlanta, GA Services: Business 254,250 units 0 1,530,000 0.56 % Stratose Aggregator Holdings, LP Common Units (4) Equity 6/30/2015 750,000 units 0 4,530,000 1.65 % Total $ 0 $ 6,060,000 2.21 % 6 Stellus Capital Investment Corporation Consolidated Schedule of Investments (unaudited) June 30, 2021 ASC Communications, LLC (17) Chicago, IL Term Loan (SBIC) (2)(35) First Lien 1M L+5.00% 1.00 % 6.00 % 6/29/2017 6/29/2023 Healthcare & Pharmaceuticals $ 3,672,839 3,663,803 3,617,746 1.32 % Term Loan (35) First Lien 1M L+5.00 % 1.00 % 6.00 % 2/4/2019 6/29/2023 $ 6,243,827 6,205,268 6,150,170 2.24 % ASC Communications Holdings, LLC Class A Preferred Units (SBIC) (2)(4) Equity 6/29/2017 73,529 shares 38,841 610,000 0.22 % Total $ 9,907,912 $ 10,377,916 3.78 % BW DME Acquisition, LLC Term Loan (SBIC) (2)(13)(22) First Lien 3M L+6.00 % 1.00 % 8.51 % 8/24/2017 8/24/2022 Tempe, AZ Healthcare & Pharmaceuticals $ 16,695,804 16,553,182 16,695,804 6.09 % BW DME Holdings, LLC, Term Loan (6) Unsecured 17.50 % 17.50% 6/1/2018 6/30/2020 $ 425,736 425,736 425,736 0.16 % BW DME Holdings, LLC Class A-1 Preferred Units (4) Equity 8/24/2017 1,000,000 shares 1,000,000 1,870,000 0.68 % BW DME Holdings, LLC Class A-2 Preferred Units (4) Equity 1/26/2018 937,261 shares 937,261 1,750,000 0.64 % Total $ 18,916,179 $ 20,741,540 7.57 % Café Valley, Inc. Term Loan (35) First Lien 1M L+7.00 % 1.25 % 8.25 % 8/28/2019 8/28/2024 Phoenix, AZ Beverage,Food, & Tobacco $ 15,989,286 15,772,132 15,509,607 5.66 % CF Topco LLC, Common Units (4) Equity 8/28/2019 9,160 shares 916,015 740,000 0.27 % Total $ 16,688,147 $ 16,249,607 5.93 % CEATI International, Inc. (39) Montreal, Quebec Term Loan (5)(35) First Lien 3M L+6.50 % 1.00 % 7.50 % 2/19/2021 2/19/2026 Services: Business $ 13,466,250 13,211,101 13,196,925 4.81 % CEATI Holdings, LP, Class A Units (4)(5) Equity 2/19/2021 250,000 shares 250,000 260,000 0.09 % Total $ 13,461,101 $ 13,456,925 4.90 % Colford Capital Holdings, LLC Preferred Units (4)(5) Equity 8/20/2015 New York, NY Finance 38,893 units 195,036 20,000 0.01 % CommentSold, LLC (8) Huntsville, AL Term Loan (SBIC) (2)(35) First Lien 1M L+6.00 % 1.00 % 7.00 % 11/20/2020 11/20/2026 High Tech Industries $ 12,437,500 12,208,387 12,250,938 4.47 % CompleteCase, LLC Seattle, WA Term Loan (SBIC II) (9)(35) First Lien 3M L+6.50 % 1.00 % 7.50 % 12/21/2020 12/21/2025 Services: Consumer $ 11,420,870 11,211,425 11,192,453 4.08 % Revolver (21)(35) First Lien 3M L+6.50 % 1.00 % 7.50 % 12/21/2020 12/21/2025 $ 33,333 33,333 32,666 0.01 % CompleteCase Holdings, Inc. Class A Common Units (SBIC II) (4)(9) Equity 12/21/2020 417 units 5 0 0.00 % CompleteCase Holdings, Inc. Series A Preferred Units (SBIC II) (4)(9) Equity 12/21/2020 522 units 521,734 620,000 0.23 % Total $ 11,766,497 $ 11,845,119 4.32 % Convergence Technologies, Inc. Indianapolis, IN Term Loan (SBIC) (2)(35) First Lien 3M L+6.75 % 1.50 % 8.25 % 8/31/2018 8/30/2024 Services: Business $ 6,946,429 6,864,216 6,876,965 2.51 % Term Loan B (SBIC) (2)(35) First Lien 3M L+6.75 % 1.50 % 8.25 % 8/14/2020 8/30/2024 $ 3,721,875 3,661,900 3,684,656 1.34 % Term Loan (35) First Lien 3M L+6.75 % 1.50 % 8.25 % 2/28/2019 8/30/2024 $ 1,396,429 1,378,748 1,382,465 0.50 % Delayed Draw Term Loan (35) First Lien 3M L+6.75 % 1.50 % 8.25 % 8/31/2018 8/30/2024 $ 5,223,214 5,223,214 5,170,982 1.89 % Tailwind Core Investor, LLC Class A Preferred Units (4) Equity 8/31/2018 5,583 units 588,813 790,000 0.29 % Total $ 17,716,891 $ 17,905,068 6.53 % 7 Stellus Capital Investment Corporation Consolidated Schedule of Investments (unaudited) June 30, 2021 Data Centrum Communications, Inc. Montvale, NJ Term Loan B (35) First Lien 3M L+5.50% 1.00 % 6.50 % 5/15/2019 5/15/2024 Media: Advertising, Printing & Publishing $ 15,925,000 15,728,652 14,173,250 5.17 % Health Monitor Holdings, LLC Series A Preferred Units (4) Equity 5/15/2019 1,000,000 shares 1,000,000 310,000 0.11 % Total $ 16,728,652 $ 14,483,250 5.28 % Douglas Products Group, LP Liberty, MO Class A Common Units (4) Equity 12/27/2018 Chemicals, Plastics, & Rubber 322 shares 139,656 820,000 0.30 % Dresser Utility Solutions, LLC Bradford, PA Term Loan (SBIC) (2)(35) Second Lien 1M L+8.50% 1.00 % 9.50 % 10/1/2018 - Utilities: Oil & Gas $ 10,000,000 9,892,808 9,850,000 3.59 % DRS Holdings III, Inc. (10) St. Louis, MO Term Loan (35) First Lien 1M L+6.25% 1.00 % 7.25 % 11/1/2019 11/1/2025 Consumer Goods: Durable $ 9,850,000 9,774,498 9,850,000 3.59 % DTE Enterprises, LLC (18) Roselle, IL Term Loan (6)(35) First Lien 6M L+8.50% 1.50 % 9.50 % 0.50 % 4/13/2018 4/13/2023 Energy: Oil & Gas $ 9,344,688 9,266,913 8,550,390 3.12 % DTE Holding Company, LLC Common Shares, Class A-2 (4) Equity 4/13/2018 776,316 shares 466,204 190,000 0.07 % DTE Holding Company, LLC Preferred Shares, Class AA (4) Equity 4/13/2018 723,684 shares 723,684 180,000 0.07 % Total $ 10,456,801 $ 8,920,390 3.26 % Elliott Aviation, LLC Moline, IL Term Loan (35) First Lien 3M L+6.00% 1.75 % 7.75 % 1/31/2020 1/31/2025 Aerospace & Defense $ 17,815,345 17,545,621 17,369,961 6.35 % Revolver (3)(35) First Lien 3M L+6.00% 1.75 % 7.75 % 1/31/2020 1/31/2025 $ 1,350,000 1,350,000 1,316,250 0.48 % SP EA Holdings, LLC Preferred Shares, Class A (4) Equity 1/31/2020 900,000 shares 900,000 280,000 0.10 % Total $ 19,795,621 $ 18,966,211 6.93 % Empirix Holdings I, Inc. Billerica, MA Common Shares, Class A (4) Equity 11/1/2013 Software 1,304 shares 1,304,232 1,000,000 0.36 % Common Shares, Class B (4) Equity 11/1/2013 1,317,406 shares 13,174 10,000 0.00 % Total $ 1,317,406 $ 1,010,000 0.36 % Energy Labs Holding Corp. Houston, TX Common Stock (4) Equity 9/29/2016 Energy: Oil & Gas 598 shares 598,182 620,000 0.23 % Exacta Land Surveyors, LLC (23)(25) Cleveland, OH Term Loan (SBIC) (2)(35) First Lien 3M L+7.75% 1.50 % 9.25 % 2/8/2019 2/8/2024 Services: Business $ 16,629,375 16,436,462 16,296,788 5.94 % SP ELS Holdings LLC, Class A Common Units (4) Equity 2/8/2019 1,069,143 shares 1,069,143 330,000 0.12 % Total $ 17,505,605 $ 16,626,788 6.06 % EOS Fitness Holdings, LLC Phoenix, AZ Preferred Units (4) Equity 12/30/2014 Hotel, Gaming, & Leisure 118 shares 0 40,000 0.01 % Class B Common Units (4) Equity 12/30/2014 3,017 shares 0 0 0.00 % Total $ 0 $ 40,000 0.01 % Fast Growing Trees, LLC (16) Fort Mill, SC Term Loan (SBIC) (2)(35) First Lien 3M L+6.75% 1.00 % 7.75 % 2/5/2018 2/5/2023 Retail $ 14,992,490 14,882,227 14,992,490 5.47 % SP FGT Holdings, LLC, Class A Common (4) Equity 2/5/2018 1,000,000 shares 978,511 3,830,000 1.40 % Total $ 15,860,738 $ 18,822,490 6.87 % 8 Stellus Capital Investment Corporation Consolidated Schedule of Investments (unaudited) June 30, 2021 FB Topco, Inc. Camden, NJ Term Loan (13)(22) First Lien 6M L+6.35% 1.00 % 9.52 % 6/27/2018 4/24/2023 Education $ 20,487,872 20,304,040 20,487,872 7.48 % Delayed Draw Term Loan ( 13)(22) First Lien 6M L+6.35% 1.00 % 9.55 % 6/27/2018 4/24/2023 $ 1,123,340 1,123,340 1,123,340 0.41 % Total $ 21,427,380 $ 21,611,212 7.89 % General LED OPCO, LLC (40) San Antonio, TX Term Loan (35) Second Lien 3M L+9.00% 1.50 % 0.00 % 5/1/2018 3/31/2026 Services: Business $ 4,500,000 4,456,077 3,667,500 1.34 % GS HVAM Intermediate, LLC Carlsbad, CA Term Loan (35) First Lien 1M L+5.75% 1.00 % 6.75 % 10/18/2019 10/2/2024 Beverage, Food, & Tobacco $ 12,830,377 12,739,981 12,830,377 4.68 % Revolver (34)(35) First Lien 1M L+5.75% 1.00 % 6.75 % 10/18/2019 10/2/2024 $ 265,152 265,152 265,152 0.10 % HV GS Acquisition, LP Class A Interests (4) Equity 10/2/2019 1,796 shares 1,618,844 1,960,000 0.71 % Total $ 14,623,977 $ 15,055,529 5.49 % Grupo HIMA San Pablo, Inc., et al San Juan, PR Term Loan B (27)(35)(41) First Lien 3M L+7.00% 1.50 % 0.00 % 2/1/2013 1/31/2018 Healthcare & Pharmaceuticals $ 4,503,720 4,503,720 2,161,786 0.79 % Term Loan (15)(27) Second Lien 13.75 % 0.00 % 2/1/2013 7/31/2018 $ 4,109,524 4,109,524 0 0.00 % Total $ 8,613,244 $ 2,161,786 0.79 % I2P Holdings, LLC Cleveland, OH Series A Preferred (4) Equity 1/31/2018 Services: Business 750,000 shares 750,000 3,460,000 1.26 % Ian, Evan & Alexander Corporation (36) Reston, VA Term Loan (SBIC) (2)(35) First Lien 3M L+8.50% 1.00 % 9.50 % 7/31/2020 7/31/2025 Services: Business $ 6,958,133 6,839,579 6,958,133 2.54 % EC Defense Holdings, LLC Class B Units (SBIC) (2)(4) Equity 7/31/2020 20,054 shares 500,000 670,000 0.24 % Total $ 7,339,579 $ 7,628,133 2.78 % ICD Holdings, LLC San Francisco, CA Class A Preferred (4)(5) Equity 1/1/2018 Finance 9,962 shares 464,616 2,020,000 0.74 % Industry Dive, Inc. (37) Washington, D.C. Term Loan (SBIC) (2)(35) First Lien 1M L+6.25% 1.00 % 7.25 % 7/17/2020 8/30/2024 Services: Business $ 6,980,586 6,868,475 6,945,683 2.53 % Integrated Oncology Network, LLC (30) Newport Beach, CA Term Loan (35) First Lien 3M L+5.50% 1.50 % 7.00 % 7/17/2019 6/24/2024 Healthcare & Pharmaceuticals $ 16,075,658 15,864,571 16,075,658 5.86 % Interstate Waste Services, Inc. Amsterdam, OH Common Units (4) Equity 1/15/2020 Environmental Industries 21,925 shares 946,125 390,000 0.14 % Intuitive Health, LLC Plano, TX Term Loan (SBIC II) (9)(35) First Lien 3M L+6.00% 1.50 % 7.50 % 10/18/2019 10/18/2024 Healthcare & Pharmaceuticals $ 5,910,000 5,826,103 5,910,000 2.16 % Term Loan (35) First Lien 3M L+6.00% 1.50 % 7.50 % 10/18/2019 10/18/2024 $ 11,327,500 11,166,698 11,327,500 4.13 % Legacy Parent, Inc. Class A Common Units (4) Equity 10/30/2020 58 shares 125,000 170,000 0.06 % Total $ 17,117,801 $ 17,407,500 6.35 % 9 Stellus Capital Investment Corporation Consolidated Schedule of Investments (unaudited) June 30, 2021 Invincible Boat Company, LLC (28) Opa Locka, FL Term Loan (35) First Lien 3M L+6.50% 1.50 % 8.00 % 8/28/2019 8/28/2025 Consumer Goods: Durable $ 5,925,636 5,785,962 5,896,008 2.15 % Term Loan (SBIC II) (9)(35) First Lien 3M L+6.50% 1.50 % 8.00 % 8/28/2019 8/28/2025 $ 5,469,818 5,388,217 5,442,469 1.99 % Term Loan (SBIC II) (9)(35) First Lien 3M L+6.50% 1.50 % 8.00 % 6/1/2021 8/28/2025 $ 1,216,012 1,192,089 1,209,932 0.44 % Warbird Parent Holdco, LLC Class A Common Units (4) Equity 8/28/2019 1,362,575 shares 1,310,554 1,410,000 0.51 % Total $ 13,676,822 $ 13,958,409 5.09 % J.R. Watkins, LLC San Francisco, CA Term Loan (SBIC) (2)(6) First Lien 10.00% 7.00 % 3.00 % 12/22/2017 12/22/2022 Consumer Goods: non-durable $ 12,373,197 12,289,310 12,373,197 4.51 % J.R. Watkins Holdings, Inc. Class A Preferred (4) Equity 12/22/2017 1,133 shares 1,132,576 730,000 0.27 % Total $ 13,421,886 $ 13,103,197 4.78 % Jurassic Acquisiton Corp. Sparks, MD Term Loan (12) First Lien 3M L+5.50% 0.00 % 5.65 % 12/28/2018 11/15/2024 Metals & Mining $ 17,062,500 16,904,135 17,062,500 6.22 % Kelleyamerit Holdings, Inc. Walnut Creek, CA Term Loan (SBIC) (2)(13)(22) First Lien 3M L+6.50% 1.00 % 8.85 % 12/24/2020 12/24/2025 Automotive $ 9,750,000 9,573,150 9,555,000 3.49 % Term Loan (13)(22) First Lien 3M L+6.50% 1.00 % 8.85 % 12/24/2020 12/24/2025 $ 1,500,000 1,472,792 1,470,000 0.54 % Total $ 11,045,942 $ 11,025,000 4.03 % KidKraft, Inc. (38) Dallas, TX Term Loan (22)(29) First Lien 3M L+5.00% 1.00 % 6.00 % 9/30/2016 8/15/2022 Consumer Goods: Durable $ 1,580,768 1,580,768 1,580,768 0.58 % KidKraft Group Holdings, LLC Preferred B Units (4) Equity 4/3/2020 4,000,000 shares 4,000,000 4,000,000 1.46 % Total $ 5,580,768 $ 5,580,768 2.04 % Lynx FBO Operating, LLC Houston, TX Term Loan (35) First Lien 3M L+5.75% 1.50 % 7.25 % 9/30/2019 9/30/2024 Aerospace & Defense $ 13,554,675 13,363,700 13,554,675 4.94 % Revolver (31)(35) First Lien 3M L+5.75% 1.50 % 7.25 % 9/30/2019 9/30/2024 $ 500,000 500,000 500,000 0.18 Lynx FBO Investments, LLC Class A-1 Common Units (4) Equity 9/30/2019 4,288 shares 593,480 720,000 0.26 % Total $ 14,457,180 $ 14,774,675 5.38 % Madison Logic, Inc. New York, NY Term Loan A (SBIC) (2)(35) First Lien 1M L+6.0% 1.00 % 7.00 % 2/4/2021 5/31/2023 Media: Broadcasting & Subscription $ 3,803,747 3,787,878 3,803,747 1.39 % Madison Logic Holdings, Inc. Common Stock (SBIC) (2)(4) Equity 11/30/2016 5,000 shares 50,000 150,000 0.05 % Madison Logic Holdings, Inc. Preferred Stock (SBIC) (2)(4) Equity 11/30/2016 4,500 shares 450,000 1,330,000 0.49 % Total $ 4,287,878 $ 5,283,747 1.93 % Mobile Acquisition Holdings, LP Santa Clara, CA Class A Common Units (4) Equity 11/1/2016 Software 750 units 455,385 2,550,000 0.93 % MOM Enterprises, LLC (43) Richmond, CA Term Loan (SBIC II) (9)(35) First Lien 3M L+6.25% 1.00 % 7.25 % 5/19/2021 5/19/2026 Healthcare & Pharmaceuticals $ 16,466,667 16,141,847 16,141,847 5.89 % Mbliss SPC Holdings, LLC Units (4) Equity 5/19/2021 933,333 units 933,333 933,333 0.34 % Total $ 17,075,180 $ 17,075,180 6.23 % 10 Stellus Capital Investment Corporation Consolidated Schedule of Investments (unaudited) June 30, 202 1 Munch's Supply, LLC New Lenox, IL Term Loan (35) First Lien 3M L+6.25% 1.00 % 7.25 % 4/11/2019 4/11/2024 Capital Equipment $ 7,192,376 7,148,955 7,192,376 2.62 % Term Loan (SBIC) (2)(35) First Lien 3M L+6.25% 1.00 % 7.25 % 3/31/2021 4/11/2024 $ 4,000,000 3,925,780 4,000,000 1.46 % Term Loan (35) First Lien 3M L+6.25% 1.00 % 7.25 % 5/28/2021 4/11/2024 $ 1,152,875 1,130,404 1,152,875 0.42 % Delayed Draw Term Loan (35) First Lien 3M L+6.25% 1.00 % 7.25 % 4/11/2019 4/11/2024 $ 2,154,749 2,126,676 2,154,749 0.79 % Cool Supply Holdings, LLC Class A Common Units (4) Equity 4/11/2019 500,000 units 486,516 770,000 0.28 % Total $ 14,818,331 $ 15,270,000 5.57 % Naumann/Hobbs Material Handling Corporation II, Inc. (32) Phoenix, AZ Term Loan (35) First Lien 3M L+6.25% 1.50 % 7.75 % 8/30/2019 8/30/2024 Services: Business $ 9,158,897 9,034,339 9,158,897 3.34 % Term Loan (SBIC II) (9)(35) First Lien 3M L+6.25% 1.50 % 7.75 % 8/30/2019 8/30/2024 $ 5,775,634 5,697,088 5,775,634 2.11 % CGC NH, Inc. Common Units (4) Equity 8/30/2019 123 shares 440,758 560,000 0.20 % Total $ 15,172,185 $ 15,494,531 5.65 % NS412, LLC Dallas, TX Term Loan (35) Second Lien 3M L+8.50% 1.00 % 9.50 % 5/6/2019 11/6/2025 Services: Consumer $ 7,615,000 7,503,067 7,462,700 2.72 % NS Group Holding Company, LLC Class A Common Units (4) Equity 5/6/2019 750 shares 750,000 610,000 0.22 % Total $ 8,253,067 $ 8,072,700 2.94 % NuMet Machining Techniques, LLC Birmingham, UK Term Loan (5)(35) Second Lien 1M L+9.00% 2.00 % 11.00 % 11/5/2019 5/5/2026 Aerospace & Defense $ 12,675,000 12,475,422 11,977,875 4.37 % Bromford Industries Limited Term Loan (5)(35) Second Lien 1M L+9.00% 2.00 % 11.00 % 11/5/2019 5/5/2026 $ 7,800,000 7,673,212 7,371,000 2.69 % Bromford Holdings, L.P. Class A Membership Units (4)(5) Equity 11/5/2019 866,629 shares 866,629 90,000 0.03 % Bromford Holdings, L.P. Class D Membership Units (4)(5) Equity 3/18/2021 280,078 shares 280,078 490,000 0.18 % Total $ 21,295,341 $ 19,928,875 7.27 % NuSource Financial, LLC Eden Prairie, MN Term Loan (SBIC II) (9)(35) First Lien 1M L+9.00% 1.00 % 10.00 % 1/29/2021 1/29/2026 Services: Business $ 11,250,000 11,039,584 11,025,000 4.02 % NuSource Financial Acquisition, Inc. (SBIC II) (9) Unsecured 13.75% 4.00 % 9.75 % 1/29/2021 7/29/2026 $ 4,868,354 4,778,247 4,770,987 1.74 % NuSource Holdings, Inc., Warrants (SBIC II) (4)(9) Equity 1/29/2021 54,966 shares 0 0 0.00 % Total $ 15,817,831 $ 15,795,987 5.76 % Nutritional Medicinals, LLC (24) Centerville, OH Term Loan (35) First Lien 3M L+6.00% 1.00 % 7.00 % 11/15/2018 11/15/2023 Healthcare & Pharmaceuticals $ 12,692,951 12,560,273 12,692,951 4.63 % Functional Aggregator, LLC Common Units (4) Equity 11/15/2018 12,500 shares 1,250,000 1,380,000 0.50 % Total $ 13,810,273 $ 14,072,951 5.13 % Onpoint Industrial Services, LLC Deer Park, TX Term Loan (SBIC) (2)(35) First Lien 3M L+7.25% 1.00 % 8.25 % 3/15/2021 3/15/2026 Services: Business $ 10,473,750 10,275,355 10,264,275 3.74 % Onpoint Parent Holdings, LLC, Class A Units (4) Equity 3/15/2021 500,000 shares 500,000 500,000 0.18 % Total $ 10,775,355 $ 10,764,275 3.92 % PCP MT Aggregator Holdings, L.P. Oak Brook, IL Common LP Units (4) Equity 3/29/2019 Finance 750,000 shares 0 1,940,000 0.71 % PCS Software, Inc. Shenandoah, TX Term Loan (35) First Lien 3M L+5.75% 1.50 % 7.25 % 7/1/2019 7/1/2024 Transportation & Logistics $ 14,283,113 14,096,723 14,283,113 5.21 % 11 Stellus Capital Investment Corporation Consolidated Schedule of Investments (unaudited) June 30, 2021 Term Loan (SBIC) (2)(35) First Lien 3M L+5.75% 1.50 % 7.25 % 7/1/2019 7/1/2024 $ 1,873,195 1,848,750 1,873,195 0.68 % Delayed Draw Term Loan (35) First Lien 3M L+5.75% 1.50 % 7.25 % 7/1/2019 7/1/2024 $ 987,500 987,500 987,500 0.36 % Revolver (11)(35) First Lien 3M L+5.75% 1.50 % 7.25 % 7/1/2019 7/1/2024 $ 571,195 571,195 571,195 0.21 % PCS Software Holdings, LLC Class A Preferred Units (4) Equity 7/1/2019 325,000 shares 325,000 230,000 0.08 % PCS Software Holdings, LLC Class A-2 Preferred Units (4) Equity 11/12/2020 63,312 shares 63,312 40,000 0.01 % Total $ 17,892,480 $ 17,985,003 6.55 % Pioneer Transformers, L.P. Franklin, WI Term Loan (SBIC II) (9)(35) First Lien 6M L+6.00% 1.50 % 7.50 % 11/22/2019 8/16/2024 Capital Equipment $ 4,912,500 4,851,679 4,912,500 1.79 % Premiere Digital Services, Inc. Los Angeles, CA Term Loan (SBIC) (2)(13)(22) First Lien 3M L+5.50% 1.50 % 8.15 % 10/18/2018 10/18/2023 Media: Broadcasting & Subscription $ 9,992,518 9,836,264 9,992,518 3.64 % Term Loan (13)(22) First Lien 3M L+5.50% 1.50 % 8.15 % 10/18/2018 10/18/2023 $ 2,428,772 2,391,940 2,428,772 0.89 % Premiere Digital Holdings, Inc., Common Stock (4) Equity 10/18/2018 5,000 shares 50,000 180,000 0.07 % Premiere Digital Holdings, Inc., Preferred Stock (4) Equity 10/18/2018 4,500 shares 314,550 1,610,000 0.59 % Total $ 12,592,754 $ 14,211,290 5.19 % Protect America, Inc. Austin TX Term Loan (SBIC) (2)(6)(26) (35) Second Lien 3M L+7.75% 1.00 % 0.00 % 8/30/2017 10/30/2020 Services: Consumer $ 17,979,749 17,979,749 2,337,367 0.85 % Rogers Mechanical Contractors, LLC (44)(45) Atlanta, GA Term Loan (35) First Lien 3M L+6.50% 1.00 % 7.50 % 4/28/2021 9/9/2025 Construction & Building $ 10,811,966 10,628,757 10,628,757 3.88 % Sales Benchmark Index, LLC (7) Dallas, TX Term Loan (35) First Lien 3M L+6.00% 1.75 % 7.75 % 1/7/2020 1/7/2025 Services: Business $ 14,243,855 14,031,071 14,172,636 5.17 % SBI Holdings Investments, LLC Class A Preferred Units (4) Equity 1/7/2020 66,573 units 665,730 290,000 0.11 % Total $ 14,696,801 $ 14,462,636 5.28 % Skopos Financial Group, LLC Irving, TX Series A Preferred Units (4)(5) Equity 1/31/2014 Finance 1,120,684 units 1,162,544 340,000 0.12 % Software Louxembourg Acquisition S.À.R.L. Nashua, NH Term Loan (22)(49) First Lien 3M L+7.50% 1.00 % 8.50 % 6/11/2021 4/27/2025 Software $ 2,000,000 2,000,000 2,000,000 0.73 % SQAD LLC Tarrytown, NY Term Loan (SBIC) (2)(35) First Lien 3M L+6.50% 1.00 % 7.50 % 12/22/2017 12/22/2022 Media: Broadcasting & Subscription $ 14,256,594 14,230,673 14,256,594 5.20 % SQAD Holdco, Inc. Preferred Shares, Series A (SBIC) (2)(4) Equity 10/31/2013 5,624 shares 156,001 750,000 0.27 % SQAD Holdco, Inc. Common Shares (SBIC) (2)(4) Equity 10/31/2013 5,800 shares 62,485 90,000 0.03 % Total $ 14,449,159 $ 15,096,594 5.50 % TAC LifePort Purchaser, LLC (42) Woodland, WA Term Loan (SBIC II) (9)(35) First Lien 3M L+6.00% 1.00 % 7.00 % 3/1/2021 3/2/2026 Aerospace & Defense $ 10,733,272 10,530,330 10,518,607 3.84 % TAC LifePort Holdings, LLC Common Units (4) Equity 3/1/2021 500,000 shares 500,000 570,000 0.21 % Total $ 11,030,330 $ 11,088,607 4.05 % 12 Stellus Capital Investment Corporation Consolidated Schedule of Investments (unaudited) June 30, 2021 TechInsights, Inc. Ottawa, Ontario Term Loan (5)(13)(22) First Lien 3M L+6.00% 1.00 % 8.30 % 8/16/2017 10/2/2023 High Tech Industries $ 21,540,925 21,381,709 21,540,925 7.87 % TFH Reliability, LLC Houston, TX Term Loan (SBIC) (2)(35) Second Lien 3M L+10.75% 0.80 % 11.55 % 10/21/2016 9/30/2023 Chemicals, Plastics, & Rubber $ 5,875,000 5,849,901 5,757,500 2.10 % TFH Reliability Group, LLC Class A-1 Units (4) Equity 6/29/2020 27,129 shares 21,511 10,000 0.00 % TFH Reliability Group, LLC Class A Common Units (4) Equity 10/21/2016 250,000 shares 231,521 100,000 0.04 % Total $ 6,102,933 $ 5,867,500 2.14 % Time Manufacturing Acquisition, LLC Waco, TX Term Loan (6) Unsecured 11.50% 10.75 % 0.75 % 2/3/2017 8/3/2023 Capital Equipment $ 13,579,993 13,403,363 13,579,993 4.95 % Time Manufacturing Investments, LLC Class A Common Units (4) Equity 2/3/2017 5,268 units 553,600 1,130,000 0.41 % Total $ 13,956,963 $ 14,709,993 5.36 % TradePending, LLC (14) Carrboro, NC Term Loan (SBIC II) (9)(35) First Lien 3M L+6.25% 1.00 % 7.25 % 3/2/2021 3/2/2026 Software $ 9,975,000 9,786,326 9,775,500 3.57 % TradePending Holdings, LLC Series A Units (4) Equity 3/2/2021 750,000 units 750,000 780,000 0.28 % Total $ 10,536,326 $ 10,555,500 3.85 % Unicat Catalyst Holdings, LLC (46) Alvin, TX Term Loan (35) First Lien 3M L+6.50% 1.00 % 7.50 % 4/27/2021 4/27/2026 Chemicals, Plastics, & Rubber $ 7,500,000 7,354,098 7,354,098 2.68 % Unicat Catalyst, LLC Class A Units (4) Equity 4/27/2021 7,500 units 750,000 750,000 0.27 % Total $ 8,104,098 $ 8,104,098 2.95 % U.S. Auto Sales, Inc. et al Lawrenceville, GA USASF Blocker II, LLC Common Units (4)(5) Equity 6/8/2015 Finance 441 units 441,000 660,000 0.24 % USASF Blocker III, LLC Series C Preferred Units (4)(5) Equity 2/13/2018 125 units 125,000 190,000 0.07 % USASF Blocker IV, LLC Units (4)(5) Equity 5/27/2020 110 units 110,000 170,000 0.06 % USASF Blocker LLC Common Units (4)(5) Equity 6/8/2015 9,000 units 9,000 10,000 0.00 % Total $ 685,000 $ 1,030,000 0.37 % Venbrook Buyer, LLC Los Angeles, CA Term Loan B (SBIC) (2)(35) First Lien 3M L+6.50% 1.50 % 8.00 % 3/13/2020 3/13/2026 Services: Business $ 13,018,542 12,804,447 13,018,542 4.75 % Term Loan B (35) First Lien 3M L+6.50% 1.50 % 8.00 % 3/13/2020 3/13/2026 $ 148,125 145,689 148,125 0.05 % Revolver (35) First Lien 3M L+6.50% 1.50 % 8.00 % 3/13/2020 3/13/2026 $ 2,222,222 2,222,222 2,222,222 0.81 % Delayed Draw Term Loan (35) First Lien 3M L+6.50% 1.50 % 8.00 % 3/13/2020 3/13/2026 $ 4,437,778 4,395,294 4,437,778 1.62 % Venbrook Holdings, LLC Common Units (4) Equity 3/13/2020 598,682 shares 595,186 650,000 0.24 % Total $ 20,162,838 $ 20,476,667 7.47 % Vortex Companies, LLC Houston, TX Term Loan (SBIC II) (9)(35) Second Lien 3M L +9.50% 1.00 % 10.50 % 12/21/2020 6/21/2026 Environmental Industries $ 10,000,000 9,813,628 9,800,000 3.57 % VRI Ultimate Holdings, LLC Franklin, OH Class A Preferred Units (4) Equity 5/31/2017 Healthcare & Pharmaceuticals 326,797 shares 500,000 530,000 0.19 % Whisps Acquisiton Corp. Elgin, IL Term Loan (35) First Lien 6M L+6.00% 1.00 % 7.00 % 4/26/2019 4/18/2025 Beverage, Food, & Tobacco $ 7,041,667 6,956,353 7,006,459 2.56 % 13 Stellus Capital Investment Corporation Consolidated Schedule of Investments (unaudited) June 30, 2021 Whisps Holdings LP Class A Common Units (4) Equity 4/18/2019 500,000 shares 500,000 540,000 0.20 % Total $ 7,456,353 $ 7,546,459 2.76 % Wise Parent Company, LLC Salt Lake City, UT Membership Units (4) Equity 8/27/2018 Beverage, Food, & Tobacco 6 units 0 410,000 0.15 % Xanitos, Inc. (47)(48) Newton Square, PA Term Loan (SBIC) (2)(35) First Lien 3M L+6.50% 1.00 % 7.50 % 6/25/2021 6/25/2026 Healthcare & Pharmaceuticals $ 14,300,000 14,014,000 14,014,000 5.11 % Pure TopCo, LLC Class A Units (4) Equity 6/25/2021 318,849 shares 760,063 760,063 0.28 % Total $ 14,774,063 $ 14,774,063 5.39 % Total Non-controlled, non-affiliated investments $ 785,364,583 $ 781,947,972 285.21 % Net Investments $ 785,364,583 $ 781,947,972 285.21 % LIABILITIES IN EXCESS OF OTHER ASSETS $ (507,781,691 ) (185.21 )% NET ASSETS $ 274,166,281 100.00 % (1) See Note 1 of the Notes to the Consolidated Financial Statements for a discussion of the methodologies used to value securities in the portfolio. (2) Investments held by the SBIC subsidiary (as defined in Note 1), which include $10,775,594 of cash and $232,634,962 of investments (at cost), are excluded from the obligations to the lenders of the Credit Facility (as defined in Note 9). Stellus Capital Investment Corporation’s (the “Company”) obligations to the lenders of the Credit Facility are secured by a first priority security interest in all investments and cash and cash equivalents, except for cash and investments held by the SBIC subsidiaries (as defined in Note 1). (3) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,350,000, with an interest rate of LIBOR plus 6.00% and a maturity of January 31, 2025. This investment is accruing an unused commitment fee of 0.50% per annum. (4) Security is non-income producing. (5) The investment is not a “qualifying asset” under the Investment Company Act of 1940, as amended. The Company may not acquire any non-qualifying assets unless, at the time of the acquisition, qualifying assets represent at least 70% of the Company’s total assets. Qualifying assets represent approximately 92% of the Company’s total assets as of June 30, 2021. (6) Represents a PIK interest security. At the option of the issuer, interest can be paid in cash or cash and PIK interest. The percentage of PIK interest shown is the maximum PIK interest that can be elected by the issuer. (7) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,331,461, with an interest rate of LIBOR plus 6.00% and a maturity of January 7, 2025. This investment is accruing an unused commitment fee of 0.50% per annum. (8) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.00% and a maturity of November 20, 2026. This investment is accruing an unused commitment fee of 0.50% per annum. (9) Investments held by the SBIC II subsidiary (as defined in Note 1), which include $4,102,622 of cash and $138,763,761 of investments (at cost), are excluded from the obligations to the lenders of the Credit Facility. The Company’s obligations to the lenders of the Credit Facility are secured by a first priority security interest in all investments and cash and cash equivalents, except for cash and investments held by the SBIC subsidiaries. (10) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $909,091, with an interest rate of LIBOR plus 6.25% and a maturity of November 1, 2025. This investment is accruing an unused commitment fee of 0.50% per annum. (11) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $746,948, with an interest rate of LIBOR plus 5.75% and a maturity of July 1, 2024. This investment is accruing an unused commitment fee of 0.50% per annum. (12) These loans have LIBOR floors which are lower than the applicable LIBOR rates; therefore, the floors are not in effect. (13) These loans are last-out term loans with contractual rates higher than the applicable LIBOR rates; therefore, the floors are not in effect. (14) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.25% and a maturity of March 2, 2026. This investment is accruing an unused commitment fee of 0.50% per annum. (15) Investment has been on non-accrual since October 31, 2017. (16) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,000,000, with an interest rate of LIBOR plus 6.75% and a maturity of February 5, 2023. This investment is accruing an unused commitment fee of 0.50% per annum. (17) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $666,667, with an interest rate of LIBOR plus 5.00% and a maturity of June 29, 2023. This investment is accruing an unused commitment fee of 0.50% per annum. 14 Stellus Capital Investment Corporation Consolidated Schedule of Investments (unaudited) June 30, 2021 (18) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $750,000, with an interest rate of LIBOR plus 8.50% and a maturity of April 13, 2023. The Company has full discretion to fund the revolver commitment. (19) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,078,186, with an interest rate of LIBOR plus 6.00% and a maturity of May 7, 2026. This investment is accruing an unused commitment fee of 0.50% per annum. (20) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.75% and a maturity of March 5, 2026. This investment is accruing an unused commitment fee of 0.50% per annum. (21) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $66,667 with an interest rate of LIBOR plus 6.50% and a maturity of December 21, 2025. This investment is accruing an unused commitment fee of 0.50% per annum. (22) This loan is a unitranche investment. (23) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,500,000 with an interest rate of LIBOR plus 7.75% and a maturity of February 8, 2024. This investment is accruing an unused commitment fee of 0.50% per annum. (24) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $2,000,000 with an interest rate of LIBOR plus 6.00% and a maturity of November 15, 2023. This investment is accruing an unused commitment fee of 0.50% per annum. (25) Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $4,000,000, with an interest rate of LIBOR plus 7.75% and a maturity of February 8, 2024. The Company has full discretion to fund the delayed draw term loan commitment. (26) Investment has been on non-accrual since June 28, 2019. 15 Stellus Capital Investment Corporation Consolidated Schedule of Investments (unaudited) June 30, 2021 (27) Maturity date is under ongoing negotiations with portfolio company and other lenders. (28) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,063,830, with an interest rate of LIBOR plus 6.50% and a maturity of August 28, 2025. This investment is accruing an unused commitment fee of 0.50% per annum. (29) These loans are last-out term loans with contractual rates lower than the applicable LIBOR rates; therefore, the floors are in effect. (30) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $553,517, with an interest rate of LIBOR plus 5.50% and a maturity of June 24, 2024. This investment is accruing an unused commitment fee of 0.50% per annum. (31) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,375,000, with an interest rate of LIBOR plus 5.75% and a maturity of September 30, 2024. This investment is accruing an unused commitment fee of 0.50% per annum. (32) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,763,033, with an interest rate of LIBOR plus 6.25% and a maturity of August 30, 2024. This investment is accruing an unused commitment fee of 0.50% per annum. (33) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $90,000, with an interest rate of LIBOR plus 6.75% and a maturity of June 4, 2026. This investment is accruing an unused commitment fee of 0.50% per annum. (34) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $2,386,364, with an interest rate of LIBOR plus 5.75% and a maturity of October 2, 2024. This investment is accruing an unused commitment fee of 0.50% per annum. (35) These loans have LIBOR floors which are higher than the current applicable LIBOR rates; therefore, the floors are in effect. (36) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 8.50% and a maturity of July 31, 2025. This investment is accruing an unused commitment fee of 0.50% per annum. This undrawn revolver commitment is held by SBIC I. (37) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, 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. (38) Instrument was restructured into a first lien term loan and preferred equity on April 3, 2020. (39) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.50% and a maturity of February 19, 2026. This investment is accruing an unused commitment fee of 0.50% per annum. (40) Investment has been on non-accrual since December 31, 2020. (41) Investment has been on non-accrual since January 1, 2021. (42) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.00% and a maturity of March 2, 2026. This investment is accruing an unused commitment fee of 0.50% per annum. (43) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.25% and a maturity of May 19, 2026. This investment is accruing an unused commitment fee of 0.50% per annum. (44) Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.50% and a maturity of September 9, 2025. This investment is accruing an unused commitment fee of 1.00% per annum. (45) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.50% and a maturity of September 9, 2025. This investment is accruing an unused commitment fee of 0.50% per annum. (46) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $2,000,000, with an interest rate of LIBOR plus 6.50% and a maturity of April 27, 2026. This investment is accruing an unused commitment fee of 0.50% per annum. (47) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.50% and a maturity of June 25, 2026. This investment is accruing an unused commitment fee of 0.50% per annum. (48) Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $4,700,000, with an interest rate of LIBOR plus 6.50% and a maturity of June 25, 2026. This investment is accruing an unused commitment fee of 1.00% per annum. (49) This loan is a second-out term loan with contractual rate lower than the applicable LIBOR rate; therefore, the floor is in effect. Abbreviation Legend PIK — Payment-In-Kind L — LIBOR 16 Stellus Capital Investment Corporation Consolidated Schedule of Investments December 31, 2020 Investments Footnotes Security Coupon LIBOR floor Cash PIK Investment Date Maturity Headquarters/ Industry Principal Amount/ Shares Amortized Cost Fair Value (1) % of Net Assets Non-controlled, non-affiliated investments (2)(9) Adams Publishing Group, LLC Greenville, TN Term Loan (35) First Lien 1M L+7.00% 1.75 % 8.75 % 8/3/2018 6/30/2023 Media: Advertising, Printing & Publishing $4,990,080 4,962,046 4,990,080 1.83 % Delayed Draw Term Loan (35) First Lien 1M L+7.00% 1.75 % 8.75 % 8/3/2018 6/30/2023 $162,106 162,106 162,106 0.06 % Total $ 5,124,152 $ 5,152,186 1.89 % Advanced Barrier Extrusions, LLC Rhinelander, WI Term Loan(SBIC) (2)(35) First Lien 1M L+6.50% 1.00 % 7.50 % 11/30/2020 11/30/2026 Containers, Packaging & Glass $17,500,000 17,153,813 17,150,000 6.27 % GP ABX Holdings Partnership, L.P. Common Stock (4) Equity 8/8/2018 644,737 units 700,000 740,000 0.27 % Total $ 17,853,813 $ 17,890,000 6.54 % APE Holdings, LLC Deer Park, TX Class A Common Units (4) Equity 9/5/2014 Chemicals, Plastics, & Rubber 375,000 units 375,000 80,000 0.03 % Atmosphere Aggregator Holdings II, LP Atlanta, GA Common Units (4) Equity 1/26/2016 Services: Business 254,250 units 0 1,350,000 0.49 % Stratose Aggregator Holdings, LP Common Units (4) Equity 6/30/2015 750,000 units 0 3,970,000 1.45 % Total $ 0 $ 5,320,000 1.94 % ASC Communications, LLC (17) Chicago, IL Term Loan (SBIC) (2)(35) First Lien 1M L+5.00% 1.00 % 6.00 % 6/29/2017 6/29/2023 Healthcare & Pharmaceuticals $4,058,642 4,044,314 3,896,296 1.43 % Term Loan (35) First Lien 1M L+5.00% 1.00 % 6.00 % 2/4/2019 6/29/2023 $6,899,691 6,847,391 6,623,704 2.42 % ASC Communications Holdings, LLC Class A Preferred Units (SBIC) (2)(4) Equity 6/29/2017 73,529 shares 58,828 330,000 0.12 % Total $ 10,950,533 $ 10,850,000 3.97 % BFC Solmetex, LLC Nashville, TN Revolver (35) First Lien 3M L+8.50% 1.00 % 9.50 % 4/2/2018 9/26/2023 Environmental Industries $2,139,364 2,139,364 2,139,364 0.78 % Term Loan (SBIC) (2)(35) First Lien 3M L+8.50% 1.00 % 9.50 % 4/2/2018 9/26/2023 $11,474,603 11,384,927 11,474,603 4.20 % Bonded Filter Co. LLC, Term Loan(SBIC) (2)(35) First Lien 3M L+8.50% 1.00 % 9.50 % 4/2/2018 9/26/2023 $1,193,460 1,184,133 1,193,460 0.44 % Total $ 14,708,424 $ 14,807,427 5.42 % BW DME Acquisition, LLC Tempe, AZ Term Loan (SBIC) (2)(13)(22) First Lien 3M L+6.00% 1.00 % 8.58 % 8/24/2017 8/24/2022 Healthcare & Pharmaceuticals $16,695,804 16,496,876 16,695,804 6.11 % BW DME Holdings, LLC, Term Loan (6) Unsecured 17.50% 17.50 % 6/1/2018 6/30/2020 $391,063 391,063 391,063 0.14 % BW DME Holdings, LLC Class A-1 Preferred Units (4) Equity 8/24/2017 1,000,000 shares 1,000,000 1,500,000 0.55 % BW DME Holdings, LLC Class A-2 Preferred Units (4) Equity 1/26/2018 937,261 shares 937,261 1,410,000 0.52 % Total $ 18,825,200 $ 19,996,867 7.32 % Café Valley, Inc. Phoenix, AZ Term Loan (35) First Lien 1M L+7.00% 1.25 % 8.25 % 8/28/2019 8/28/2024 Beverage, Food, & Tobacco $16,077,381 15,829,176 15,675,447 5.73 % CF Topco LLC, Common Units (4) Equity 8/28/2019 9,160 shares 916,015 720,000 0.26 % Total $ 16,745,191 $ 16,395,447 5.99 % Colford Capital Holdings, LLC New York, NY Preferred Units (4)(5) Equity 8/20/2015 Finance 38,893 units 195,036 20,000 0.01 % CommentSold, LLC (8) Huntsville, AL Term Loan (SBIC) (2)(35) First Lien 1M L+6.00% 1.00 % 7.00 % 11/20/2020 11/20/2026 High Tech Industries $12,500,000 12,252,768 12,252,768 4.48 % 17 Stellus Capital Investment Corporation Consolidated Schedule of Investments December 31, 2020 Investments Footnotes Security Coupon LIBOR floor Cash PIK Investment Date Maturity Headquarters/ Industry Principal Amount/ Shares Amortized Cost Fair Value (1) % of Net Assets CompleteCase, LLC (21) Seattle, WA Term Loan (SBIC II) (9)(35) First Lien 3M L+6.50% 1.00 % 7.50 % 12/21/2020 12/21/2025 Services: Consumer $ 11,478,261 11,248,696 11,248,696 4.11 % Revolver (35) First Lien 3M L+6.50% 1.00 % 7.50 % 12/21/2020 12/21/2025 $ 33,333 33,333 32,667 0.01 % CompleteCase Holdings, Inc. Class A Common Units (SBIC II) (4)(9) Equity 12/21/2020 417 units 5 0 0.00 % CompleteCase Holdings, Inc.Series A Preferred Units (SBIC II) (4)(9) Equity 12/21/2020 522 units 521,734 520,000 0.19 % Total $ 11,803,768 $ 11,801,363 4.31 % Convergence Technologies, Inc. Indianapolis, IN Term Loan (SBIC) (2)(35) First Lien 3M L+6.75% 1.50 % 8.25 % 8/31/2018 8/30/2024 Services: Business $ 6,982,143 6,888,406 6,982,143 2.55 % Term Loan (35) First Lien 3M L+6.75% 1.50 % 8.25 % 2/28/2019 8/30/2024 $ 1,403,571 1,383,414 1,403,571 0.51 % Term Loan B (SBIC) (2)(35) First Lien 3M L+6.75% 1.50 % 8.25 % 8/14/2020 8/30/2024 $ 3,740,625 3,672,274 3,740,625 1.37 % Delayed Draw Term Loan (35) First Lien 3M L+6.75% 1.50 % 8.25 % 8/31/2018 8/30/2024 $ 5,250,000 5,250,000 5,250,000 1.92 % Tailwind Core Investor, LLC Class A Preferred Units (4) Equity 8/31/2018 5,282 units 547,795 650,000 0.24 % Total $ 17,741,889 $ 18,026,339 6.59 % Data Centrum Communications, Inc. Montvale, NJ Term Loan (35) First Lien 3M L+5.50% 1.00 % 6.50 % 5/15/2019 5/15/2024 Media: Advertising, Printing & Publishing $ 16,006,250 15,778,905 15,446,031 5.65 % Health Monitor Holdings, LLC Seires A Preferred Units (4) Equity 5/15/2019 1,000,000 shares 1,000,000 750,000 0.27 % Total $ 16,778,905 $ 16,196,031 5.92 % Douglas Products Group, LP Liberty, MO Class A Common Units (4) Equity 12/27/2018 Chemicals, Plastics, & Rubber 322 shares 139,656 820,000 0.30 % DRS Holdings III, Inc. (10) St. Louis, MO Term Loan (35) First Lien 1M L+5.75% 1.00 % 6.75 % 11/1/2019 11/1/2025 Consumer Goods: Durable $ 9,900,000 9,816,898 9,900,000 3.62 % DTE Enterprises, LLC (18) Roselle, IL Term Loan (35) First Lien 6M L+8.50% 1.50 % 10.00 % 4/13/2018 4/13/2023 Energy: Oil & Gas $ 9,323,691 9,226,943 8,531,177 3.12 % DTE Holding Company, LLC Common Shares, Class A-2 (4) Equity 4/13/2018 776,316 shares 466,204 220,000 0.08 % DTE Holding Company, LLC Preferred Shares, Class AA (4) Equity 4/13/2018 723,684 shares 723,684 200,000 0.07 % Total $ 10,416,831 $ 8,951,177 3.27 % Elliott Aviation, LLC Moline, IL Term Loan (35) First Lien 3M L+6.00% 1.75 % 7.75 % 1/31/2020 1/31/2025 Aerospace & Defense $ 18,427,500 18,115,703 18,151,088 6.64 % Revolver (3)(35) First Lien 3 M L+6.00% 1.75 % 7.75 % 1/31/2020 1/31/2025 $ 450,000 450,000 443,250 0.16 % SP EA Holdings, LLC Preferred Shares, Class A (4) Equity 1/31/2020 900,000 shares 900,000 560,000 0.20 % Total $ 19,465,703 $ 19,154,338 7.00 % Empirix Holdings I, Inc. Billerica, MA Common Shares, Class A (4) Equity 11/1/2013 Software 1,304 shares 1,304,232 1,760,000 0.64 % Common Shares, Class B (4) Equity 11/1/2013 1,317,406 shares 13,174 20,000 0.01 % Total $ 1,317,406 $ 1,780,000 0.65 % Energy LabsHolding Corp. Houston, TX Common Stock (4) Equity 9/29/2016 Energy: Oil & Gas 598 shares 598,182 1,040,000 0.38 % Exacta Land Surveyors, LLC (23)(25) Cleveland, OH Term Loan (SBIC) (2)(35) First Lien 3M L+5.75% 1.50 % 7.25 % 2/8/2019 2/8/2024 Services: Business $ 16,714,375 16,488,364 16,547,231 6.05 % SP ELS Holdings LLC, Class A Common Units (4) Equity 2/8/2019 1,069,143 shares 1,069,143 720,000 0.26 % Total $ 17,557,507 $ 17,267,231 6.31 % EOS Fitness Holdings, LLC Phoenix, AZ Preferred Units (4) Equity 12/30/2014 Hotel, Gaming, & Leisure 118 shares 0 10,000 0.00 % Class B Common Units (4) Equity 12/30/2014 3,017 shares 0 0 0.00 % Total $ 0 $ 10,000 0.00 % 18 Stellus Capital Investment Corporation Consolidated Schedule of Investments December 31, 2020 Investments Footnotes Security Coupon LIBOR floor Cash PIK Investment Date Maturity Headquarters/ Industry Principal Amount/ Shares Amortized Cost Fair Value (1) % of Net Assets Fast Growing Trees, LLC (16) Fort Mill, SC Term Loan (SBIC) (2)(35) First Lien 3M L+6.75% 1.00 % 7.75 % 2/5/2018 02/05/23 Retail $ 14,992,490 14,850,620 14,992,490 5.48 % SP FGT Holdings, LLC, Class A Common (4) Equity 2/5/2018 1,000,000 shares 983,851 3,140,000 1.15 % Total $ 15,834,471 $ 18,132,490 6.63 % FB Topco, Inc. Camden, NJ Term Loan (13)(22) First Lien 6M L+6.35% 1.00 % 9.52 % 6/27/2018 4/24/2023 Education $ 20,550,738 20,322,696 20,447,984 7.48 % Delayed Draw Term Loan (13)(22) First Lien 6M L+6.35% 1.00 % 9.55 % 6/27/2018 4/24/2023 $ 1,126,758 1,126,758 1,121,124 0.41 % Total $ 21,449,454 $ 21,569,108 7.89 % GK Holdings, Inc. Cary, NC Term Loan (33)(35) Second Lien 3M L+10.25% 1.00 % 0.00 % 1/30/2015 1/20/2022 Education $ 5,000,000 4,979,153 2,925,000 1.07 % General LED OPCO, LLC San Antonio, TX Term Loan (35) Second Lien 3M L+9.00% 1.50 % 10.50 % 5/1/2018 11/1/2023 Services: Business $ 4,500,000 4,447,700 3,690,000 1.35 % GS HVAM Intermediate, LLC (34) Carlsbad, CA Term Loan (35) First Lien 1M L+5.75% 1.00 % 6.75 % 10/18/2019 10/2/2024 Beverage, Food, & Tobacco $ 12,895,506 12,792,753 12,895,506 4.72 % HV GS Acquisition, LP Class A Interests (4) Equity 6/29/2018 1,796 shares 1,618,844 2,460,000 0.90 % Total $ 14,411,597 $ 15,355,506 5.62 % Grupo HIMA San Pablo, Inc., et al San Juan, PR Term Loan (27)(35) First Lien 3M L+7.00% 1.50 % 8.50 % 2/1/2013 1/31/2018 Healthcare & Pharmaceuticals $ 4,503,720 4,503,720 2,589,639 0.95 % Term Loan (15)(27) Second Lien 13.75% 0.00 % 2/1/2013 7/31/2018 $ 4,109,524 4,109,524 0 0.00 % Total $ 8,613,244 $ 2,589,639 0.95 % I2P Holdings, LLC Cleveland, OH Series A Preferred (4) Equity 1/31/2018 Services: Business 750,000 shares 750,000 3,160,000 1.16 % Ian, Evan & Alexander Corporation (36) Reston, VA Term Loan (SBIC) (2)(35) First Lien 3M L+8.50% 1.00 % 9.50 % 7/31/2020 7/31/2025 Services: Business $ 7,140,425 7,005,287 7,069,020 2.59 % EC Defense Holding, Class B Units (SBIC) (2)(4) Equity 7/31/2020 20,054 shares 500,000 690,000 0.25 % Total $ 7,505,287 $ 7,759,020 2.84 % ICD Holdings, LLC San Francisco, CA Class A Preferred (4)(5) Equity 1/1/2018 9,962 shares 474,182 2,090,000 0.76 % Industry Dive, Inc. Washington, D.C. Term Loan (SBIC) (2)(35) First Lien 1M L+6.75% 1.00 % 7.75 % 7/17/2020 8/30/2024 Services: Business $ 7,015,841 6,887,907 6,980,762 2.55 % Revolver (35)(37) First Lien 1M L+6.75% 1.00 % 7.75 % 7/17/2020 8/30/2024 $ 50,000 50,000 49,750 0.02 % Total $ 6,937,907 $ 7,030,512 2.57 % Integrated Oncology Network, LLC (30) Newport Beach, CA Term Loan (35) First Lien 3M L+5.50% 1.50 % 7.00 % 7/17/2019 6/24/2024 Healthcare & Pharmaceuticals $ 16,470,413 16,227,281 16,470,413 6.03 % Revolver (35) First Lien 3M L+5.50% 1.50 % 7.00 % 7/17/2019 6/24/2024 $ 553,517 553,517 553,517 0.20 % Total $ 16,780,798 $ 17,023,930 6.23 % Interstate Waste Services, Inc. Amsterdam, OH Common Units (4) Equity 10/30/2015 Environmental Industries 21,925 shares 946,125 370,000 0.14 % Intuitive Health, LLC Plano, TX Term Loan (SBIC II) (9)(35) First Lien 3M L+6.00% 1.50 % 7.50 % 10/18/2019 10/18/2024 Healthcare & Pharmaceuticals $ 5,940,000 5,844,850 5,940,000 2.17 % Term Loan (35) First Lien 3M L+6.00% 1.50 % 7.50 % 10/18/2019 10/18/2024 $ 11,385,000 11,202,629 11,385,000 4.16 % Legacy Parent, Inc. Class A Common Units (4) Equity 10/30/2020 58 shares 125,000 130,000 Total $ 17,172,479 $ 17,455,000 6.33 % Invincible Boat Company, LLC (28) Opa Locka, FL Term Loan (SBIC II) (9)(35) First Lien 3M L+6.50% 1.50 % 8.00 % 8/28/2019 8/28/2025 Consumer Goods: Durable $ 5,469,818 5,380,207 5,469,818 2.00 % 19 Stellus Capital Investment Corporation Consolidated Schedule of Investments December 31, 2020 Investments Footnotes Security Coupon LIBOR floor Cash PIK Investment Date Maturity Headquarters/ Industry Principal Amount/ Shares Amortized Cost Fair Value (1) % of Net Assets Term Loan (35) First Lien 3M L+6.50% 1.50 % 8.00 % 8/28/2019 8/28/2025 $ 5,925,636 5,772,336 5,925,636 2.17 % Revolver (35) First Lien 3M L+6.50% 1.50 % 8.00 % 8/28/2019 8/28/2025 $ 284,091 284,091 284,091 Invincible Parent Holdco, LLC Class A Common Units (4) Equity 8/28/2019 1,000,000 shares 968,105 620,000 0.23 % Total $ 12,404,739 $ 12,299,545 4.40 % J.R. Watkins, LLC San Francisco, CA Term Loan (SBIC) (2) First Lien 7.00% 7.00 % 12/22/2017 12/22/2022 Consumer Goods: non-durable $ 12,250,000 12,139,807 12,250,000 4.48 % J.R. Watkins Holdings, Inc. Class A Preferred (4) Equity 12/22/2017 1,133 shares 1,132,576 680,000 0.25 % Total $ 13,272,383 $ 12,930,000 4.73 % Jurassic Acquisiton Corp. Sparks, MD Term Loan (12) First Lien 3M L+5.50% 0.00 % 5.75 % 12/28/2018 11/15/2024 Metals & Mining $ 17,150,000 16,970,057 17,064,250 6.24 % Kelleyamerit Holdings, Inc. Walnut Creek, CA Term Loan (SBIC) (2)(13)(22) First Lien 3M L+6.50% 1.00 % 8.89 % 12/24/2020 12/24/2025 Automotive $ 9,750,000 9,557,708 9,557,708 3.50 % Term Loan (13)(22) First Lien 3M L+6.50% 1.00 % 8.89 % 12/24/2020 12/24/2025 $ 1,500,000 1,470,417 1,470,417 0.54 % Total $ 11,028,125 $ 11,028,125 4.04 % KidKraft, Inc. (38) Dallas, TX Term Loan (22)(29) First Lien 3M L+5.00% 1.00 % 6.00 % 9/30/2016 8/15/2022 Consumer Goods: Durable $ 1,580,487 1,580,487 1,580,487 0.58 % KidKraft Group Holdings, LLC Preferred B Units (4) Equity 4/3/2020 4,000,000 shares 4,000,000 4,000,000 1.46 % Total $ 5,580,487 $ 5,580,487 2.04 % Lynx FBO Operating, LLC (31) Houston, TX Term Loan (35) First Lien 3M L+5.75% 1.50 % 7.25 % 9/30/2019 9/30/2024 Aerospace & Defense $ 13,612,500 13,397,053 13,612,500 4.98 % Lynx FBO Investments, LLC Class A-1 Common Units (4) Equity 9/30/2019 4,288 shares 593,480 690,000 0.25 % Total $ 13,990,533 $ 14,302,500 5.23 % Madison Logic, Inc. New York, NY Term Loan (SBIC) (2)(35) First Lien 1M L+7.50% 0.50 % 8.00 % 11/30/2016 11/30/2021 Media: Broadcasting & Subscription $ 4,323,985 4,314,586 4,323,985 1.58 % Madison Logic Holdings, Inc. Common Stock (SBIC) (2)(4) Equity 11/30/2016 5,000 shares 50,000 70,000 0.03 % Madison Logic Holdings, Inc. Series A Preferred Stock (SBIC) (2)(4) Equity 11/30/2016 4,500 shares 450,000 670,000 0.25 % Total $ 4,814,586 $ 5,063,985 1.86 % Mobile Acquisition Holdings, LP Santa Clara, CA Class A Common Units (4) Equity 11/1/2016 Software 750 units 455,385 2,650,000 0.97 % Munch’s Supply, LLC New Lenox, IL Term Loan (35) First Lien 3M L+6.25% 1.00 % 7.25 % 4/11/2019 4/11/2024 Capital Equipment $ 7,229,111 7,178,680 7,229,111 2.64 % Delayed Draw Term Loan (20)(35) First Lien 3M L+6.25% 1.00 % 7.25 % 4/11/2019 4/11/2024 $ 649,111 640,345 649,111 0.24 % Cool Supply Holdings, LLC Class A Common Units (4) Equity 4/11/2019 500,000 units 496,362 710,000 0.26 % Total $ 8,315,387 $ 8,588,222 3.14 % National Trench Safety, LLC, et al Houston, TX Term Loan (SBIC) (2) Second Lien 11.50% 11.50 % 3/31/2017 3/31/2022 Construction & Building $ 10,000,000 9,946,055 10,000,000 3.66 % NTS Investors, LP Class A Common Units (4) Equity 3/31/2017 2,335 units 500,000 750,000 0.27 % Total $ 10,446,055 $ 10,750,000 3.93 % Naumann/Hobbs Material Handling Corporation II, Inc. (32) Phoenix, AZ Term Loan (SBIC II) (9)(35) First Lien 3M L+6.25% 1.50 % 7.75 % 8/30/2019 8/30/2024 Services: Business $ 5,817,693 5,727,857 5,817,693 2.13 % Term Loan (35) First Lien 3M L+6.25% 1.50 % 7.75 % 8/30/2019 8/30/2024 $ 9,225,593 9,083,133 9,225,593 3.37 % CGC NH, Inc. Common Units (4) Equity 8/30/2019 123 shares 440,758 570,000 0.21 % Total $ 15,251,748 $ 15,613,286 5.71 % NGS US Finco, LLC Bradford, PA Term Loan (SBIC) (2)(35) Second Lien 1M L+8.50% 1.00 % 9.50 % 10/1/2018 4/1/2026 Utilities: Oil & Gas $ 10,000,000 9,884,148 9,900,000 3.62 % 20 Stellus Capital Investment Corporation Consolidated Schedule of Investments December 31, 2020 Investments Footnotes Security Coupon LIBOR floor Cash PIK Investment Date Maturity Headquarters/ Industry Principal Amount/ Shares Amortized Cost Fair Value (1) of% Net Assets NS412, LLC Dallas, TX Term Loan (35) Second Lien 3M L+8.50% 1.00 % 9.50 % 5/6/2019 11/6/2025 Services: Consumer $ 7,615,000 7,492,970 7,462,700 2.73 % NS Group Holding Company, LLC Class A Common Units (4) Equity 5/6/2019 750 shares 750,000 550,000 0.20 % Total $ 8,242,970 $ 8,012,700 2.93 % NuMet Machining Techniques, LLC Birmingham, UK Term Loan (5)(35) Second Lien 3M L+9.00% 2.00 % 11.00 % 11/5/2019 5/5/2026 Aerospace & Defense $ 11,700,000 11,495,790 11,056,500 4.04 % Bromford Industries Limited Term Loan (5)(35) Second Lien 3M L+9.00% 2.00 % 11.00 % 11/5/2019 5/5/2026 $ 7,800,000 7,663,860 7,371,000 2.70 % Bromford Holdings, L.P. Class A Membership Units (4)(5) Equity 11/5/2019 1,000,000 shares 1,000,000 300,000 0.11 % Total $ 20,159,650 $ 18,727,500 6.85 % Nutritional Medicinals, LLC (24) Centerville, OH Term Loan (35) First Lien 3M L+6.00% 1.00 % 7.00 % 11/15/2018 11/15/2023 Healthcare & Pharmaceuticals $ 13,270,451 13,106,025 13,270,451 4.85 % Functional Aggregator, LLC Common Units (4) Equity 11/15/2018 12,500 shares 1,250,000 1,180,000 0.43 % Total $ 14,356,025 $ 14,450,451 5.28 % PCP MT Aggregator Holdings, L.P. Oak Brook, IL Common LP Units (4) Equity 3/29/2019 Finance 750,000 shares 0 1,490,000 0.55 % PCS Software, Inc. Shenandoah, TX Term Loan (SBIC) (2)(35) First Lien 3M L+5.75% 1.50 % 7.25 % 7/1/2019 7/1/2024 Transportation & Logistics $ 1,970,000 1,940,669 1,970,000 0.72 % Term Loan (35) First Lien 3M L+5.75% 1.50 % 7.25 % 7/1/2019 7/1/2024 $ 15,021,250 14,797,600 15,021,250 5.50 % Delayed Draw Term Loan (35) First Lien 3M L+5.75% 1.50 % 7.25 % 7/1/2019 7/1/2024 $ 992,500 992,500 992,500 0.36 % Revolver (35)(11) First Lien 3M L+5.75% 1.50 % 7.25 % 7/1/2019 7/1/2024 $ 571,195 571,195 571,195 0.21 % PCS Software Holdings, LLC Class A Preferred Units (4) Equity 7/1/2019 325,000 shares 325,000 330,000 0.12 % PCS Software Holdings, LLC Class A-2 Preferred Units (4) Equity 11/12/2020 63,312 shares 63,312 60,000 0.02 % Total $ 18,690,276 $ 18,944,945 6.93 % Pioneer Transformers, L.P. Franklin, WI Term Loan (SBIC II) (9)(35) First Lien 6M L+6.00% 1.50 % 7.50 % 11/22/2019 8/16/2024 Capital Equipment $ 4,937,500 4,868,043 4,937,500 1.81 % Premiere Digital Services, Inc. Los Angeles, CA Term Loan (SBIC) (2)(13)(22) First Lien 3M L+5.50% 1.50 % 8.24 % 10/18/2018 10/18/2023 Media: Broadcasting & Subscription $ 9,992,518 9,807,217 9,992,518 3.66 % Term Loan (13)(22) First Lien 3M L+5.50% 1.50 % 8.24 % 10/18/2018 10/18/2023 $ 2,428,772 2,385,098 2,428,772 0.89 % Premiere Digital Holdings, Inc., Common Stock (4) Equity 10/18/2018 5,000 shares 50,000 150,000 0.05 % Premiere Digital Holdings, Inc., Preferred Stock (4) Equity 10/18/2018 4,500 shares 314,550 1,320,000 0.48 % Total $ 12,556,865 $ 13,891,290 5.08 % Protect America, Inc. Austin TX Term Loan (SBIC) (2)(6)(26)(35) Second Lien 3M L+7.75% 1.00 % 0.00 % 8/30/2017 10/30/2020 Services: Consumer $ 17,979,749 17,979,749 2,786,861 1.02 % Sales Benchmark Index, LLC (7)(14) Dallas, TX Term Loan (35) First Lien 3M L+6.00% 1.75 % 7.75 % 1/7/2020 1/7/2025 Services: Business $ 14,315,976 14,076,964 14,315,976 5.24 % SBI Holdings Investments, LLC Class A Preferred Units (4) Equity 1/7/2020 66,573 units 665,730 590,000 0.22 % Total $ 14,742,694 $ 14,905,976 5.46 % Skopos Financial, LLC Irving, TX Term Loan (5) Unsecured 12.00% 12.00 % 1/31/2014 1/31/2021 Finance $ 15,500,000 15,500,000 14,415,000 5.27 % Skopos Financial Group, LLC Series A Preferred Units (4)(5) Equity 1/31/2014 1,120,684 units 1,162,544 320,000 0.12 % $ 16,662,544 $ 14,735,000 5.39 % SQAD, LLC Tarrytown, NY Term Loan (SBIC) (2)(35) First Lien 3M L+6.50% 1.00 % 7.50 % 12/22/2017 12/22/2022 Media: Broadcasting & Subscription $ 14,333,594 14,299,486 14,333,594 5.24 % SQAD Holdco, Inc. Preferred Shares,Series A (SBIC) (2)(4) Equity 10/31/2013 5,624 shares 156,001 1,010,000 0.37 % 21 Stellus Capital Investment Corporation Consolidated Schedule of Investments December 31, 2020 Investmest Footnotes Security Coupon LIBOR floor Cash PIK Investment Date Maturity Headquarters/ Industry Principal Amount/ Shares Amortized Cost Fair Value (1) % of Net Assets SQAD Holdco, Inc. Common Shares (SBIC) (2)(4) Equity 10/31/2013 5,800 shares 62,485 120,000 0.04 % Total $ 14,517,972 $ 15,463,594 5.65 % TechInsights, Inc. Ottawa, Ontario Term Loan (5)(13)(22) First Lien L+6.00% 1.00 % 8.33 % 8/16/2017 10/2/2023 High Tech Industries $ 21,540,925 21,318,659 21,540,925 7.88 % Time Manufacturing Acquisition, LLC Waco, TX Term Loan (6) Unsecured 11.50% 10.75 % 0.75 % 2/3/2017 8/3/2023 Capital Equipment $ 6,385,182 6,321,825 6,385,182 2.34 % Time Manufacturing Investments, LLC Class A Common Units (4) Equity 2/3/2017 5,000 units 500,000 770,000 0.28 % Total $ 6,821,825 $ 7,155,182 2.62 % TFH Reliability, LLC Houston, TX Term Loan (SBIC) (2)(35) Second Lien 3M L+10.75% 0.80 % 11.55 % 10/21/2016 9/30/2023 Chemicals, Plastics, & Rubber $ 5,875,000 5,837,336 5,728,125 2.10 % TFH Reliability Group, LLC Class A-1 Units (4) Equity 6/29/2020 27,129 shares 21,511 10,000 0.00 % TFH Reliability Group, LLC Class A Common Units (4) Equity 10/21/2016 250,000 shares 231,521 170,000 0.06 % Total $ 6,090,368 $ 5,908,125 2.16 % U.S. Auto Sales, Inc. Lawrenceville, GA USASF Blocker II, LLC Common (4)(5) Equity 6/8/2015 Finance 441 units 441,000 710,000 0.26 % USASF Blocker III, LLC Series C Preferred Units (4)(5) Equity 2/13/2018 125 units 125,000 200,000 0.07 % USASF Blocker IV, LLC Units (4)(5) Equity 5/27/2020 110 units 110,000 180,000 0.07 % USASF Blocker LLC Common Units (4)(5) Equity 6/8/2015 9,000 units 9,000 10,000 0.00 % Total $ 685,000 $ 1,100,000 0.40 % Venbrook Buyer, LLC Los Angeles, CA Term Loan (SBIC) (2)(35) First Lien 3M L+6.50% 1.50 % 8.00 % 3/13/2020 3/13/2026 Services: Business $ 13,084,458 12,851,226 12,953,614 4.74 % Term Loan (35) First Lien 3M L+6.50% 1.50 % 8.00 % 3/13/2020 3/13/2026 $ 148,875 146,221 147,386 0.05 % Revolver (35) First Lien 6M L+6.50% 1.50 % 8.00 % 3/13/2020 3/13/2026 $ 2,222,222 2,222,222 2,200,000 0.80 % Delayed Draw Term Loan (19)(35) First Lien 1M L+6.50% 1.50 % 8.00 % 3/13/2020 3/13/2026 $ 1,333,333 1,320,000 1,320,000 Venbrook Holdings, LLC Common Units (4) Equity 3/13/2020 534,959 shares 531,463 480,000 0.18 % .Total $ 17,071,132 $ 17,101,000 5.77 % Vortex Companies, LLC Houston, TX Term Loan (SBIC II) (9)(35) Second Lien 3M L+9.50% 1.00 % 10.50 % 12/21/2020 6/21/2026 Environmental Industries $ 10,000,000 9,800,000 9,800,000 3.59 % VRI Ultimate Holdings, LLC Franklin, OH Class A Preferred Units (4) Equity 5/31/2017 Healthcare & Pharmaceuticals 326,797 shares 500,000 580,000 0.21 % Whisps Acquisiton Corp. Elgin, IL Term Loan (35) First Lien 6M L+6.00% 1.00 % 7.00 % 4/26/2019 4/18/2025 Beverage, Food, & Tobacco $ 7,791,667 7,682,302 7,791,667 2.85 % Whisps Holding LP Class A Common Units (4) Equity 4/18/2019 500,000 shares 500,000 710,000 0.26 % Total $ 8,182,302 $ 8,501,667 3.11 % Wise Parent Company, LLC Salt Lake City, UT Membership Units (4) Equity 8/27/2018 Beverage, Food, & Tobacco 6 units 0 760,000 0.28 % Total Non-controlled, non-affiliated investments $ 658,628,966 $ 653,424,495 239.03 % Net Investments $ 658,628,966 $ 653,424,495 239.03 % LIABILITIES IN EXCESS OF OTHER ASSETS $ (380,063,846 (139.03 )% NET ASSETS $ 273,360,649 100.00 % 22 Stellus Capital Investment Corporation Consolidated Schedule of Investments December 31, 2020 (1) See Note 1 of the Notes to the Consolidated Financial Statements for a discussion of the methodologies used to value securities in the portfolio. (2) Investments held by the SBIC subsidiary (as defined in Note 1), which include $14,750,888 of cash and $228,144,990 of investments (at cost), are excluded from the obligations to the lenders of the Credit Facility (as defined in Note 9). Stellus Capital Investment Corporation’s (“the Company”) obligations to the lenders of the Credit Facility are secured by a first priority security interest in all investments and cash and cash equivalents, except for cash and investments held by the SBIC subsidiaries (as defined in Note 1). (3) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $2,250,000, with an interest rate of LIBOR plus 6.00% and a maturity of January 31, 2025. This investment is accruing an unused commitment fee of 0.50% per annum. (4) Security is non-income producing. (5) The investment is not a “qualifying asset” under the Investment Company Act of 1940, as amended. The Company may not acquire any non-qualifying assets unless, at the time of the acquisition, qualifying assets represent at least 70% of the Company’s total assets. Qualifying assets represent approximately 91% of the Company’s total assets as of December 31, 2020. (6) Represents a PIK interest security. At the option of the issuer, interest can be paid in cash or cash and PIK interest. The percentage of PIK interest shown is the maximum PIK interest that can be elected by the issuer. (7) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,331,461, with an interest rate of LIBOR plus 6.00% and a maturity of January 7, 2025. This investment is accruing an unused commitment fee of 0.50% per annum. (8) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 6.00% and a maturity of November 20, 2026. This investment is accruing an unused commitment fee of 0.50% per annum. (9) Investments held by the SBIC II subsidiary (as defined in Note 1), which include $2,653,295 of cash and $43,391,392 of investments (at cost), are excluded from the obligations to the lenders of the Credit Facility. The Company’s obligations to the lenders of the Credit Facility are secured by a first priority security interest in all investments and cash and cash equivalents, except for cash and investments held by the SBIC subsidiaries. (10) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $909,091, with an interest rate of LIBOR plus 5.75% and a maturity of November 1, 2025. This investment is accruing an unused commitment fee of 0.50% per annum. (11) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $746,948, with an interest rate of LIBOR plus 5.75% and a maturity of July 1, 2024. This investment is accruing an unused commitment fee of 0.50% per annum. (12) These loans have LIBOR floors which are lower than the applicable LIBOR rates; therefore, the floors are not in effect. (13) These loans are last-out term loans with contractual rates higher than the applicable LIBOR rates; therefore, the floors are not in effect. (14) Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $3,328,652, with an interest rate of LIBOR plus 6.00% and a maturity of January 7, 2025. This investment is accruing an unused commitment fee of 0.50% per annum. (15) Investment has been on non-accrual since October 31, 2017. (16) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,000,000, with an interest rate of LIBOR plus 6.75% and a maturity of February 5, 2023. This investment is accruing an unused commitment fee of 0.50% per annum. (17) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $666,667, with an interest rate of LIBOR plus 5.00% and a maturity of June 29, 2022. This investment is accruing an unused commitment fee of 0.50% per annum. (18) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $750,000, with an interest rate of LIBOR plus 7.50% and a maturity of April 13, 2023. The Company has full discretion to fund the revolver commitment. (19) Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $3,111,111, with an interest rate of LIBOR plus 6.50% and a maturity of March 13, 2026. This investment is accruing an unused commitment fee of 0.50% per annum. (20) Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $1,511,111, with an interest rate of LIBOR plus 6.25% and a maturity of April 11, 2024. This investment is accruing an unused commitment fee of 1.00% per annum. 23 Stellus Capital Investment Corporation Consolidated Schedule of Investments December 31, 2020 (21) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $66,667 with an interest rate of LIBOR plus 6.50% and a maturity of December 21, 2025. This investment is accruing an unused commitment fee of 0.50% per annum. (22) This loan is a unitranche investment. (23) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,500,000 with an interest rate of LIBOR plus 5.75% and a maturity of February 8, 2024. This investment is accruing an unused commitment fee of 0.50% per annum. (24) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $2,000,000 with an interest rate of LIBOR plus 6.00% and a maturity of November 15, 2023. This investment is accruing an unused commitment fee of 0.50% per annum. (25) Excluded from the investment is an undrawn delayed draw term commitment in an amount not to exceed $4,000,000, with an interest rate of LIBOR plus 5.75% and a maturity of February 8, 2024. The Company has full discretion to fund the delayed draw term loan commitment. (26) Investment has been on non-accrual since June 28, 2019. (27) Maturity date is under ongoing negotiations with portfolio company and other lenders. (28) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,136,364, with an interest rate of LIBOR plus 6.50% and a maturity of August 28, 2025. This investment is accruing an unused commitment fee of 0.50% per annum. (29) These loans are last-out term loans with contractual rates lower than the applicable LIBOR rates; therefore, the floors are in effect. (30) Excluded from the investment is an undrawn delayed draw term loan commitment in an amount not to exceed $2,767,584, with an interest rate of LIBOR plus 5.50% and a maturity of June 24, 2024. This investment is accruing an unused commitment fee of 1.00% per annum. (31) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,875,000, with an interest rate of LIBOR plus 5.75% and a maturity of September 30, 2024. This investment is accruing an unused commitment fee of 0.50% per annum. (32) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,763,033, with an interest rate of LIBOR plus 6.25% and a maturity of August 30, 2024. This investment is accruing an unused commitment fee of 0.50% per annum. (33) Investment has been on non-accrual since January 1, 2020. (34) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $2,651,515, with an interest rate of LIBOR plus 5.75% and a maturity of October 2, 2024. This investment is accruing an unused commitment fee of 0.50% per annum. (35) These loans have LIBOR Floors which are higher than the current applicable LIBOR rates; therefore, the floors are in effect. (36) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $100,000, with an interest rate of LIBOR plus 8.50% and a maturity of July 31, 2025. This investment is accruing an unused commitment fee of 0.50% per annum. This undrawn revolver commitment is held by SBIC I. (37) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $50,000, with an interest rate of LIBOR plus 6.75% and a maturity of August 30, 2024. This investment is accruing an unused commitment fee of 0.50% per annum. (38) Instrument was restructured into a first lien term loan and preferred equity on April 3, 2021. Abbreviation Legend PIK — Payment-In-Kind L — LIBOR Euro — Euro Dollar 24 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) NOTE 1 — NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Stellus Capital Investment Corporation (“we”, “us”, “our” and the “Company”) was formed as a Maryland corporation on May 18, 2012 (“Inception”) and is an externally managed, closed-end, non-diversified investment management company. The Company is applying the guidance of Accounting Standards Codification (“ASC”) Topic 946, Financial Services Investment Companies . The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), for U.S. federal income tax purposes. The Company’s investment activities are managed by our investment adviser, Stellus Capital Management, LLC (“Stellus Capital” or the “Advisor”). As of June 30, 2021, the Company had issued a total of 19,486,003 shares and raised $286,629,817 in gross proceeds since Inception, incurring $9,127,227 in offering expenses and sales load fees for net proceeds from offerings of $277,502,590. The Company’s shares are currently listed on the New York Stock Exchange under the symbol “SCM”. See Note 4 for further details. The Company has established the following wholly owned subsidiaries: SCIC — Consolidated Blocker, Inc., SCIC – ICD Blocker 1, Inc., SCIC — Invincible Blocker 1, Inc., SCIC — FBO Blocker 1, Inc., SCIC — SKP Blocker 1, Inc., SCIC — APE Blocker 1, Inc., SCIC — Venbrook Blocker, Inc., SCIC — CC Blocker 1, Inc., SCIC — ERC Blocker 1, Inc., and SCIC — Hollander Blocker 1, Inc., which are structured as Delaware entities, to hold equity or equity-like investments in portfolio companies organized as limited liability companies, or LLCs (or other forms of pass-through entities) (collectively, the “Taxable Subsidiaries”). The Taxable Subsidiaries are consolidated for U.S. generally accepted accounting principles (“U.S. GAAP”) reporting purposes, and the portfolio investments held by them are included in the consolidated financial statements. On June 14, 2013, the Company formed Stellus Capital SBIC, LP (the “SBIC subsidiary”), a Delaware limited partnership, and its general partner, Stellus Capital SBIC GP, LLC, a Delaware limited liability company, as wholly owned subsidiaries of the Company. On June 20, 2014, the SBIC subsidiary received a license from the U.S. Small Business Administration (“SBA”) to operate as a Small Business Investment Company (“SBIC”) under Section 301(c) of the Small Business Investment Company Act of 1958, as amended (the “SBIC Act”). The SBIC subsidiary and its general partner are consolidated for U.S. GAAP reporting purposes, and the portfolio investments held by it are included in the consolidated financial statements. On November 29, 2018, the Company formed Stellus Capital SBIC II, LP (the “SBIC II subsidiary” and, together with the SBIC subsidiary, the “SBIC subsidiaries”), a Delaware limited partnership. On August 14, 2019, the SBIC II subsidiary received a license from the SBA to operate as an SBIC under Section 301(c) of the SBIC Act. The SBIC II subsidiary and its general partner, Stellus Capital SBIC GP, LLC, are consolidated for U.S. GAAP reporting purposes, and the portfolio investments held by it are included in the consolidated financial statements. The SBIC licenses allow the SBIC subsidiaries and SBIC II subsidiary (together, “the SBIC subsidiaries”) to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with 10-year maturities. The SBA, as a creditor, will have a superior claim to the SBIC subsidiaries’ assets over the Company’s stockholders in the event the Company liquidates one or both of the SBIC subsidiaries or the SBA exercises its remedies under the SBA-guaranteed debentures issued by the SBIC subsidiaries upon an event of default. For the SBIC subsidiary, SBA regulations limit the amount that a single licensee may borrow to a maximum of $150,000,000 when it has at least $75,000,000 in regulatory capital, as such term is defined by the SBA, receives a capital commitment from the SBA and has been through an examination by the SBA subsequent to licensing. For the SBIC II subsidiary, SBA regulations limit these amounts to $175,000,000 of borrowings when it has at least $87,500,000 of regulatory capital. 25 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) As of both June 30, 2021 and December 31, 2020, the SBIC subsidiary had $75,000,000 in regulatory capital. As of June 30, 2021 and December 31, 2020, the SBIC II subsidiary had $87,500,000 and $40,000,000 in regulatory capital, respectively. As of June 30, 2021 and December 31, 2020, $60,000,000 and $20,000,000 has been contributed, respectively. As of both June 30, 2021 and December 31, 2020, the SBIC subsidiary had $150,000,000 of SBA-guaranteed debentures outstanding. As of June 30, 2021 and December 31, 2020, the SBIC II subsidiary had $84,000,000 and $26,500,000 of SBA-guaranteed debentures outstanding, respectively. See footnote (2) of the Consolidated Schedule of Investments as of June 30, 2021 for additional information regarding the treatment of the SBIC subsidiaries’ investments with respect to the Credit Facility (as defined in Note 9). As a BDC, the Company is required to comply with certain regulatory requirements. On March 23, 2018, the Small Business Credit Availability Act (the “SBCAA”) was signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The SBCAA included changes to the 1940 Act to allow BDCs to decrease their asset coverage requirement to 150% from 200% under certain circumstances. On April 4, 2018, the Company’s board of directors (the “Board”), including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. At the Company’s 2018 annual meeting of stockholders, our stockholders also approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the asset coverage ratio test applicable to the Company was decreased from 200% to 150%, effective June 29, 2018. The amount of leverage that we employ at any time depends on our assessment of the market and other factors at the time of any proposed borrowing. As of June 30, 2021, our asset coverage ratio was 194%. The Company’s investment objective is to maximize the total return to its stockholders in the form of current income and capital appreciation through debt and related equity investments in middle-market companies. The Company seeks to achieve its investment objective by originating and investing primarily in private U.S. middle-market companies (typically those with $5,000,000 to $50,000,000 of EBITDA (earnings before interest, taxes, depreciation and amortization)) through first lien, second lien, unitranche and unsecured debt financing, oftentimes with a corresponding equity co-investments. The Company sources investments primarily through the extensive network of relationships that the principals of Stellus Capital have developed with financial sponsor firms, financial institutions, middle-market companies, management teams and other professional intermediaries. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, certain disclosures accompanying the annual financial statements prepared in accordance with U.S. GAAP are omitted. The unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. In the opinion of management, the unaudited consolidated financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of the financial statements for the interim periods included herein. The results of operations for the three and six months ended June 30, 2021 and June 30, 2020 are not necessarily indicative of the operating results to be expected for the full year. Also, the unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2020. In accordance with Regulation S-X under the Exchange Act, the Company does not consolidate portfolio company investments. The accounting records of the Company are maintained in U.S. dollars. 26 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) COVID-19 Developments On March 11, 2020, the World Health Organization declared COVID-19 a pandemic and recommended containment and mitigation measures worldwide. The COVID-19 pandemic has had a significant impact on the U.S. and global economy. Each portfolio company has been assessed on an individual basis to identify the impact of the COVID-19 pandemic on the valuation of our investments in such company. We believe that any such COVID-19 pandemic impacts have been reflected in the valuation of our investments. The global impact of the outbreak continues to evolve, and many countries have reacted by instituting quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues. Businesses are also implementing similar precautionary measures. Such measures, as well as the general uncertainty surrounding the dangers and impact of the COVID-19 pandemic, have created significant disruption in supply chains and economic activity. While several countries, as well as certain states in the United States, have begun to lift public health restrictions with the view to reopening their economies, recurring COVID-19 outbreaks and the spread of more contagious variants of COVID-19 have led to the re-introduction of such restrictions in certain states in the United States and globally and could continue to lead to the re-introduction of such restrictions elsewhere. In addition, the Delta variant of COVID-19, which appears to be highly transmissible, has begun to spread in the United States. The impact of the Delta variant cannot be predicted at this time, and could depend on numerous factors, including vaccination rates among the population, the effectiveness of COVID-19 vaccine against the variant, and the response by governmental bodies and regulators. The Federal Food and Drug Administration authorized vaccines produced for emergency use starting in December 2020, and such vaccines have been distributed nationally. However, it remains unclear how quickly the vaccines will continue to be distributed nationwide and globally or when “herd immunity” will be achieved, both in the United States and abroad, or when and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. The delay in distributing the vaccines could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience a recession, and we anticipate our business and operations could be materially adversely affected by a prolonged recession in the United States and other major markets. As COVID-19 continues to spread, the potential impacts, including a global, regional, or other economic recession, remain uncertain and difficult to assess. The extent of the impact of the COVID-19 pandemic on the financial performance of our current and future investments will depend on future developments, including the duration and spread of the virus, related advisories and restrictions, and the health of the financial markets and economy, all of which are highly uncertain and cannot be predicted. To the extent our portfolio companies are adversely impacted by the effects of the COVID-19 pandemic, it may have a material adverse impact on our future net investment income, the fair value of our portfolio investments and our financial condition. Portfolio Investment Classification The Company classifies its portfolio investments in accordance with the requirements of the 1940 Act as follows: (a) “Control Investments” are defined as investments in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation, (b) “Affiliate Investments” are defined as investments in which the Company owns between 5% and 25% of the voting securities and does not have rights to maintain greater than 50% of the board representation, and (c) “Non-controlled, non-affiliate investments” are defined as investments that are neither Control Investments nor Affiliate Investments. Cash and Cash Equivalents At June 30, 2021, cash balances totaling $4,718,838 exceeded the FDIC insurance protection levels of $250,000 by $4,468,838. In addition, at June 30, 2021, the Company held $13,883,937 in cash equivalents, which are carried at cost, which approximates the fair value of the cash equivalents. All of the Company’s cash deposits are held at large established high credit quality financial institutions and management believes that risk of loss associated with any uninsured balances is remote. Cash consists of bank demand deposits. We deem certain U.S. Treasury Bills and other high-quality, short-term debt securities as cash equivalents. Fair Value Measurements We account for all of our financial instruments at fair value in accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework used to measure fair value, and requires disclosures for fair value measurements, including the categorization of financial instruments into a three-level hierarchy based on the transparency of valuation inputs. ASC Topic 820 requires disclosure of the fair value of financial instruments for which it is practical to estimate such value. We believe that the carrying amounts of our financial instruments such as cash, receivables and payables approximate the fair value of these items due to the short maturity of these instruments. This is considered a Level 1 valuation technique. The carrying values of our Credit Facility and SBA-guaranteed debentures approximate fair value because the interest rates adjust to the market interest rates (Level 3 input). The carrying value of our 2026 Notes approximates fair value. See Note 6 to the consolidated financial statements for further discussion regarding the fair value measurements and hierarchy 27 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) The COVID-19 pandemic, including uncertainty regarding new variants of COVID-19 that have emerged, 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 June 30, 2021, by circumstances and events that are not yet known. The COVID-19 pandemic may impact the Company’s portfolio companies’ ability to pay their respective contractual obligations, including principal and interest due to the Company, and some portfolio companies could require interest or principal deferrals in order to fulfill short-term liquidity needs in response to COVID-19. The Company is working with each of its portfolio companies, as necessary, to help them access short-term liquidity through potential interest deferrals, funding on unused lines of credit, and other sources of liquidity. For the six months ended June 30, 2021, no interest deferrals have been made on loans on accrual. Consolidation As permitted under Regulation S-X under the Exchange Act and ASC Topic 946, we generally do not consolidate our investment in a portfolio company other than an investment company subsidiary. Accordingly, we consolidated the results of the SBIC subsidiaries and the Taxable Subsidiaries. All intercompany balances have been eliminated upon consolidation. Use of Estimates The preparation of the consolidated statements of assets and liabilities in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially. Deferred Financing Costs Deferred financing costs, prepaid loan fees on SBA-guaranteed debentures and prepaid loan structure fees consist of fees and expenses paid in connection with the closing and maintenance of our Credit Facility, 2022 Notes, 2026 Notes and SBA-guaranteed debentures and are capitalized at the time of payment. These costs are amortized using the straight-line method over the term of the respective instrument and presented as an offset to the corresponding debt on the Consolidated Statement of Assets and Liabilities. Offering Costs Deferred offering costs consist of fees and expenses incurred in connection with the offer and sale of the Company’s common stock, including legal, accounting, printing fees and other related expenses, as well as costs incurred in connection with the filing of a shelf registration statement. These costs are capitalized when incurred and recognized as a reduction of offering proceeds when the offering is consummated and shown on the Consolidated Statement of Changes in Net Assets and Liabilities as a reduction to Paid-in-Capital. 28 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) Investments As a BDC, the Company will generally invest in illiquid loans and securities including debt and equity securities of private middle-market companies. Under procedures established by our Board, the Company intends to value investments for which market quotations are readily available at such market quotations. The Company will obtain these market values from an independent pricing service or at the median between the bid and ask prices obtained from at least two brokers or dealers (if available, otherwise by a principal market maker or a primary market dealer). Debt and equity securities that are not publicly traded or whose market prices are not readily available will be valued at fair value as determined in good faith by our Board. Such determination of fair values may involve subjective judgments and estimates. The Company also engages independent valuation providers to review the valuation of each portfolio investment that does not have a readily available market quotation at least twice annually. Investments purchased within approximately 90 days of the valuation date will typically be valued at cost plus accreted discount, or minus amortized premium, which approximates fair value. With respect to unquoted securities, our we will value each investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies that are public and other factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the we will use the pricing indicated by the external event to corroborate and/or assist us in our valuation. Because the Company expects that there will not be a readily available market for many of the investments in our portfolio, the Company expects to value most of our portfolio investments at fair value as determined in good faith by the Board using a documented valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material. In following these approaches, the types of factors that will be taken into account in fair value pricing investments will include, as relevant, but not be limited to: • available current market data, including relevant and applicable market trading and transaction comparables; • applicable market yields and multiples; • security covenants; • call protection provisions; • information rights; • the nature and realizable value of any collateral; • the portfolio company’s ability to make payments, its earnings and discounted cash flows and the markets in which it does business; • comparisons of financial ratios of peer companies that are public; • comparable merger and acquisition transactions; and • the principal market and enterprise values. Revenue Recognition The Company records interest income on an accrual basis to the extent such interest is deemed collectible. Payment-in-kind (“PIK”) interest, represents contractual interest accrued and added to the loan balance that generally becomes due at maturity. We will not accrue any form of interest on loans and debt securities if there is reason to doubt our ability to collect such interest. Loan origination fees, original issue discount and market discount or premium are capitalized, and we then accrete or amortize such amounts using the effective interest method as interest income. Upon the prepayment of a loan or debt security, any unamortized loan origination fee is recorded as interest income. We record prepayment premiums on loans and debt securities as other income. Dividend income, if any, will be recognized on the declaration date. 29 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) A presentation of the interest income we have received from portfolio companies for the three and six months ended June 30, 2021 and 2020 is as follows: For the three months ended For the six months ended June 30, June 30, June 30, June 30, 2021 2020 2021 2020 Loan interest $ 13,873,443 $ 12,902,025 $ 26,524,371 $ 26,335,098 PIK income 241,676 14,961 360,003 552,245 Fee amortization income (1) 662,956 600,110 1,240,209 1,229,829 Fee income acceleration (2) 68,323 118,384 234,592 367,896 Total Interest Income $ 14,846,398 $ 13,635,480 $ 28,359,175 $ 28,485,068 (1) Includes amortization of fees on unfunded commitments. (2) Unamortized loan origination fees recognized upon realization. To maintain our treatment as a RIC, substantially all of this income must be paid to stockholders in the form of distributions, even if we have not collected any cash. Management considers portfolio-specific circumstances as well as other economic factors in determining collectability. As of June 30, 2021, we had four loans on non-accrual status, which represented approximately 4.2% of our loan portfolio at cost and 1.1% at fair value. As of December 31, 2020, we had three loans on non-accrual status, which represented approximately 4.3% of our loan portfolio at cost and 1.0% at fair value. As of June 30, 2021 and December 31, 2020, $8,355,065 and $7,057,415 of income from investments on non-accrual has not been accrued. If a loan or debt security’s status significantly improves regarding the debtor’s ability to service the debt or other obligations, or if a loan or debt security is sold or written off, it will be removed from non-accrual status. Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation Realized gains or losses are measured by the difference between the net proceeds from the repayment, sale or disposition and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized. Investment Transaction Costs Costs that are material associated with an investment transaction, including legal expenses, are included in the cost basis of purchases and deducted from the proceeds of sales unless such costs are reimbursed by the borrower. Receivables and Payables for Unsettled Securities Transaction The Company records all investments on a trade date basis. 30 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) U.S. Federal Income Taxes The Company has elected to be treated as a RIC under Subchapter M of the Code, and intends to operate in a manner to qualify annually for the tax treatment applicable to RICs. To qualify for tax treatment as a RIC, among other things, the Company is required to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. So long as the Company maintains its status as a RIC, it generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes at least annually to its stockholders as dividends. Rather, any tax liability related to income earned by the Company represents obligations of the Company’s investors and will not be reflected in the consolidated financial statements of the Company. To avoid a 4% U.S federal excise tax on undistributed earnings, the Company is required to distribute each calendar year the sum of (i) 98% of its ordinary income for such calendar year (ii) 98.2% of its net capital gains for the one-year period ending December 31 (iii) any income recognized, but not distributed, in preceding years and on which the Company paid no U.S. federal income tax or the Excise Tax Avoidance Requirement. For this purpose, however, any net ordinary income or capital gain net income retained by us that is subject to corporate income tax for the tax year ending in that calendar year will be considered to have been distributed by year end (or earlier if estimated taxes are paid). The Company, at its discretion, may choose not to distribute all of its taxable income for the calendar year and pay a non-deductible 4% excise tax on this income. If the Company chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to stockholders. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes on estimated excess taxable income as taxable income is earned. Income tax expense of $286,276 and $526,257 for the three and six months ended June 30, 2021, respectively, was related mostly to excise tax; as was income tax expense of $289,000 and $485,795 for the three and six months ended June 30, 2020. The Company evaluates tax positions taken or expected to be taken while preparing its tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the applicable period . As of June 30, 2021 and December 31, 2020, the Company had not recorded a liability for any unrecognized tax positions. Management’s evaluation of uncertain tax positions may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof. The Company’s policy is to include interest and penalties related to income taxes, if applicable, in general and administrative expenses. Any expenses for the three and six months ended June 30, 2021 and 2020 were de minimis. The Taxable Subsidiaries are direct wholly owned subsidiaries of the Company that have elected to be taxable entities. The Taxable Subsidiaries permit the Company to hold equity investments in portfolio companies that are “pass through” entities for U.S. federal income tax purposes and continue to comply with the “source-of-income” requirements contained in RIC tax provisions of the Code. The Taxable Subsidiaries are not consolidated with the Company for U.S. federal income tax purposes and may generate income tax expense, benefit, and the related tax assets and liabilities, as a result of their ownership of certain portfolio investments. The income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in the Company’s consolidated financial statements. The Taxable Subsidiaries use the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory tax rates in effect for the year in which the temporary differences are expected to reverse. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. Taxable income generally excludes net unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized. 31 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) For the three and six months ended June 30, 2021, the Company recorded deferred income tax benefit of $187,721 and $19,917, respectively, related to the Taxable Subsidiaries. For the three and six months ended June 30, 2020, the Company recorded deferred income tax (provision) of ($58,909) and ($29,950), respectively, related to the Taxable Subsidiaries. In addition, as of June 30, 2021 and December 31, 2020, the Company had a deferred tax liability of $339,673 and $359,590, respectively. Earnings per Share Basic per share calculations are computed utilizing the weighted average number of shares of common stock outstanding for the period. The Company has no common stock equivalents. As a result, there is no difference between diluted earnings per share and basic per share amounts. Paid In Capital The Company records the proceeds from the sale of its common stock on a net basis to (i) capital stock and (ii) paid in capital in excess of par value, excluding all commissions and marketing support fees. Distributable Earnings (Accumulated Undistributed Deficit) The components that make up distributable earnings (accumulated undistributed deficit) on the Statement of Assets and Liabilities as of June 30, 2021 and December 31, 2020 are as follows: June 30, December 31, 2021 2020 Accumulated net realized loss from investments, net of cumulative dividends of $24,557,535 for both periods $ (18,247,056 ) $ (16,388,369 ) Net unrealized depreciation on non-controlled non-affiliated investments and cash equivalents, net of provision for taxes of $339,673 and $359,590, respectively (3,756,284 ) (5,564,061 ) Accumulated undistributed net investment income 20,123,468 19,266,926 Accumulated undistributed deficit $ (1,879,872 ) $ (2,685,504 ) 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 six months ended June 30, 2021. From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. We believe the impact of the recently issued standards and any that are not yet effective will not have a material impact on our consolidated financial statements upon adoption. 32 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) NOTE 2 — RELATED PARTY ARRANGEMENTS Investment Advisory Agreement The Company has entered into an investment advisory agreement with Stellus Capital pursuant to which Stellus Capital serves as its investment adviser. Pursuant to this agreement, the Company has agreed to pay to Stellus Capital an annual base management fee of 1.75% of gross assets, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents, and an incentive fee. For the three and six months ended June 30, 2021, the Company recorded an expense for base management fees of $3,278,479 and $6,242,340, respectively. For the three and six months ended June 30, 2020, the Company recorded an expense for base management fees of $2,743,195 and $5,462,249, respectively. As of June 30, 2021 and December 31, 2020, $2,278,479 and $2,825,322, respectively, were payable to Stellus Capital. The incentive fee has two components, investment income and capital gains, as follows: Income Incentive Fee The investment income component (“Investment Income Incentive Fee”) is calculated, and payable to the Advisor, quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter, subject to a cumulative total return requirement and to deferral of non-cash amounts. The pre-incentive fee net investment income excludes items classified below the Net Investment Income line including realized and unrealized gains and losses, loss on debt extinguishment, and other capital transactions. The pre-incentive fee net investment income, which is expressed as a rate of return on the value of the Company’s net assets attributable to the Company’s common stock, for the immediately preceding calendar quarter, will have a 2.0% (which is 8.0% annualized) hurdle rate (also referred to as the “Hurdle”). Pre-incentive fee net investment income means interest income, dividend income and any other income accrued during the calendar quarter, minus the Company’s operating expenses for the quarter excluding the incentive fee. Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero-coupon securities), accrued income that the Company has not yet received in cash. The Advisor receives no incentive fee for any calendar quarter in which the Company’s pre-incentive fee net investment income does not exceed the Hurdle. Subject to the cumulative total return requirement described below, the Advisor receives 100% of the Company’s pre-incentive fee net investment income for any calendar quarter with respect to that portion of the pre-incentive net investment income for such quarter, if any, that exceeds the Hurdle but is less than 2.5% (which is 10.0% annualized) of net assets (also referred to as the “Catch-up”) and 20.0% of the Company’s pre-incentive fee net investment income for such calendar quarter, if any, greater than 2.5% (10.0% annualized) of net assets. The foregoing Investment Income Incentive Fee is subject to a total return requirement, which provides that no Investment Income Incentive Fee in respect of the Company’s pre-incentive fee net investment income is payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding calendar quarters exceeds the cumulative Investment Income Incentive Fees accrued and/or paid for the 11 preceding quarters. In other words, any Investment Income Incentive Fee that is payable in a calendar quarter is limited to the lesser of (i) 20% of the amount by which the Company’s pre-incentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, subject to the Catch-up, and (ii) (x) 20% of the cumulative net increase in net assets resulting from operations for the then current and 11 preceding quarters minus (y) the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the amount, if positive, of the sum of pre-incentive fee net investment income, realized gains and losses and unrealized appreciation and depreciation of the Company for the then current and 11 preceding calendar quarters. In addition, the Advisor is not paid the portion of such Investment Income Incentive Fee that is attributable to deferred interest until the Company actually receives such interest in cash. For both the three and six months ended June 30, 2021, the Company incurred $55,899 of Income Incentive Fees. For the three and six months ended June 30, 2020, the Company incurred $168,749 and $1,508,386, respectively, of Income Incentive Fees. As of June 30, 2021 and December 31, 2020, $178,398 and $681,660, respectively, of such Income Incentive Fees were payable to the Advisor, of which $53,459 and $559,161, respectively, were currently payable (as explained below). As of June 30, 2021 and December 31, 2020, $124,939 and $122,499 respectively, of Income Incentive Fees incurred but not paid by the Company were generated from deferred interest (i.e. PIK interest, certain discount accretion and deferred interest) and are not payable until such deferred amounts are received by the Company in cash. 33 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) Capital Gains Incentive Fee The Company also pays the Advisor an incentive fee based on capital gains (the “Capital Gains Incentive Fee”). The Capital Gains Incentive Fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment management agreement, as of the termination date). The Capital Gains Incentive Fee is equal to 20.0% of the Company’s cumulative aggregate realized capital gains from Inception through the end of that calendar year, computed net of the cumulative aggregate realized capital losses and cumulative aggregate unrealized capital depreciation through the end of such year. The aggregate amount of any previously paid Capital Gain Incentive Fees is subtracted from such Capital Gain Incentive Fees when the Capital Gains Incentive Fee is calculated. U.S. GAAP requires that the Capital Gains Incentive Fee accrual considers the cumulative aggregate realized gains and losses and unrealized capital appreciation or depreciation of investments or other financial instruments in the calculation, as an incentive fee would be payable if such realized gains and losses and unrealized capital appreciation or depreciation were realized, even though such realized gains and losses and unrealized capital appreciation or depreciation is not permitted to be considered in calculating the Capital Gains Incentive Fee actually payable under the investment advisory agreement. There can be no assurance that unrealized appreciation or depreciation will be realized in the future. Accordingly, such fees, as calculated and accrued, may not necessarily be payable under the investment advisory agreement, and may never be paid based upon the computation of incentive fees in subsequent periods. For the three and six months ended June 30, 2021, the Company accrued $14,387 and $97,668, respectively, related to the Capital Gains Incentive Fee. The Company accrued $0 and ($880,913) of Capital Gains Incentive Fee for the three and six months ended June 30, 2020, respectively. As of June 30, 2021 and December 31, 2020, $618,689 and $521,021, respectively, of Capital Gains Incentive Fees were accrued but not currently payable to the Advisor. The following tables summarize the components of the incentive fees discussed above: Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Income incentive fees incurred $ 55,899 $ 168,749 $ 55,899 $ 1,508,386 Capital gains incentive fees incurred (reversed) 14,387 — 97,668 (880,913 ) Incentive fee expense $ 70,286 $ 168,749 $ 153,567 $ 627,473 June 30, December 31, 2021 2020 Income incentive fee currently payable $ 53,459 $ 559,161 Income incentive fee deferred 124,939 122,499 Capital gains incentive fee deferred 618,689 521,021 Incentive fee payable $ 797,087 $ 1,202,681 34 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) Director Fees For the three and six months ended June 30, 2021, the Company recorded an expense relating to director fees of $74,500 and $166,000, respectively. For the three and six months ended June 30, 2020, the Company recorded an expense relating to director fees of $110,566 and $242,816, respectively. As of June 30, 2021 and December 31, 2020, there were no fees payable to the Company’s independent directors. Co-Investments On October 23, 2013, the Company received an exemptive order (the “Prior Order”) from the SEC to co-invest with private funds managed by Stellus Capital where doing so is consistent with the Company’s investment strategy as well as applicable law (including the terms and conditions of the exemptive order issued by the SEC). On December 18, 2018, the Company received a new exemptive order (the “Order”) that supersedes the Prior Order and permits the Company greater flexibility to enter into co-investment transactions. The Order expands on the Prior Order and allows the Company to co-invest with additional types of private funds, other BDCs, and registered investment companies managed by Stellus Capital or an adviser that is controlled, controlling, or under common control with Stellus Capital, subject to the conditions included therein. Pursuant to the Order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Company’s independent directors must make certain conclusions in connection with a co-investment transaction, including (1) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to the Company and its stockholders and do not involve overreaching of the Company or its stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of the Company’s stockholders and is consistent with its investment objectives and strategies. The Company co-invests, subject to the conditions in the Order, with private credit funds managed by Stellus Capital that have an investment strategy that is similar or identical to the Company’s investment strategy, and the Company may co-invest with other BDCs and registered investment companies managed by Stellus Capital or an adviser that is controlled, controlling, or under common control with Stellus Capital in the future. The Company believes that such co-investments may afford it additional investment opportunities and an ability to achieve greater diversification. Administrative Agent The Company serves as the administrative agent on certain investment transactions, including co-investments with its affiliates under the Order. As of both June 30, 2021 and December 31, 2020, Cash and Cash Equivalents included $1,372,000 and $0, respectively, of cash related to an add on funding by other investment funds managed by Stellus Capital Management. Any such amount is included in “Other Accrued Expenses and Liabilities” on the Consolidated Statement of Assets and Liabilities. License Agreement The Company has entered into a license agreement with Stellus Capital under which Stellus Capital has agreed to grant the Company a non-exclusive, royalty-free license to use the name “Stellus Capital.” Under this agreement, the Company has a right to use the “Stellus Capital” name for so long as Stellus Capital or one of its affiliates remains its investment adviser. Other than with respect to this limited license, the Company has no legal right to the “Stellus Capital” name. This license agreement will remain in effect for so long as the investment advisory agreement with Stellus Capital is in effect. Administration Agreement The Company has entered into an administration agreement with Stellus Capital pursuant to which Stellus Capital will furnish the Company with office facilities and equipment and will provide the Company with the clerical, bookkeeping, recordkeeping and other administrative services necessary to conduct day-to-day operations. Under this administration agreement, Stellus Capital will perform, or oversee the performance of, the administrative services required to be performed for the Company, which include, among other things, being responsible for the financial records which the Company is required to maintain and preparing reports to its stockholders and reports filed with the SEC. 35 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) For the three and six months ended June 30, 2021, the Company recorded expenses of $383,578 and $764,628, respectively, relating to the administration agreement with Stellus Capital. For the three and six months ended June 30, 2020, the Company recorded expenses of $389,929 and $789,529, respectively, relating to the administration agreement with Stellus Capital. These amounts are included in administrative service expenses on the Statement of Operations. As of June 30, 2021 and December 31, 2020, $383,578 and $381,690, respectively, remained payable to Stellus Capital relating to the administration agreement. Indemnifications The investment advisory agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations under the investment advisory agreement, Stellus Capital and its officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of Stellus Capital’s services under the investment advisory agreement or otherwise as our investment adviser. The Company has also entered into indemnification agreements with its directors. The indemnification agreements are intended to provide the Company’s directors the maximum indemnification permitted under Maryland law and the 1940 Act. Each indemnification agreement provides that the Company shall indemnify the director who is a party to the agreement (an “Indemnitee”), including the advancement of legal expenses, if, by reason of his or her corporate status, the Indemnitee is, or is threatened to be, made a party to or a witness in any threatened, pending, or completed proceeding, other than a proceeding by or in the right of the Company. NOTE 3 — DISTRIBUTIONS Distributions are generally declared by the Company’s Board each calendar quarter and recognized as distribution liabilities on the declaration date. The Company intends to distribute net realized gains (i.e., net capital gains in excess of net capital losses), if any, at least annually. The stockholder distributions, if any, will be determined by the Board. Any distribution to stockholders will be declared out of assets legally available for distribution. For the three and six months ended June 30, 2021, the Company has declared distributions of $0.25 and $0.50 per share, respectively, on its common stock. The Company has declared distributions of $11.41 per share on its common stock from Inception through June 30, 2021. 36 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) Date Declared Record Date Payment Date Per Share (1) Fiscal 2012 Various $ 0.18 Fiscal 2013 $ 1.36 Fiscal 2014 $ 1.42 Fiscal 2015 $ 1.36 Fiscal 2016 $ 1.36 Fiscal 2017 $ 1.36 Fiscal 2018 $ 1.36 Fiscal 2019 $ 1.36 Fiscal 2020 $ 1.15 Fiscal 2021 January 15, 2021 January 29, 2021 February 16, 2021 $ 0.0833 January 15, 2021 February 26, 2021 March 15, 2021 $ 0.0833 January 15, 2021 March 31, 2021 April 15, 2021 $ 0.0833 April 19, 2021 April 30, 2021 May 14, 2021 $ 0.0833 April 19, 2021 May 28, 2021 June 15, 2021 $ 0.0833 April 19, 2021 June 30, 2021 July 15, 2021 $ 0.0833 Total $ 11.41 (1) Distributions for fiscal years 2012 through 2020 are shown in aggregate amounts The Company has adopted an “opt out” dividend reinvestment plan (“DRIP”) pursuant to which a stockholder whose shares are held in his own name will receive distributions in shares of the Company’s common stock under the Company’s DRIP unless it elects to receive distributions in cash. Stockholders whose shares are held in the name of a broker or the nominee of a broker may have distributions reinvested only if such service is provided by the broker or the nominee, or if the broker of the nominee permits participation in our DRIP. Although distributions paid in the form of additional shares of the Company’s common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, investors participating in the Company’s DRIP will not receive any corresponding cash distributions with which to pay any such applicable taxes. Any distributions reinvested through the issuance of shares through the Company’s DRIP will increase the Company’s gross assets on which the base management fee and the incentive fee are determined and paid to Stellus Capital. The Company issued no shares through the DRIP during the three and six months ended June 30, 2021, respectively. The Company issued 11,756 and 21,666 shares through the DRIP during the three and six ended June 30, 2020, respectively. 37 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) NOTE 4 — EQUITY OFFERINGS AND RELATED EXPENSES The table below illustrates the number of common shares the Company issued since Inception through various equity offerings and pursuant to the Company’s DRIP. Number of Gross Underwriting Offering Net Average Offering Issuance of Common Stock Shares Proceeds (1)(2) fees Expenses Proceeds (3) Price Year ended December 31, 2012 12,035,023 $ 180,522,093 $ 4,959,720 $ 835,500 $ 174,726,873 $ 14.90 Year ended December 31, 2013 63,998 899,964 — — 899,964 14.06 Year ended December 31, 2014 380,936 5,485,780 75,510 29,904 5,380,366 14.47 Year ended December 31, 2017 3,465,922 48,741,406 1,358,880 307,021 47,075,505 14.06 Year ended December 31, 2018 7,931 93,737 — — 93,737 11.85 Year ended December 31, 2019 3,177,936 45,862,995 1,015,127 521,715 44,326,153 14.43 Year ended December 31, 2020 354,257 5,023,842 5,681 18,169 4,999,992 14.18 Total 19,486,003 $ 286,629,817 $ 7,414,918 $ 1,712,309 $ 277,502,590 (1) Net of partial share transactions. Such transactions impacted gross proceeds by $(96), $757, $(1,051), $(142), $(31) and $(29) in 2020, 2019, 2018, 2017, 2016 and 2015, respectively. (2) Includes proceeds from common shares issued under the DRIP of $0 for the six months ended June 30, 2021, $228,943 for the year ended December 31, 2020, $0 for the year ended December 31, 2019, $94,788 during the year ended December 31, 2018, $0 for the years ended December 31, 2017, 2016 and 2015, and $398,505, $899,964, $113,000 for the years ended December 31, 2014, 2013, and 2012, respectively. (3) Net proceeds per this table will differ from the Statement of Assets and Liabilities as of June 30, 2021 and December 31, 2020 in the amount of $1,456,437, which represents a tax reclassification of stockholder’s equity in accordance with U.S. GAAP. This reclassification reduces paid-in capital and increases distributable earnings (reduces accumulated undistributed deficit). The Company did not issue any shares during the six months ended June 30, 2021. During the six months ended June 30, 2020, the Company issued 332,591 shares in under the At-the-Market (“ATM”) Program. Gross proceeds resulting from the ATM Program totaled $4,794,995 and underwriting and other expenses totaled $23,850. The average per share offering price in the ATM Program during 2020 was $14.42. The Company issued 0 and 21,666 shares of common stock through the DRIP for the six months ended June 30, 2021 and 2020, respectively. See Note 3 for further information on distributions. 38 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) NOTE 5 — NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS PER COMMON SHARE The following information sets forth the computation of net increase in net assets resulting from operations per common share for the three and six months ended June 30, 2021 and June 30, 2020. Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2021 2020 2021 2020 Net increase (decrease) in net assets resulting from operations $ 5,606,948 $ 39,812,674 $ 10,544,736 $ (4,127,058 ) Weighted average common shares 19,486,003 19,484,217 19,486,003 19,456,849 Net increase (decrease) in net assets from operations per share $ 0.29 $ 2.04 $ 0.54 $ (0.21 ) NOTE 6 — PORTFOLIO INVESTMENTS AND FAIR VALUE In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Company discloses the fair value of its investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows: Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2 — Quoted prices in markets that are not considered to be active or financial instruments for which significant inputs are observable, either directly or indirectly; and Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. The level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by management. The Company considers whether the volume and level of activity for the asset or liability have significantly decreased and identifies transactions that are not orderly in determining fair value. Accordingly, if the Company determines that either the volume and/or level of activity for an asset or liability has significantly decreased (from normal conditions for that asset or liability) or price quotations or observable inputs are not associated with orderly transactions, increased analysis and management judgment will be required to estimate fair value. Valuation techniques such as an income approach might be appropriate to supplement or replace a market approach in those circumstances. 39 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) At June 30, 2021, the Company had investments in 76 portfolio companies. The total fair value and cost of the investments were $781,947,972 and $785,364,583, respectively. The composition of our investments as of June 30, 2021 is as follows: Cost Fair Value Senior Secured – First Lien (1) $ 645,480,178 $ 643,634,506 Senior Secured – Second Lien 79,753,388 58,223,942 Unsecured Debt 18,607,346 18,776,716 Equity 41,523,671 61,312,808 Total Investments $ 785,364,583 $ 781,947,972 (1) Includes unitranche investments, which account for 11.1% 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 “second-out” and “last-out” tranche. At December 31, 2020, the Company had investments in 66 portfolio companies. The total cost and fair value of the investments were $658,628,966 and $653,424,495, respectively. The composition of our investments as of December 31, 2020 was as follows: Cost Fair Value Senior Secured – First Lien (1) $ 508,060,059 $ 508,673,064 Senior Secured – Second Lien 93,636,285 70,720,186 Unsecured Debt 22,212,888 21,191,245 Equity 34,719,734 52,840,000 Total Investments $ 658,628,966 $ 653,424,495 (1) Includes unitranche investments, which account for 13.0% of our portfolio at fair value. Unitranche structures may combine characteristics of first lien senior secured as well as second lien and/or subordinated loans and our unitranche loans will expose us to the risks associated with the second lien and subordinated loans to the extent we invest in the “last-out” tranche. The Company’s investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require the Company to provide funding when requested by portfolio companies in accordance with the terms and conditions of the underlying loan agreements. As of June 30, 2021 and December 31, 2020, the Company had 27 and 19 such investments with aggregate unfunded commitments of $25,680,764 and $28,865,204, respectively. The Company maintains sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded commitments should the need arise. The aggregate gross unrealized appreciation and depreciation and the aggregate cost and fair value of the Company’s portfolio company securities as June 30, 2021 and December 31, 2020 were as follows: 40 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) 2021 2020 Aggregate cost of portfolio company securities $ 785,364,583 $ 658,628,966 Gross unrealized appreciation of portfolio company securities 30,834,950 28,143,621 Gross unrealized depreciation of portfolio company securities (34,251,561 ) (33,348,092 ) Aggregate fair value of portfolio company securities $ 781,947,972 $ 653,424,495 The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of June 30, 2021 are as follows: Quoted Prices in Active Markets Significant Other Significant for Identical Observable Unobservable Securities Inputs Inputs (Level 1) (Level 2) (Level 3) Total Senior Secured – First Lien $ — $ — $ 643,634,506 $ 643,634,506 Senior Secured – Second Lien — — 58,223,942 58,223,942 Unsecured Debt — — 18,776,716 18,776,716 Equity — — 61,312,808 61,312,808 Total Investments $ — $ — $ 781,947,972 $ 781,947,972 The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of December 31, 2020 are as follows: Quoted Prices in Active Markets Significant Other Significant for Identical Observable Unobservable Securities Inputs Inputs (Level 1) (Level 2) (Level 3) Total Senior Secured – First Lien $ — $ — $ 508,673,064 $ 508,673,064 Senior Secured – Second Lien — — 70,720,186 70,720,186 Unsecured Debt — — 21,191,245 21,191,245 Equity — — 52,840,000 52,840,000 Total Investments $ — $ — $ 653,424,495 $ 653,424,495 41 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) The aggregate values of Level 3 portfolio investments changed during the six months ended June 30, 2021 are as follows: Senior Secured Loans-First Lien Senior Secured Loans-Second Lien Unsecured Debt Equity Total Fair value at beginning of period $ 508,673,064 $ 70,720,186 $ 21,191,245 $ 52,840,000 $ 653,424,495 Purchases of investments 164,765,171 965,250 11,705,915 7,519,888 184,956,224 Payment-in-kind interest 206,976 — 153,027 — 360,003 Sales and redemptions (28,528,912 ) (13,161,430 ) (15,500,000 ) (1,155,368 ) (58,345,710 ) Realized (losses) gains — (1,781,664 ) — 439,417 (1,342,247 ) Change in unrealized (depreciation) appreciation included in earnings (1) (2,458,678 ) 1,386,654 1,191,013 1,668,871 1,787,860 Amortization of premium and accretion of discount, net 976,885 94,946 35,516 — 1,107,347 Fair value at end of period $ 643,634,506 $ 58,223,942 $ 18,776,716 $ 61,312,808 $ 781,947,972 (1) Includes reversal of positions realized during the six months ended June 30, 2021. There were no Level 3 transfers during the six months ended June 30, 2021. The aggregate values of Level 3 portfolio investments changed during the year ended December 31, 2020 are as follows: Senior Secured Loans-First Lien Senior Secured Loans-Second Lien Unsecured Debt Equity Total Fair value at beginning of period $ 455,169,878 $ 111,961,013 $ 22,137,186 $ 39,680,000 $ 628,948,077 Purchases of investments 139,571,726 9,800,000 — 8,135,439 157,507,165 Payment-in-kind interest 80,487 506,754 77,751 — 664,992 Sales and Redemptions (85,804,667 ) (43,642,752 ) — (4,801,419 ) (134,248,838 ) Realized (losses) gains (8,599,062 ) (4,003,655 ) (163,423 ) 2,665,177 (10,100,963 ) Change in unrealized appreciation (depreciation) included in earnings (1) 6,550,721 (4,276,940 ) (879,310 ) 7,160,803 8,555,274 Amortization of premium and accretion of discount, net 1,703,981 375,766 19,041 — 2,098,788 Fair value at end of period $ 508,673,064 $ 70,720,186 $ 21,191,245 $ 52,840,000 $ 653,424,495 (1) Includes reversal of positions realized during the twelve months ended December 31, 2020. There were no Level 3 transfers during the twelve months ended December 31, 2020. 42 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) The following is a summary of geographical concentration of our investment portfolio as of June 30, 2021: % of Total Investments at Cost Fair Value Fair Value Texas $ 151,322,626 $ 134,514,015 17.20 % California 122,068,171 127,950,320 16.33 % Illinois 62,435,020 63,020,976 8.06 % Arizona 50,776,511 52,525,678 6.72 % New Jersey 38,156,032 36,094,463 4.62 % Ohio 33,512,002 35,079,739 4.49 % Canada 34,842,810 34,997,850 4.48 % Pennsylvania 24,666,871 24,624,063 3.15 % Washington 22,796,827 22,933,726 2.93 % Wisconsin 22,643,018 22,923,812 2.93 % New York 18,932,074 20,400,342 2.61 % United Kingdom 21,295,341 19,928,875 2.55 % Washington, D.C. 18,988,139 19,274,808 2.46 % South Carolina 15,860,738 18,822,490 2.41 % Indiana 17,716,890 17,905,067 2.29 % Georgia 11,313,756 17,718,756 2.27 % Maryland 16,904,135 17,062,500 2.18 % Minnesota 15,817,831 15,795,987 2.02 % Colorado 15,213,977 15,213,780 1.95 % Florida 13,676,822 13,958,409 1.79 % Alabama 12,208,387 12,250,938 1.57 % Missouri 9,914,154 10,670,000 1.36 % North Carolina 10,536,326 10,555,500 1.35 % Virginia 7,339,579 7,628,133 0.98 % Tennessee 4,495,893 4,515,959 0.58 % Puerto Rico 8,613,244 2,161,786 0.28 % New Hampshire 2,000,000 2,000,000 0.26 % Massachusetts 1,317,406 1,010,000 0.13 % Utah - 410,000 0.05 % $ 785,364,583 $ 781,947,972 100.00 % 43 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) The following is a summary of geographical concentration of our investment portfolio as of December 31, 2020: % of Total Investments Cost Fair Value at fair value Texas $ 151,640,862 $ 135,146,776 20.67 % California 86,050,467 92,069,851 14.09 % Illinois 57,330,756 57,535,404 8.81 % Arizona 50,822,139 52,015,600 7.96 % New Jersey 38,228,359 37,765,139 5.78 % Ohio 34,109,657 35,827,682 5.48 % Wisconsin 22,721,856 22,827,500 3.49 % Canada 21,318,659 21,540,925 3.30 % New York 19,527,594 20,547,579 3.14 % Tennessee 19,832,576 19,959,613 3.05 % United Kingdom 20,159,650 18,727,500 2.87 % South Carolina 15,834,471 18,132,490 2.78 % Indiana 17,741,889 18,026,339 2.76 % Maryland 16,970,057 17,064,250 2.61 % Florida 12,404,739 12,299,545 1.88 % Alabama 12,252,768 12,252,768 1.88 % Washington 11,803,768 11,801,363 1.81 % Missouri 9,956,554 10,720,000 1.64 % Pennsylvania 9,884,148 9,900,000 1.52 % Virginia 7,505,287 7,759,020 1.19 % Washington, D.C. 6,937,907 7,030,512 1.08 % Georgia 685,000 6,420,000 0.98 % North Carolina 4,979,153 2,925,000 0.45 % Puerto Rico 8,613,244 2,589,639 0.40 % Massachusetts 1,317,406 1,780,000 0.27 % Utah - 760,000 0.11 % $ 658,628,966 $ 653,424,495 100.00 % 44 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) The following is a summary of industry concentration of our investment portfolio as of June 30, 2021: % of Total Investments Cost Fair Value at Fair Value Services: Business $ 173,203,423 $ 181,431,116 23.20 % Healthcare & Pharmaceuticals 116,579,225 113,216,595 14.49 % Aerospace & Defense 81,792,450 79,972,148 10.23 % Beverage, Food, & Tobacco 38,768,477 39,261,594 5.02 % Capital Equipment 33,626,974 34,892,494 4.46 % Media: Broadcasting & Subscription 31,329,792 34,591,632 4.42 % High Tech Industries 33,590,096 33,791,862 4.32 % Consumer Goods: Durable 29,032,088 29,389,177 3.76 % Services: Consumer 37,999,312 22,255,186 2.85 % Education 21,427,380 21,611,213 2.76 % Media: Advertising, Printing & Publishing 21,224,545 18,999,209 2.43 % Retail 15,860,738 18,822,490 2.41 % Containers, Packaging, & Glass 17,791,339 18,011,313 2.30 % Transportation & Logistics 17,892,480 17,985,003 2.30 % Metals & Mining 16,904,135 17,062,500 2.18 % Software 14,309,117 16,115,500 2.06 % Chemicals, Plastics, & Rubber 14,721,687 14,811,598 1.89 % Consumer goods: non-durable 13,421,886 13,103,197 1.68 % Automotive 11,045,942 11,025,000 1.41 % Construction & Building 10,628,756 10,628,756 1.36 % Environmental Industries 10,759,753 10,190,000 1.30 % Utilities: Oil & Gas 9,892,808 9,850,000 1.26 % Energy: Oil & Gas 11,054,984 9,540,390 1.22 % Finance 2,507,196 5,350,000 0.68 % Hotel, Gaming, & Leisure - 40,000 0.01 % $ 785,364,583 $ 781,947,972 100.00 % 45 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) The following is a summary of industry concentration of our investment portfolio as of December 31, 2020: % of Total Investments Cost Fair Value at fair value Services: Business $ 102,005,864 $ 109,873,364 16.81 % Healthcare & Pharmaceuticals 87,198,279 82,945,887 12.69 % Aerospace & Defense 53,615,886 52,184,338 7.99 % Beverage, Food, & Tobacco 39,339,090 41,012,620 6.28 % Media: Broadcasting & Subscription 31,889,423 34,418,869 5.27 % High Tech Industries 33,571,427 33,793,693 5.17 % Consumer Goods: Durable 27,802,124 27,780,032 4.25 % Environmental Industries 25,454,549 24,977,427 3.82 % Education 26,428,607 24,494,108 3.75 % Services: Consumer 38,026,487 22,600,924 3.46 % Media: Advertising, Printing & Publishing 21,903,057 21,348,217 3.27 % Capital Equipment 20,005,255 20,680,904 3.17 % Finance 18,016,762 19,435,000 2.97 % Transportation & Logistics 18,690,276 18,944,945 2.90 % Retail 15,834,471 18,132,490 2.78 % Containers, Packaging, & Glass 17,853,813 17,890,000 2.74 % Metals & Mining 16,970,057 17,064,250 2.61 % Consumer goods: non-durable 13,272,383 12,930,000 1.98 % Automotive 11,028,125 11,028,125 1.69 % Construction & Building 10,446,055 10,750,000 1.65 % Energy: Oil & Gas 11,015,013 9,991,177 1.53 % Utilities: Oil & Gas 9,884,148 9,900,000 1.52 % Chemicals, Plastics, & Rubber 6,605,024 6,808,125 1.04 % Software 1,772,791 4,430,000 0.66 % Hotel, Gaming, & Leisure - 10,000 — % $ 658,628,966 $ 653,424,495 100.00 % 46 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) The following provides quantitative information about Level 3 fair value measurements as of June 30, 2021: Description: Fair Value Valuation Technique Unobservable Inputs Range (Average) (1)(3) HY credit spreads, -4.06 to 0.40% (-0.41%) Risk free rates -2.78% to 0.56% (-0.95%) First lien debt $ 643,634,506 Income/Market approach (2) Market multiples 5x to 45x (14x) (4) HY credit spreads, -3.38% to 0.40% (-0.79%) Risk free rates -2.19% to 0.54% (-0.72%) Second lien debt $ 58,223,942 Income/Market approach (2) Market multiples 9x to 19x (16x) (4) HY credit spreads, -0.46% to 0.05% (-0.20%) Risk free rates -1.79% to -1.55% (-1.67%) Unsecured debt $ 18,776,716 Income/Market approach (2) Market multiples 15x to 24x (18x) (4) Underwriting multiple/ Equity investments $ 61,312,808 Market approach (5) EBITDA Multiple 2x to 24x (12x) Total Long Term Level 3 Investments $ 781,947,972 (1) Weighted average based on fair value as of June 30, 2021. (2) Included but not limited to (a) the market approach which is used to determine sufficient enterprise value, and (b) the income approach which is based on discounting future cash flows using an appropriate market yield. (3) The Company calculates the price of the loan by discounting future cash flows, which include forecasted future LIBOR rates based on the published forward LIBOR curve at the valuation date, using an appropriate yield calculated as of the valuation date. This yield is calculated based on the loan’s yield at the original investment and is adjusted as of the valuation date based on: changes in comparable credit spreads, changes in risk free interest rates (per swap rates), and changes in credit quality (via an estimated shadow rating). Significant movements in any of these factors could result in a significantly lower or higher fair value measurement. As an example, the “Range (Average)” for first lien debt instruments in the table above indicates that the change in the HY spreads between the date a loan closed and the valuation date ranged from -4.06% (-406 basis points) to 0.40% (40 basis points). The average of all changes was -0.41% (-41 basis points). (4) Median of LTM (last twelve months) EBITDA multiples of comparable companies. (5) The primary significant unobservable input used in the fair value measurement of the Company’s equity investments is the EBITDA multiple (the “Multiple”). Significant increases (decreases) in the Multiple in isolation could result in a significantly higher (lower) fair value measurement. To determine the Multiple for the market approach, the Company considers current market trading and/or transaction multiple, portfolio company performance (financial ratios) relative to public and private peer companies and leverage levels, among other factors. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate Multiple to use in the market approach. 47 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) The following provides quantitative information about Level 3 fair value measurements as of December 31, 2020: Description: Fair Value Valuation Technique Unobservable Inputs Range (Average) (1)(3) HY credit spreads, -3.78% to 1.84% (-0.15%) Income/Market (2) Risk free rates -2.95% to 0.14% (-1.68%) First lien debt $ 508,673,064 approach Market multiples 7x to 48x (13x) (4) HY credit spreads, -1.71% to 3.83% (0.54%) Income/Market (2) Risk free rates -2.65% to 0.08% (-1.44%) Second lien debt $ 70,720,186 approach Market multiples 8x to 14x (11x) (4) HY credit spreads, -0.25% to 0.34% (-0.03%) Risk free rates -1.92% to -1.62% (-1.78%) Unsecured debt $ 21,191,245 Income/Market approach (2) Market multiples 1x to 24x (6x) (4) Equity investments $ 52,840,000 Market approach (5) Underwriting multiple/ 1x to 24x (12x) Total Long Term Level 3 Investments $ 653,424,495 EBITDA Multiple (1) Weighted average based on fair value as of December 31, 2020. (2) Inclusive of but not limited to (a) the market approach which is used to determine sufficient enterprise value, and (b) the income approach which is based on discounting future cash flows using an appropriate market yield. (3) The Company calculates the price of the loan by discounting future cash flows, which include forecasted future LIBOR rates based on the published forward LIBOR curve at the valuation date, using an appropriate yield calculated as of the valuation date. This yield is calculated based on the loan’s yield at the original investment and is adjusted as of the valuation date based on: changes in comparable credit spreads, changes in risk free interest rates (per swap rates), and changes in credit quality (via an estimated shadow rating). Significant movements in any of these factors would result in a significantly lower or higher fair value measurement. As an example, the “Range (Average)” for a first lien debt instruments in the table above indicates that the change in the HY spreads between the date a loan closed and the valuation date ranged from -3.78% (-378 basis points) to 1.84% (184 basis points). The average of all changes was -0.15%. (4) (5) Median of LTM (last twelve months) EBITDA multiples of comparable companies. The primary significant unobservable input used in the fair value measurement of the Company’s equity investments is the EBITDA multiple (the “Multiple”). Significant increases (decreases) in the Multiple in isolation would result in a significantly higher (lower) fair value measurement. To determine the Multiple for the market approach, the Company considers current market trading and/or transaction multiple, portfolio company performance (financial ratios) relative to public and private peer companies and leverage levels, among other factors. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate Multiple to use in the market approach. 48 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) NOTE 7 — COMMITMENTS AND CONTINGENCIES The Company is currently not subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our business, financial condition or results of operations. As of June 30, 2021, the Company had $25,680,764 of unfunded commitments to provide debt financing to 27 existing portfolio companies. As of December 31, 2020, the Company had $28,865,202 of unfunded commitments to provide debt to 19 existing portfolio companies. As of June 30, 2021, the Company had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded loan commitments should the need arise. NOTE 8 — FINANCIAL HIGHLIGHTS For the For the six months six months ended ended June 30, 2021 June 30, 2020 (unaudited) (unaudited) Per Share Data: (1) Net asset value at beginning of period $ 14.03 $ 14.14 Net investment income 0.54 0.60 Change in unrealized appreciation (depreciation) 0.09 (0.68 ) Net realized loss (0.07 ) (0.13 ) Loss on debt extinguishment (0.03 ) — Benefit for taxes on unrealized appreciation on investments 0.01 — Total from investment operations $ 0.54 $ (0.21 ) Stockholder distributions from: Net investment income (0.50 ) (0.59 ) Net asset value at end of period $ 14.07 $ 13.34 Per share market value at end of period $ 12.59 $ 7.28 Total return based on market value (2) 20.4 % (47.1 )% Weighted average shares outstanding 19,486,003 19,456,849 49 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) For the For the six months six months ended ended June 30, 2021 June 30, 2020 (unaudited) (unaudited) Ratio/Supplemental Data: Net assets at end of period $ 274,166,281 $ 259,953,308 Weighted Average net assets $ 273,765,691 $ 247,686,579 Annualized ratio of gross operating expenses to net assets (7) 13.62 % 14.12 % Annualized ratio of interest expense and other fees to net assets 6.64 % 6.79 % Annualized ratio of net investment income to net assets (5) 7.81 % 9.44 % Portfolio Turnover (3) 8.15 % 7.64 % Senior Securities: Notes payable $ 100,000,000 $ 48,875,000 Credit Facility payable $ 192,600,000 $ 185,000,000 SBA Debentures $ 234,000,000 $ 161,000,000 Asset coverage ratio (4) 1.94 x 2.11 x (1) Financial highlights are based on weighted average shares outstanding as of period end. (2) Total return on market value is based on the change in market price per share since the end of the prior year and assumes enrollment in the Company’s DRIP. The total returns are not annualized. (3) Portfolio turnover is calculated as the lesser of purchases or sales/repayments divided by average portfolio balance and is not annualized. (4) Asset coverage ratio is equal to total assets less all liabilities and indebtedness not represented by senior securities over the aggregate amount of the senior securities. SBA-guaranteed debentures are deducted from the numerator and excluded from the denominator. (5) These ratios include the impact of the provision for income taxes related to unrealized gain on investments in Taxable Subsidiaries of $19,917 and ($29,950), respectively, for the six months ended June 30, 2021 and June 30, 2020, which are not reflected in net investment income, gross operating expenses or net operating expenses. The provision for income taxes related to unrealized gain or loss on investments to net assets for the six months ended June 30, 2021 and 2020 is -0.01% and 0.02%, respectively. (6) Includes the impact of different share amounts as a result of calculating certain per share data based on weighted average shares outstanding during the period and certain per share data based on shares outstanding as of the period end. (7) These ratios include the impact of the income and capital gains incentive fees of $153,567 and $627,473, respectively, for the six months ended June 30, 2021 and June 30, 2020. Without these, the ratio of operating expense to net assets would have been 13.50% and 13.61%, respectively, for the six months ended June 30, 2021 and 2020. NOTE 9 — CREDIT FACILITY On October 11, 2017, the Company entered into a senior secured revolving credit agreement, as amended, dated as of October 10, 2017, that was amended and restated on September 18, 2020 with ZB, N.A., dba Amegy Bank and various other lenders (the “Credit Facility”). The Company entered the Credit Facility, as amended and restated, provides for borrowings up to a maximum of $230,000,000 on a committed basis with an accordion feature that allows the Company to increase the aggregate commitments up to $280,000,000, subject to new or existing lenders agreeing to participate in the increase and other customary conditions. Borrowings under the Credit Facility bear interest, subject to the Company’s election, on a per annum basis equal to (i) LIBOR plus 2.50% (or 2.75% during certain periods in which the Company’s asset coverage ratio is equal to or below 1.90 to 1.00) with a 0.25% LIBOR floor, or (ii) 1.50% (or 1.75% during certain periods in which the Company’s asset coverage ratio is equal to or below 1.90 to 1.00) plus an alternate base rate based on the highest of the prime rate (subject to a 3% floor), Federal Funds Rate plus 0.5% or one month LIBOR plus 1.0%. The Company pays unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility. Interest is payable monthly or quarterly in arrears. The commitment to fund the revolver expires on September 18, 2024, after which the Company may no longer borrow under the Credit Facility and must begin repaying principal equal to 1/12 of the aggregate amount outstanding under the Credit Facility each month. Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on September 18, 2025. 50 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) The Company’s obligations to the lenders are secured by a first priority security interest in its portfolio of securities and cash not held at the SBIC subsidiaries, but excluding short term investments. The Credit Facility contains certain covenants, including but not limited to: (i) maintaining a minimum liquidity test of at least $10,000,000, including cash, liquid investments and undrawn availability, (ii) maintaining an asset coverage ratio of at least 1.67 to 1.0, (iii) maintaining a minimum shareholder’s equity, and (iv) maintaining a minimum interest coverage ratio of at least 2.00 to 1.00. As of June 30, 2021, the Company was in compliance with these covenants. As of June 30, 2021 and December 31, 2020, the outstanding balance under the Credit Facility was $192,600,000 and $174,000,000, respectively. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value. The fair value of the Credit Facility is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Credit Facility is estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. The Company incurred costs of $3,641,549 in connection with the Credit Facility, which are being amortized over the life of the facility. Additionally, $341,979 of costs from a prior credit facility will continue to be amortized over the remaining life of the Credit Facility. As of June 30, 2021 and December 31, 2020, $2,036,737 and $2,271,595 of such prepaid loan structure fees and administration fees had yet to be amortized, respectively. These prepaid loan fees are presented on our consolidated statement of assets and liabilities as a deduction from the debt liability. The following is a summary of the Credit Facility, net of prepaid loan structure fees: June 30, December 31, 2021 2020 Credit Facility payable $ 192,600,000 $ 174,000,000 Prepaid loan structure fees 2,036,737 2,271,595 Credit facility payable, net of prepaid loan structure fees $ 190,563,263 $ 171,728,405 Interest is paid monthly or quarterly in arrears. The following table summarizes the interest expense and amortized loan fees on the Credit Facility for the three and six months ended June 30, 2021 and 2020: 51 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) For the three months ended For the six months ended June 30, June 30, June 30, June 30, 2021 2020 2021 2020 Interest expense $ 1,324,618 $ 1,606,601 $ 2,299,118 $ 3,393,071 Loan fee amortization 118,531 157,667 236,233 300,634 Commitment fees on unused portion 52,635 26,222 168,308 81,876 Administration fees 1,743 8,702 3,467 17,404 Total interest and financing expenses $ 1,497,527 $ 1,799,192 $ 2,707,126 $ 3,792,985 Weighted average interest rate 2.8 % 3.1 % 2.8 % 3.6 % Effective interest rate (including fee amortization) 3.2 % 3.5 % 3.3 % 4.0 % Weighted average debt outstanding $ 189,050,549 $ 204,648,352 $ 164,992,265 $ 190,230,220 Cash paid for interest and unused fees $ 1,483,154 $ 1,719,430 $ 2,489,007 $ 3,649,323 NOTE 10 — SBA-GUARANTEED DEBENTURES Due to the SBIC subsidiaries’ status as licensed SBICs, the Company can issue debentures guaranteed by the SBA at favorable interest rates. Under the regulations applicable to SBIC funds, a single licensee can have outstanding debentures guaranteed by the SBA subject to a regulatory leverage limit, up to two times the amount of “regulatory capital”, as such term is defined by the SBA. As of both June 30, 2021 and December 31, 2020, the SBIC subsidiary had $75,000,000 in regulatory capital, as such term is defined by the SBA, and $150,000,000 of SBA-guaranteed debentures outstanding. As of June 30, 2021 and December 31, 2020, the SBIC II subsidiary had $87,500,000 and $40,000,000 in regulatory capital and $84,000,000 and $26,500,000 of SBA-guaranteed debentures outstanding, respectively. On August 12, 2014, the Company obtained exemptive relief from the SEC to permit it to exclude the debt of the SBIC subsidiaries guaranteed by the SBA from its asset coverage test under the 1940 Act. The exemptive relief provides the Company with increased flexibility under the asset coverage test by permitting it to borrow up to $325,000,000 more than it would otherwise be able to absent the receipt of this exemptive relief. On a stand-alone basis, the SBIC subsidiaries held $374,691,854 and $277,440,338 in assets at June 30, 2021 and December 31, 2020, respectively, which accounted for approximately 46.6% and 41.1% of the Company’s total consolidated assets, respectively. Debentures guaranteed by the SBA have fixed interest rates that equal prevailing 10-year U.S. Treasury Note rates plus a market spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the debentures is not required to be paid before maturity but may be pre-paid at any time with no prepayment penalty. SBA-guaranteed debentures drawn before October 1, 2019 incur upfront fees of 3.425%, which consists of a 1.00% commitment fee and a 2.425% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. SBA-guaranteed debentures drawn after October 1, 2019 incur upfront fees of 3.435%, which consists of a 1.00% commitment fee and a 2.435% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. Once pooled, which occurs in March and September of each applicable year, the SBA-guaranteed debentures bear interest at a fixed rate that is set to the current 10-year U.S. Treasury Note rate plus a spread at each pooling date. 52 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) The following table summarizes the SBIC subsidiaries’ SBA-guaranteed debentures as of June 30, 2021: SBIC I SBA-guaranteed Debentures Issuance Date Licensee Maturity Date Debenture Amount Interest Rate SBA Annual Charge October 14, 2014 SBIC I March 1, 2025 $ 6,500,000 2.52 % 0.36 % October 17, 2014 SBIC I March 1, 2025 6,500,000 2.52 % 0.36 % December 24, 2014 SBIC I March 1, 2025 3,250,000 2.52 % 0.36 % June 29, 2015 SBIC I September 1, 2025 9,750,000 2.83 % 0.36 % October 22, 2015 SBIC I March 1, 2026 6,500,000 2.51 % 0.36 % October 22, 2015 SBIC I March 1, 2026 1,500,000 2.51 % 0.74 % November 10, 2015 SBIC I March 1, 2026 8,800,000 2.51 % 0.74 % November 18, 2015 SBIC I March 1, 2026 1,500,000 2.51 % 0.74 % November 25, 2015 SBIC I March 1, 2026 8,800,000 2.51 % 0.74 % December 16, 2015 SBIC I March 1, 2026 2,200,000 2.51 % 0.74 % December 29, 2015 SBIC I March 1, 2026 9,700,000 2.51 % 0.74 % November 28, 2017 SBIC I March 1, 2028 25,000,000 3.19 % 0.22 % April 27, 2018 SBIC I September 1, 2028 40,000,000 3.55 % 0.22 % July 30, 2018 SBIC I September 1, 2028 17,500,000 3.55 % 0.22 % September 25, 2018 SBIC I March 1, 2029 2,500,000 3.11 % 0.22 % Total SBIC I SBA-guaranteed debentures $ 150,000,000 SBIC II SBA-guaranteed Debentures Issuance Date Licensee Maturity Date Debenture Amount Interest Rate SBA Annual Charge October 17, 2019 SBIC II March 1, 2030 $ 6,000,000 2.08 % 0.09 % November 15, 2019 SBIC II March 1, 2030 5,000,000 2.08 % 0.09 % December 17, 2020 SBIC II March 1, 2031 9,000,000 1.67 % 0.09 % December 17, 2020 SBIC II March 1, 2031 6,500,000 1.67 % 0.27 % February 16, 2021 SBIC II March 1, 2031 13,500,000 1.67 % 0.27 % February 26, 2021 SBIC II March 1, 2031 10,000,000 1.67 % 0.27 % March 2, 2021 SBIC II March 1, 2031 10,000,000 1.67 % 0.27 % April 21, 2021 SBIC II September 1, 2031 10,000,000 0.50 %(1) 0.27 % May 14, 2021 SBIC II September 1, 2031 6,700,000 0.47 %(1) 0.27 % May 28, 2021 SBIC II September 1, 2031 7,300,000 0.44 %(1) 0.27 % Total SBIC II SBA-guaranteed debentures $ 84,000,000 Total SBA-guaranteed debentures $ 234,000,000 (1) Interest rate of the SBA-guaranteed debentures will be set as determined by the SBA when pooled on September 22, 2021. As of June 30, 2021 and December 31, 2020, the carrying amount of the SBA-guaranteed debentures approximated their fair value. The fair values of the SBA-guaranteed debentures are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the SBA-guaranteed debentures are estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. At June 30, 2021 and December 31, 2020, the SBA-guaranteed debentures would be deemed to be Level 3 (as defined in Note 6). 53 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) As of June 30, 2021, the Company has incurred $8,382,900, in financing costs related to the SBA-guaranteed debentures since the SBIC subsidiaries received their licenses, which were recorded as prepaid loan fees. As of June 30, 2021 and December 31, 2020, $5,030,744 and $3,332,504 of prepaid financing costs had yet to be amortized, respectively. These prepaid loan fees are presented on the consolidated statement of assets and liabilities as a deduction from the debt liability. The following is a summary of the SBA-guaranteed debentures, net of prepaid loan fees: June 30, December 31, 2021 2020 SBA debentures payable $ 234,000,000 $ 176,500,000 Prepaid loan fees 5,030,744 3,332,504 SBA-guaranteed debentures, net of prepaid loan fees $ 228,969,256 $ 173,167,496 The following table summarizes the interest expense and amortized fees on the SBA-guaranteed debentures for the three and six months ended June 30, 2021 and 2020: For the three months ended For the six months ended June 30, June 30, June 30, June 30, 2021 2020 2021 2020 Interest expense $ 1,596,234 $ 1,336,675 $ 2,982,068 $ 2,678,358 Debenture fee amortization 268,071 171,275 501,885 342,550 Total interest and financing expenses $ 1,864,305 $ 1,507,950 $ 3,483,953 $ 3,020,908 Weighted average interest rate 2.9 % 3.3 % 2.9 % 3.3 % Effective interest rate (including fee amortization) 3.3 % 3.8 % 3.4 % 3.8 % Average debt outstanding $ 224,063,736 $ 161,000,000 $ 207,230,939 $ 161,000,000 Cash paid for interest $ — $ — $ 2,706,619 $ 2,659,213 NOTE 11 — NOTES On August 21, 2017, the Company issued $42,500,000 in aggregate principal amount of 5.75% fixed-rate notes due September 15, 2022 (the “2022 Notes”). On September 8, 2017, the Company issued an additional $6,375,000 in aggregate principal amount of the 2022 Notes pursuant to a full exercise of the underwriters’ overallotment option. On January 13, 2021, the Company caused notices to be issued to the holders of its 2022 Notes regarding the Company’s exercise of its option to redeem all of the issued and outstanding 2022 Notes, pursuant to the Second Supplemental Indenture dated as of August 21, 2017, between the Company and U.S. Bank National Association, as trustee. The Company redeemed all $48,875,000 in aggregate principal amount of the 2022 Notes on February 12, 2021. The 2022 Notes were redeemed at 100% of their principal amount, plus the accrued and unpaid interest thereon through the redemption date. As a result of the redemption, the Company recognized a loss on debt extinguishment of $539,250 due to the write off of the remaining deferred financing costs on the 2022 Notes. This loss is included in the Consolidated Statement of Operations for the six months ended June 30, 2021. The following table summarizes the interest expense and deferred financing costs on the 2022 Notes for the three and six months ended June 30, 2021 and 2020: 54 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) For the three months ended For the six months ended June 30, June 30, June 30, June 30, 2021 2020 2021 2020 Interest expense $ — $ 702,578 $ 320,063 $ 1,405,156 Deferred financing costs — 82,874 28,232 165,748 Administration Fees — — 9,000 — Total interest and financing expenses $ — $ 785,452 $ 357,295 $ 1,570,904 Loss on debt extinguishment (1) 539,250 Weighted average interest rate (2) 0.0 % 5.8 % 5.7 % 5.8 % Effective interest rate (including fee amortization) (2) 0.0 % 6.4 % 6.4 % 6.4 % Average debt outstanding (3) $ — $ 48,875,000 $ 48,875,000 $ 48,875,000 Cash paid for interest $ — $ 702,578 $ 453,966 $ 1,405,156 (1) The loss on debt extinguishment is not included in interest expense or net investment income (2) Excludes the loss on debt extinguishment (3) For the six months ended June 30, 2021, the average is calculated for the period January 1, 2021 through February 12, 2021; the repayment date of the 2022 Notes On January 14, 2021, the Company issued $100,000,000 in aggregate principal amount of 4.875% fixed-rate notes due 2026 (the “2026 Notes”). The 2026 Notes will mature on March 30, 2026, and may be redeemed in whole or in part at any time or from time to time at our option on or after December 31, 2025 at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest on the 2026 Notes is payable semi-annually beginning September 30, 2021. The Company used the net proceeds from the 2026 Notes offering to fully redeem the 2022 Notes and repay a portion of the amount outstanding under the Credit Facility. As of June 30, 2021, the aggregate carrying amount of the 2026 Notes was approximately $100,000,000. Prior to their redemption on February 12, 2021, the 2022 Notes were listed on New York Stock Exchange under the trading symbol “SCA”. As of December 31, 2020, the fair value of the 2022 Notes was $49,168,250. The 2026 Notes are institutional, non-traded notes. As these notes were recently issued, the 2026 Notes are carried at cost, which approximates fair value. In connection with the issuance and maintenance of the 2026 Notes, the Company incurred $2,327,835 of fees, which are being amortized over the term of the 2026 Notes, of which $2,122,222 remains to be amortized as of June 30, 2021. These financing costs are presented on the consolidated statement of assets and liabilities as a deduction from the debt liability. The following is a summary of the 2026 Notes Payable, net of deferred financing costs: 55 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) June 30, December 31, 2021 2020 Notes payable $ 100,000,000 $ — Deferred financing costs 2,122,222 — Notes payable, net of deferred financing costs $ 97,877,778 $ — The following table summarizes the interest expense and deferred financing costs on the 2026 Notes for the three and six months ended June 30, 2021 and 2020: For the three months ended For the six months ended June 30, June 30, June 30, June 30, 2021 2020 2021 2020 Interest expense $ 1,218,750 $ — $ 2,261,458 $ — Deferred financing costs 111,385 — 205,613 — Total interest and financing expenses $ 1,330,135 $ — $ 2,467,071 $ — Weighted average interest rate 4.9 % 0.0 % 4.9 % 0.0 % Effective interest rate (including fee amortization) 5.3 % 0.0 % 5.4 % 0.0 % Average debt outstanding $ 100,000,000 $ — $ 100,000,000 (1) $ — (1) The average is calculated from January 14, 2021, the date of the 2026 Notes offering, through June 30, 2021. The indenture and supplements thereto relating to the 2026 Notes contain certain covenants, including but not limited to (i) a requirement that the Company comply with the asset coverage requirements of the 1940 Act or any successor provisions, and (ii) a requirement to provide financial information to the holders of the notes and the trustee under the indenture if the Company should no longer be subject to the reporting requirements under the Exchange Act. As of June 30, 2021, the Company was in compliance with these covenants. NOTE 12 — SUBSEQUENT EVENTS Investment Portfolio On July 16, 2021, the Company received full repayment on the first lien term loan of Software Luxembourg Acquisition S.A.R.L. for total proceeds of $2,000,000. On July 30, 2021, the Company invested $10,000,000 in the first lien term loan and committed $100,000 in the unfunded revolver of a provider of software solutions to automotive dealerships. Additionally, we invested $750,000 in the equity of the company. Credit Facility The outstanding balance under the Credit Facility as of August 2, 2021 was $187,000,000. SBA-guaranteed Debentures The total consolidated balance of SBA-guaranteed debentures outstanding as of August 2, 2021 was $250,000,000. 56 STELLUS CAPITAL INVESTMENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (Unaudited) Dividend Declared On July 19, 2021, our Board declared a regular monthly dividend and supplemental dividend for each of July 2021, August 2021 and September 2021 as follows: Ex-Dividend Record Payment Regular Supplemental Total Declared Date Date Date Amount per Share Amount per Share per Share 7/19/2021 7/29/2021 7/30/2021 8/13/2021 $ 0.09 $ 0.01 $ 0.10 7/19/2021 8/30/2021 8/31/2021 9/15/2021 $ 0.09 $ 0.01 $ 0.10 7/19/2021 9/29/2021 9/30/2021 10/15/2021 $ 0.09 $ 0.01 $ 0.10 57 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, related to the current COVID-19 pandemic and otherwise, including statements as to: • our future operating results; • our business prospects and the prospects of our portfolio companies; • the effect of investments that we expect to make; • our contractual arrangements and relationships with third parties; • actual and potential conflicts of interest with Stellus Capital Management, LLC (“Stellus Capital” or the “Advisor); • the dependence of our future success on the general economy and its effect on the industries in which we invest; • the ability of our portfolio companies to achieve their objectives; • the use of borrowed money to finance a portion of our investments; • the adequacy of our financing sources and working capital; • the timing of cash flows, if any, from the operations of our portfolio companies; • the ability of Stellus Capital to locate suitable investments for us and to monitor and administer our investments; • the ability of Stellus Capital to attract and retain highly talented professionals; • our ability to maintain our qualification as a RIC and as a BDC; and • the effect of future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to business development companies or RICs. Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words. We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or Securities and Exchange Commission (“SEC”) rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Overview We were organized as a Maryland corporation on May 18, 2012, and formally commenced operations on November 7, 2012. Our investment objective is to maximize the total return to our stockholders in the form of current income and capital appreciation through debt and related equity investments in middle-market companies. We are an externally managed, non-diversified, closed-end investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 Act, as amended (the “1940 Act”). Our investment activities are managed by our investment adviser, Stellus Capital. 58 As a BDC, we are required to comply with certain regulatory requirements. For instance, as a BDC, we may not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets. Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and certain public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal of business in the United States. We have elected to be treated for U.S. federal tax purposes as a RIC under Subchapter M of the Code and intend to operate in a manner to qualify annually for a tax treatment applicable to RICs. To maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. As of June 30, 2021, we were in compliance with the RIC requirements. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any income we distribute to our stockholders. On March 23, 2018, the Small Business Credit Availability Act (the “SBCAA”) was signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The SBCAA included changes to the 1940 Act to allow BDCs to decrease their asset coverage requirement to 150% from 200% under certain circumstances On April 4, 2018, the Board, including a required majority (as such term is defined in Section 57(o) of the 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. At our 2018 annual meeting of stockholders our stockholders also approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the asset coverage ratio applicable to us was decreased from 200% to 150%, effective June 29, 2018. As of June 30, 2021, our asset coverage ratio was 194%. The amount of leverage that we employ at any time depends on our assessment of the market and other factors at the time of any proposed borrowing. COVID-19 Developments On March 11, 2020, the World Health Organization declared COVID-19 a pandemic and recommended containment and mitigation measures worldwide. The COVID-19 pandemic has had a significant impact on the U.S. and global economy. Each portfolio company has been assessed on an individual basis to identify the impact of the COVID-19 pandemic on the valuation of our investments in such company. We believe that any such COVID-19 pandemic impacts have been reflected in the valuation of our investments. The global impact of the outbreak continues to evolve, and many countries have reacted by instituting quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues. Businesses are also implementing similar precautionary measures. Such measures, as well as the general uncertainty surrounding the dangers and impact of the COVID-19 pandemic, have created significant disruption in supply chains and economic activity. While several countries, as well as certain states in the United States, have begun to lift public health restrictions with the view to reopening their economies, recurring COVID-19 outbreaks have led to the re-introduction of such restrictions in certain states in the United States and globally and could continue to lead to the re-introduction of such restrictions elsewhere. The Federal Food and Drug Administration authorized vaccines produced for emergency use starting in December 2020, and such vaccines have been distributed nationally; however, it remains unclear how quickly the vaccines will continue to be be distributed nationwide and globally or when “herd immunity” will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. The delay in distributing the vaccines could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience a recession, and we anticipate our business and operations could be materially adversely affected by a prolonged recession in the United States and other major markets. As COVID-19 continues to spread, the potential impacts, including a global, regional, or other economic recession, remain uncertain and difficult to assess. The extent of the impact of the COVID-19 pandemic on the financial performance of our current and future investments will depend on future developments, including the duration and spread of the virus, related advisories and restrictions, and the health of the financial markets and economy, all of which are highly uncertain and cannot be predicted. To the extent our portfolio companies are adversely impacted by the effects of the COVID-19 pandemic, it may have a material adverse impact on our future net investment income, the fair value of our portfolio investments and our financial condition. 59 Economic outlook The Federal Food and Drug Administration authorized vaccines produced for emergency use starting in December 2020, it remains unclear how quickly the vaccines will be distributed nationwide and globally or when “herd immunity” will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. The delay in distributing the vaccines could lead people to continue to self- isolate and not participate in the economy at pre-pandemic levels for a prolonged period. The COVID-19 pandemic could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The COVID-19 pandemic presents material uncertainty and risks with respect to the underlying value of our portfolio companies and with respect to our business, financial condition, results of operations, and cash flows, such as the potential negative impact to financing arrangements, increased costs of operations, changes in law and/or regulation, and uncertainty regarding government and regulatory policy. Operations The partners and employees of Stellus Capital, our advisor, have been primarily operating remotely since March 16, 2020 without disruption to Stellus Capital’s operations and such partners and employees are prepared to continue working remotely as long as is necessary for the health and safety of all personnel. Our COVID-19 response Since the onset of the COVID-19 pandemic, we have been in regular contact with all of our portfolio companies and/or their sponsors to assess among other things their ability to function in the new environment. Discussions have addressed the portfolio companies’ liquidity position, expected covenant compliance, and the health of their workforce and customers. Financial impact We will continue to closely monitor the financial condition of our portfolio companies as part of our efforts to mitigate the impact of the COVID-19 pandemic. Historical information may be relatively less significant. Portfolio Composition and Investment Activity Portfolio Composition We originate and invest primarily in privately-held middle-market companies (typically those with $5.0 million to $50.0 million of EBITDA (earnings before interest, taxes, depreciation and amortization)) through first lien (including unitranche), second lien, and unsecured debt financing, often times with a corresponding equity investment. As of June 30, 2021, we had $781.9 million (at fair value) invested in 76 portfolio companies. As of June 30, 2021, our portfolio included approximately 83% of first lien debt, 7% of second lien debt, 2% of unsecured debt and 8% of equity investments at fair value. The composition of our investments at cost and fair value as of June 30, 2021 was as follows: Cost Fair Value Senior Secured – First Lien (1) $ 645,480,178 $ 643,634,506 Senior Secured – Second Lien 79,753,388 58,223,942 Unsecured Debt 18,607,346 18,776,716 Equity 41,523,671 61,312,808 Total Investments $ 785,364,583 $ 781,947,972 (1) Includes unitranche investments, which account for 11.1% of our portfolio at fair value. Unitranche structures may combine characteristics of first lien senior secured as well as second lien and/or subordinated loans and our unitranche loans will expose us to the risks associated with second lien and subordinated loans to the extent we invest in the “second-out” and “last-out” tranche. 60 As of December 31, 2020, we had $653.4 million (at fair value) invested in 66 portfolio companies. As of December 31, 2020, our portfolio included approximately 78% of first lien debt, 11% of second lien debt, 3% of unsecured debt and 8% of equity investments at fair value. The composition of our investments at cost and fair value as of December 31, 2020 was as follows: Cost Fair Value Senior Secured – First Lien (1) $ 508,060,059 $ 508,673,064 Senior Secured – Second Lien 93,636,285 70,720,186 Unsecured Debt 22,212,888 21,191,245 Equity 34,719,734 52,840,000 Total Investments $ 658,628,966 $ 653,424,495 (1) Includes unitranche investments, which account for 13.0% of our portfolio at December 31, 2020 at fair value. Unitranche structures may combine characteristics of first lien senior secured as well as second lien and/or subordinated loans and our unitranche loans will expose us to the risks associated with second lien and subordinated loans to the extent we invest in the “last-out” tranche. Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms and conditions of the underlying loan agreements. As of June 30, 2021 and December 31, 2020, we had unfunded commitments of $25.7 million and $28.9 million, respectively, to provide debt financing for 27 and 19 portfolio companies, respectively. As of June 30, 2021, we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded commitments should the need arise. 61 The following is a summary of geographical concentration of our investment portfolio as of June 30, 2021: % of Total Investments at Cost Fair Value Fair Value Texas $ 151,322,626 $ 134,514,015 17.20 % California 122,068,171 127,950,320 16.33 % Illinois 62,435,020 63,020,976 8.06 % Arizona 50,776,511 52,525,678 6.72 % New Jersey 38,156,032 36,094,463 4.62 % Ohio 33,512,002 35,079,739 4.49 % Canada 34,842,810 34,997,850 4.48 % Pennsylvania 24,666,871 24,624,063 3.15 % Washington 22,796,827 22,933,726 2.93 % Wisconsin 22,643,018 22,923,812 2.93 % New York 18,932,074 20,400,342 2.61 % United Kingdom 21,295,341 19,928,875 2.55 % Washington, D.C. 18,988,139 19,274,808 2.46 % South Carolina 15,860,738 18,822,490 2.41 % Indiana 17,716,890 17,905,067 2.29 % Georgia 11,313,756 17,718,756 2.27 % Maryland 16,904,135 17,062,500 2.18 % Minnesota 15,817,831 15,795,987 2.02 % Colorado 15,213,977 15,213,780 1.95 % Florida 13,676,822 13,958,409 1.79 % Alabama 12,208,387 12,250,938 1.57 % Missouri 9,914,154 10,670,000 1.36 % North Carolina 10,536,326 10,555,500 1.35 % Virginia 7,339,579 7,628,133 0.98 % Tennessee 4,495,893 4,515,959 0.58 % Puerto Rico 8,613,244 2,161,786 0.28 % New Hampshire 2,000,000 2,000,000 0.26 % Massachusetts 1,317,406 1,010,000 0.13 % Utah - 410,000 0.05 % $ 785,364,583 $ 781,947,972 100.00 % 62 The following is a summary of geographical concentration of our investment portfolio as of December 31, 2020: % of Total Investments Cost Fair Value at fair value Texas $ 151,640,862 $ 135,146,776 20.67 % California 86,050,467 92,069,851 14.09 % Illinois 57,330,756 57,535,404 8.81 % Arizona 50,822,139 52,015,600 7.96 % New Jersey 38,228,359 37,765,139 5.78 % Ohio 34,109,657 35,827,682 5.48 % Wisconsin 22,721,856 22,827,500 3.49 % Canada 21,318,659 21,540,925 3.30 % New York 19,527,594 20,547,579 3.14 % Tennessee 19,832,576 19,959,613 3.05 % United Kingdom 20,159,650 18,727,500 2.87 % South Carolina 15,834,471 18,132,490 2.78 % Indiana 17,741,889 18,026,339 2.76 % Maryland 16,970,057 17,064,250 2.61 % Florida 12,404,739 12,299,545 1.88 % Alabama 12,252,768 12,252,768 1.88 % Washington 11,803,768 11,801,363 1.81 % Missouri 9,956,554 10,720,000 1.64 % Pennsylvania 9,884,148 9,900,000 1.52 % Virginia 7,505,287 7,759,020 1.19 % Washington, D.C. 6,937,907 7,030,512 1.08 % Georgia 685,000 6,420,000 0.98 % North Carolina 4,979,153 2,925,000 0.45 % Puerto Rico 8,613,244 2,589,639 0.40 % Massachusetts 1,317,406 1,780,000 0.27 % Utah - 760,000 0.11 % $ 658,628,966 $ 653,424,495 100.00 % 63 The following is a summary of industry concentration of our investment portfolio as of June 30, 2021: % of Total Investments Cost Fair Value at Fair Value Services: Business $ 173,203,423 $ 181,431,116 23.20 % Healthcare & Pharmaceuticals 116,579,225 113,216,595 14.49 % Aerospace & Defense 81,792,450 79,972,148 10.23 % Beverage, Food, & Tobacco 38,768,477 39,261,594 5.02 % Capital Equipment 33,626,974 34,892,494 4.46 % Media: Broadcasting & Subscription 31,329,792 34,591,632 4.42 % High Tech Industries 33,590,096 33,791,862 4.32 % Consumer Goods: Durable 29,032,088 29,389,177 3.76 % Services: Consumer 37,999,312 22,255,186 2.85 % Education 21,427,380 21,611,213 2.76 % Media: Advertising, Printing & Publishing 21,224,545 18,999,209 2.43 % Retail 15,860,738 18,822,490 2.41 % Containers, Packaging, & Glass 17,791,339 18,011,313 2.30 % Transportation & Logistics 17,892,480 17,985,003 2.30 % Metals & Mining 16,904,135 17,062,500 2.18 % Software 14,309,117 16,115,500 2.06 % Chemicals, Plastics, & Rubber 14,721,687 14,811,598 1.89 % Consumer goods: non-durable 13,421,886 13,103,197 1.68 % Automotive 11,045,942 11,025,000 1.41 % Construction & Building 10,628,756 10,628,756 1.36 % Environmental Industries 10,759,753 10,190,000 1.30 % Utilities: Oil & Gas 9,892,808 9,850,000 1.26 % Energy: Oil & Gas 11,054,984 9,540,390 1.22 % Finance 2,507,196 5,350,000 0.68 % Hotel, Gaming, & Leisure - 40,000 0.01 % $ 785,364,583 $ 781,947,972 100.00 % 64 The following is a summary of industry concentration of our investment portfolio as of December 31, 2020: % of Total Investments Cost Fair Value at fair value Services: Business $ 102,005,864 $ 109,873,364 16.81 % Healthcare & Pharmaceuticals 87,198,279 82,945,887 12.69 % Aerospace & Defense 53,615,886 52,184,338 7.99 % Beverage, Food, & Tobacco 39,339,090 41,012,620 6.28 % Media: Broadcasting & Subscription 31,889,423 34,418,869 5.27 % High Tech Industries 33,571,427 33,793,693 5.17 % Consumer Goods: Durable 27,802,124 27,780,032 4.25 % Environmental Industries 25,454,549 24,977,427 3.82 % Education 26,428,607 24,494,108 3.75 % Services: Consumer 38,026,487 22,600,924 3.46 % Media: Advertising, Printing & Publishing 21,903,057 21,348,217 3.27 % Capital Equipment 20,005,255 20,680,904 3.17 % Finance 18,016,762 19,435,000 2.97 % Transportation & Logistics 18,690,276 18,944,945 2.90 % Retail 15,834,471 18,132,490 2.78 % Containers, Packaging, & Glass 17,853,813 17,890,000 2.74 % Metals & Mining 16,970,057 17,064,250 2.61 % Consumer goods: non-durable 13,272,383 12,930,000 1.98 % Automotive 11,028,125 11,028,125 1.69 % Construction & Building 10,446,055 10,750,000 1.65 % Energy: Oil & Gas 11,015,013 9,991,177 1.53 % Utilities: Oil & Gas 9,884,148 9,900,000 1.52 % Chemicals, Plastics, & Rubber 6,605,024 6,808,125 1.04 % Software 1,772,791 4,430,000 0.66 % Hotel, Gaming, & Leisure - 10,000 — % $ 658,628,966 $ 653,424,495 100.00 % At June 30, 2021, our average portfolio company investment at both amortized cost and fair value was approximately $10.3 million, and our largest portfolio company investment at amortized cost and fair value was $21.4 million and $21.6 million, respectively. At December 31, 2020, our average portfolio company investment at amortized cost and fair value was approximately $10.0 million and $9.9 million, respectively, and our largest portfolio company investment at amortized cost and fair value was approximately $21.4 million and $21.6 million, respectively. At June 30, 2021, 96% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 4% bore interest at fixed rates. At December 31, 2020, 93% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 7% bore interest at fixed rates. The weighted average yield on all of our debt investments as of June 30, 2021 and December 31, 2020 was 8.2% and 8.3%, respectively. The weighted average yield on all of our investments, including non-income producing equity positions, investments as of June 30, 2021 and December 31, 2020 was approximately 7.8% and 7.9%, respectively. The weighted average yield was computed using the effective interest rates for all of our debt investments, including accretion of original issue discount. The weighted average yield of our debt investments is not the same as a return on investment for our stockholder, but, rather relates to a portion of our investment portfolio and is calculated before the payment of all of our and our subsidiaries’ fees and expenses. As of June 30, 2021 and December 31, 2020, we had cash and cash equivalents of $18.6 million and $18.5 million, respectively. Investment Activity During the six months ended June 30, 2021, we made an aggregate of $185.0 million (net of fees) of investments in 14 new portfolio companies and 14 existing portfolio companies. During the six months ended June 30, 2021, we received an aggregate of $58.4 million in proceeds from repayments of our investments. 65 Our level of investment activity can vary substantially from period to period depending on many factors, including the amount of debt and equity capital required by middle-market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make. Asset Quality In addition to various risk management and monitoring tools, Stellus Capital uses an investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in our investment portfolio. This investment rating system uses a five-level numeric scale. The following is a description of the conditions associated with each investment category: • Investment Category 1 is used for investments that are performing above expectations, and whose risks remain favorable compared to the expected risk at the time of the original investment. • Investment Category 2 is used for investments that are performing within expectations and whose risks remain neutral compared to the expected risk at the time of the original investment. All new loans are initially rated 2. • Investment Category 3 is used for investments that are performing below expectations and that require closer monitoring, but where no loss of return or principal is expected. Portfolio companies with a rating of 3 may be out of compliance with financial covenants. • Investment Category 4 is used for investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are often in work out. Investments with a rating of 4 are those for which some loss of return but no loss of principal is expected. • Investment Category 5 is used for investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are almost always in work out. Investments with a rating of 5 are those for which some loss of return and principal is expected. As of June 30, 2021 As of December 31, 2020 (dollars in millions) (dollars in millions) Number of Number of % of Total Portfolio % of Total Portfolio Investment Category Fair Value Portfolio Companies Fair Value Portfolio Companies 1 $ 145.6 19 % 16 $ 87.3 14 % 12 2 551.5 70 % 51 496.5 76 % 45 3 76.6 10 % 6 61.3 9 % 6 4 3.7 0 % 1 — — % — 5 4.5 1 % 2 8.3 1 % 3 Total $ 781.9 100 % 76 $ 653.4 100 % 66 Loans and Debt Securities on Non-Accrual Status We will not accrue interest on loans and debt securities if we have reason to doubt our ability to collect such interest. As of June 30, 2021, we had four loans on non-accrual status, which represented approximately 4.2% of our loan portfolio at cost and 1.1% at fair value. As of December 31, 2020, we had three loans on non-accrual status that represented approximately 4.3% of our loan portfolio at cost and 1.0% at fair value. As of June 30, 2021 and December 31, 2020, $8.4 million and $7.1 million of income from investments on non-accrual has not been accrued, respectively. Results of Operations An important measure of our financial performance is net increase (decrease) in net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income (loss) is the difference between our income from interest, dividends, fees and other investment income and our operating expenses including interest on borrowed funds. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio. 66 Comparison of the Three Months and Six Months Ended June 30, 2021 and 2020 Revenues We generate revenue in the form of interest income on debt investments and capital gains and distributions, if any, on investment securities that we may acquire in portfolio companies. Our debt investments typically have a term of five to seven years and bear interest at primarily floating rates. Interest on our debt securities is generally payable quarterly. Payments of principal on our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments may pay interest in-kind, or PIK interest. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect that the total dollar amount of interest and any dividend income that we earn will increase as the size of our investment portfolio increases. In addition, we may generate revenue in the form of prepayment fees, commitment, loan origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees. The following shows the breakdown of investment income for the three and six months ended June 30, 2021 and 2020 (in millions). Three months ended Six months ended June 30, June 30, (dollars in millions) (dollars in millions) 2021 2020 2021 2020 Interest income (1) $ 13.9 $ 12.9 $ 26.5 $ 26.3 PIK interest 0.2 - 0.4 0.6 Miscellaneous fees (1) 1.0 0.9 2.2 2.2 Total $ 15.1 $ 13.8 $ 29.1 $ 29.1 (1) For the three and six months ended June 30, 2021, we recognized $0.1 million and $0.4 million, respectively, of non-recurring income related to early repayments, and amendments to specific loan positions. For the three and six months ended June 30, 2020, we recognized $0.1 million and $0.9 million, respectively, of non-recurring income related to early repayments, amendments to specific loan positions, and the recognition of previously reserved income from a prior period. The increase in total income for three months ended June 30, 2021 is due to the growth in the overall investment portfolio. For the six months ended June 30, 2021, interest income increased due to portfolio growth, however, during the six months ended June 30, 2020, we recognized income that had been reserved in a previous period. Therefore, total income was unchanged over the compared period. Expenses Our primary operating expenses include the payment of fees to Stellus Capital under the investment advisory agreement, our allocable portion of overhead expenses under the administration agreement and other operating costs described below. We bear all other out-of-pocket costs and expenses of our operations and transactions, which may include: • organization and offering; • calculating our net asset value (including the cost and expenses of any independent valuation firm); • fees and expenses payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments; 67 • interest payable on debt, if any, incurred to finance our investments and expenses related to unsuccessful portfolio acquisition efforts; • base management and incentive fees; • administration fees and expenses, if any, payable under the administration agreement (including our allocable portion of Stellus Capital’s overhead in performing its obligations under the administration agreement, including rent and the allocable portion of the cost of our Chief Compliance Officer and Chief Financial Officer and their respective staff); • transfer agent, dividend paying agent and custodial fees and expenses; • U.S. federal and state registration fees; • all costs of registration and listing our securities on any securities exchange; • U.S. federal, state and local taxes; • independent directors’ fees and expenses; • costs of preparing and filing reports or other documents required by the SEC or other regulators; • costs of distributing any reports, proxy statements or other notices to stockholders, including printing costs; • costs and fees associated with any fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums; • direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; • proxy voting expenses; and • all other expenses incurred by us or Stellus Capital in connection with administering our business. The following shows the breakdown of operating expenses for the three and six months ended June 30, 2021 and 2020 (in millions). Three months ended Six months ended June 30, June 30, (dollars in millions) (dollars in millions) 2021 2020 2021 2020 Operating Expenses Management fees $ 3.3 $ 2.7 $ 6.2 $ 5.5 Valuation Fees - - 0.2 0.1 Administrative services expenses 0.5 0.4 0.9 0.9 Income incentive fees 0.1 0.2 0.1 1.5 Capital gain incentive fees - - 0.1 (0.9 ) Professional fees 0.2 0.2 0.5 0.5 Directors’ fees 0.1 0.1 0.2 0.2 Insurance expense 0.1 0.1 0.2 0.2 Interest expense and other fees 4.7 4.1 9.0 8.4 Income tax expense 0.3 0.3 0.5 0.5 Other general and administrative 0.3 0.3 0.6 0.5 Total Operating Expenses $ 9.6 $ 8.4 $ 18.5 $ 17.4 The increase in operating expenses for the three months ended June 30, 2021and six months ended June 30, 2021, was due to 1) higher interest expense as a result of higher outstanding balances on our SBA-guaranteed debentures and Notes, and 2) higher management fees due to a larger investment portfolio. This increase was offset for the three months ended June 30, 2021 by lower income incentive fees from growing net assets, making it more challenge to get through the hurdle . See Note 2 for further discussion on incentive fees. Net Investment Income For the three months ended June 30, 2021, net investment income was $5.5 million, or $0.28 per common share (based on 19,486,003 weighted-average common shares outstanding at June 30, 2021). 68 For the three months ended June 30, 2020, net investment income was $5.4 million, or $0.28 per common share (based on 19,484,217 weighted-average common shares outstanding at June 30, 2020). For the six months ended June 30, 2021, net investment income was $10.6 million, or $0.54 per common share (based on 19,486,003 weighted-average common shares outstanding at June 30, 2021). For the six months ended June 30, 2020, net investment income was $11.7 million, or $0.60 per common share (based on 19,456,849 weighted-average common shares outstanding at June 30, 2020). Net investment income for the three and six months ended June 30, 2021 increased slightly from the three and six months ended June 30, 2021 as a result of portfolio growth. Net Realized Gains and Losses We measure realized gains or losses by the difference between the net proceeds from the repayment, sale or disposition and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized. Repayments and sales of investments and amortization of other certain investments for the three months ended June 30, 2021 totaled $24.8 million, and net realized losses totaled ($1.8) million, primarily attributable to the loss after the restructuring of one specific investment. Repayments and sales of investments and amortization of other certain investments for the three months ended June 30, 2020 totaled $10.5 million, and net realized losses totaled ($3.9) million, primarily attributable to loss on conversion of debt from a specific investment. Repayments and sales of investments and amortization of other certain investments for the six months ended June 30, 2021 totaled $56.0 million, and net realized losses totaled ($1.3) million, primarily attributable to the loss after the restructuring of one specific investment. Repayments and sales of investments and amortization of other certain investments for the six months ended June 30, 2020 totaled $42.3 million, and net realized losses totaled ($2.6) million primarily attributable to realizations of our equity investments in a few portfolio companies and a loss on conversion of debt from a specific investment. Net Change in Unrealized Appreciation (depreciation) of Investments Net change in unrealized appreciation (depreciation) primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded appreciation or depreciation when gains or losses are realized. Net change in unrealized appreciation on investments and cash equivalents for the three months ended June 30, 2021 and 2020 totaled $1.7 million and $38.3 million, respectively. Net change in unrealized appreciation (depreciation) on investments and cash equivalents for the six months ended June 30, 2021 and 2020 totaled $1.8 million and ($13.2) million, respectively. The change in unrealized appreciation for the three and six months ended June 30, 2021 was due primarily to the accounting reversal upon realization of one portfolio company. Provision for Taxes on Unrealized Appreciation on Investments We have direct wholly owned subsidiaries that have elected to be taxable entities (the “Taxable Subsidiaries”). The Taxable Subsidiaries permit us to hold equity investments in portfolio companies which are “pass through” entities for U.S. federal income tax purposes and continue to comply with the “source income” requirements contained in RIC tax provisions of the Code. The Taxable Subsidiaries are not consolidated with us for U.S. federal income tax purposes and may generate U.S. federal income tax expense, benefit, and the related tax assets and liabilities, as a result of their ownership of certain portfolio investments. The income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in our consolidated financial statements. For the three months ended June 30, 2021 and 2020, we recognized a benefit (provision) for income tax on unrealized investments of $187.7 thousand and ($58.9) thousand, respectively, for the Taxable Subsidiaries. For the six months ended June 30, 2021 and 2020, we recognized a benefit (provision) for income tax on unrealized investments of $19.9 thousand and ($30.0) thousand, respectively. As of June 30, 2021 and December 31, 2020, there was a deferred tax liability of $339.7 thousand and $359.6 thousand on the Consolidated Statement of Assets and Liabilities, respectively. 69 Net Increase in Net Assets Resulting from Operations For the three months ended June 30, 2021, net increase in net assets resulting from operations totaled $5.6 million, or $0.29 per common share (based on 19,486,003 weighted-average common shares outstanding at June 30, 2021). For the three months ended June 30, 2020, net increase in net assets resulting from operations totaled $39.8 million, or $2.04 per common share (based on 19,484,217 weighted-average common shares outstanding at June 30, 2020). For the six months ended June 30, 2021, net increase in net assets resulting from operations totaled $10.5 million, or $0.54 per common share (based on 19,486,003 weighted-average common shares outstanding at June 30, 2021). For the six months ended June 30, 2020, net decrease in net assets resulting from operations totaled ($4.1) million, or ($0.21) per common share (based on 19,456,849 weighted-average common shares outstanding at June 30, 2020). The increase in net assets resulting from operations for the three months ended June 30, 2021 was lower than the increase in net assets resulting from operations for the three months ended June 30, 2020 primarily due to a much larger increase in unrealized appreciation on our investments in the prior period after the initial impact of COVID-19 normalized. The increase to net assets resulting from operations for the six months ended June 30, 2021 over the prior period was primarily due to larger unrealized depreciation from company specific write-downs during the six months ended June 30, 2020 as compared to the current period. Financial condition, liquidity and capital resources Cash Flows from Operating and Financing Activities Our operating activities used net cash of ($114.5) million for the six months ended June 30, 2021, primarily in connection with the purchase and origination of new portfolio investments, some of which was offset by repayment of portfolio investments. Our financing activities for the six months ended June 30, 2021 provided cash of $114.7 million due to the issuance of our 4.875% fixed-rate notes due 2026 (the “2026 Notes”) offset by the repayment of our 5.75% fixed-rate notes due 2022 (the “2022 Notes”), issuance of additional SBA-guaranteed debentures, and net repayments on our Credit Facility. Our operating activities used net cash of $12.4 million for the six months ended June 30, 2020, primarily in connection with the purchase and origination of new portfolio investments, some of which was offset by the sales and repayments on our investments. Our financing activities for the six months ended June 30, 2020 provided cash of $19.5 million due net borrowings under our Credit Facility. Liquidity and Capital Resources Our liquidity and capital resources are derived from the Credit Facility, 2026 Notes, SBA-guaranteed debentures and cash flows from operations, including investment sales and repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies and other operating expenses we incur, as well as the payment of dividends to the holders of our common stock. We used, and expect to continue to use, these capital resources as well as proceeds from turnover within our portfolio and from public and private offerings of securities to finance our investment activities. Although we expect to fund the growth of our investment portfolio through the net proceeds from future public and private equity offerings and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act, our plans to raise capital may not be successful. In this regard, if our common stock trades at a price below our then-current net asset value per share, we may be limited in our ability to raise equity capital given that we cannot sell our common stock at a price below net asset value per share unless our stockholders approve such a sale and our Board makes certain determinations in connection therewith. A proposal, approved by our stockholders at our 2021 annual stockholders meeting, authorizes us to sell up to 25% of our outstanding common shares at a price equal to or below the then current net asset value per share in one or more offerings. This authorization will expire on June 24, 2022, the one-year anniversary of our 2021 annual stockholders meeting. We would need similar future approval from our stockholders to issue shares below the then current net asset value per share any time after the expiration of the current approval. In addition, we intend to distribute between 90% and 100% of our taxable income to our stockholders in order to satisfy the requirements applicable to RICs under Subchapter M of the Code. Consequently, we may not have the funds or the ability to fund new investments, to make additional investments in our portfolio companies, to fund our unfunded commitments to portfolio companies or to repay borrowings. In addition, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value. 70 Also, as a BDC, we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, over the aggregate amount of the senior securities, which include all of our borrowings and any outstanding preferred stock, of at least 150% effective June 29, 2018 (at least 200% prior to June 28, 2018). This requirement limits the amount that we may borrow. We have received exemptive relief from the SEC to permit us to exclude the debt of Stellus Capital SBIC, LP (“SBIC subsidiary”) and Stellus Capital SBIC II, LP (“SBIC II subsidiary”) (together, “the SBIC subsidiaries”) guaranteed by the Small Business Administration (“SBA”) from the definition of senior securities in the asset coverage test under the 1940 Act. We were in compliance with the asset coverage ratios at all times. As of June 30, 2021 and December 31, 2020, our asset coverage ratio was 194% and 223%, respectively. The amount of leverage that we employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing, such as the maturity, covenant package and rate structure of the proposed borrowings, our ability to raise funds through the issuance of shares of our common stock and the risks of such borrowings within the context of our investment outlook. Ultimately, we only intend to use leverage if the expected returns from borrowing to make investments will exceed the cost of such borrowing. As of June 30, 2021 and December 31, 2020, we had cash and cash equivalents of $18.6 million and $18.5 million, respectively. Cash held within the SBIC subsidiaries is generally restricted to the origination of new SBIC-eligible loans and the payment of SBA debentures, related interest expense and fund-expenses. Distributions from positive retained earnings available for distribution are made to the BDC as provided in the SBICs’ limited partnership agreements. Credit Facility On October 11, 2017, we entered a senior secured revolving credit agreement, dated as of October 10, 2017, as amended, that was amended and restated on September 18, 2020 with ZB, N.A., dba Amegy Bank and various other lenders (the “Credit Facility”). The Credit Facility, as amended and restated, provides for borrowings up to a maximum of $230.0 million on a committed basis with an accordion feature that allows us to increase the aggregate commitments up to $280.0 million, subject to new or existing lenders agreeing to participate in the increase and other customary conditions. Borrowings under the Credit Facility bear interest, subject to our election, on a per annum basis equal to (i) LIBOR plus 2.50% (or 2.75% during certain periods in which our asset coverage ratio is equal to or below 1.90 to 1.00) with a 0.25% LIBOR floor, or (ii) 1.50% (or 1.75% during certain periods in which our asset coverage ratio is equal to or below 1.90 to 1.00) plus an alternate base rate based on the highest of the Prime Rate (subject to a 3% floor), Federal Funds Rate plus 0.5% or one month LIBOR plus 1.0%. We pay unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility. Interest is payable monthly or quarterly in arrears. The commitment to fund the revolver expires on September 18, 2024, after which we may no longer borrow under the Credit Facility and must begin repaying principal equal to 1/12 of the aggregate amount outstanding under the Credit Facility each month. Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on September 18, 2025. Our obligations to the lenders are secured by a first priority security interest in our portfolio of securities and cash not held at the SBIC subsidiaries, but excluding short term investments. The Credit Facility contains certain covenants, including but not limited to: (i) maintaining a minimum liquidity test of at least $10,000,000, including cash, liquid investments and undrawn availability, (ii) maintaining an asset coverage ratio of at least 1.67 to 1.0, (iii) maintaining a minimum shareholder’s equity, and (iv) maintaining a minimum interest coverage ratio of at least 2.00 to 1.00. As of June 30, 2021, we were in compliance with these covenants. As of June 30, 2021 and December 31, 2020, the outstanding balance under the Credit Facility was $192.6 million and $174.0 million, respectively. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value. The fair values of the Credit Facility is determined in accordance with Accounting Standards Codification (“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. We incurred costs of $3.6 million in connection with the Credit Facility, which are being amortized over the life of the facility. Additionally, $0.3 million of costs from a prior credit facility will continue to be amortized over the remaining life of the Credit Facility. As of June 30, 2021 and December 31, 2020, $2.0 million and $2.3 million of such prepaid loan structure fees and administration fees had yet to be amortized, respectively. These prepaid loan fees are presented on our consolidated statement of assets and liabilities as a deduction from the debt liability. 71 Interest is payable monthly or quarterly in arrears. The following table summarizes the interest expense and amortized loan fees on the Credit Facility for the three and six months ended June 30, 2021 and 2020 (in millions): For the three months ended For the six months ended June 30, June 30, June 30, June 30, 2021 2020 2021 2020 Interest expense $ 1.3 $ 1.6 $ 2.3 $ 3.4 Loan fee amortization 0.1 0.2 0.2 0.3 Commitment fees on unused portion 0.1 - 0.2 0.1 Total interest and financing expenses $ 1.5 $ 1.8 $ 2.7 $ 3.8 Weighted average interest rate 2.8 % 3.1 % 2.8 % 3.6 % Effective interest rate (including fee amortization) 3.2 % 3.5 % 3.3 % 4.0 % Average debt outstanding (1) $ 189.1 $ 204.6 $ 165.0 $ 190.2 Cash paid for interest and unused fees $ 1.5 $ 1.7 $ 2.5 $ 3.6 (1) Calculated for the period from January 14, 2021, the date of the 2026 Notes offering, through June 30, 2021. SBA-Guaranteed Debentures Due to the SBIC subsidiaries’ status as licensed SBICs, we have the ability to issue debentures guaranteed by the SBA at favorable interest rates. Under the regulations applicable to SBIC funds, a single licensee can have outstanding debentures guaranteed by the SBA subject to a regulatory leverage limit, up to two times the amount of regulatory capital. As of both June 30, 2021 and December 31, 2020, the SBIC subsidiary had $75.0 million in regulatory capital, as such term is defined by the SBA, and $150.0 million of SBA-guaranteed debentures outstanding. As of June 30, 2021 and December 31, 2020, the SBIC II subsidiary had $87.5 million and $40.0 million in regulatory capital and $84.0 million and $26.5 million of SBA-guaranteed debentures outstanding, respectively. See Note 10 to the Consolidated Financial Statements for further detail on the SBA-guaranteed debentures outstanding. On August 12, 2014, we obtained exemptive relief from the SEC to permit us to exclude the debt of the SBIC subsidiaries guaranteed by the SBA from our 200% asset coverage test under the 1940 Act. The exemptive relief provides us with increased flexibility under the 200% asset coverage test by permitting us to borrow up to $325.0 million more than we would otherwise be able to absent the receipt of this exemptive relief. On a stand-alone basis, the SBIC subsidiaries held $374.7 million and $277.3 million in assets at June 30, 2021 and December 31, 2020, respectively, which accounted for approximately 46.6% and 41.1% of our total consolidated assets at June 30, 2021 and December 31, 2020, respectively. SBA-guaranteed debentures have fixed interest rates that equal prevailing 10-year U.S. Treasury Note rates plus a market spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the debentures is not required to be paid before maturity but may be pre-paid at any time with no prepayment penalty. SBA-guaranteed debentures drawn before October 1, 2019 incurred upfront fees of 3.425%, which consisted of a 1.00% commitment fee and a 2.425% issuance discount, which are being amortized over the life of the SBA-guaranteed debentures. SBA-guaranteed debentures drawn after October 1, 2019 incur upfront fees of 3.435%, which consists of a 1.00% commitment fee and a 2.435% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. Once pooled, which occurs in March and September of each applicable year, the SBA-guaranteed debentures bear interest at a fixed rate that is set to the current 10-year treasury rate plus a spread at each pooling date. 72 As of June 30, 2021 and December 31, 2020, the carrying amount of the SBA-guaranteed debentures approximated their fair value. The fair values of the SBA-guaranteed debentures are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the SBA-guaranteed debentures are estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. At June 30, 2021 and December 31, 2020 the SBA-guaranteed debentures would be deemed to be Level 3 as defined in Note 6 to the Consolidated Financial Statements). As of June 30, 2021, we have incurred $8.4 million in financing costs related to the SBA-guaranteed debentures since the SBIC subsidiaries received their licenses, which were recorded as prepaid loan fees. As of June 30, 2021 and December 31, 2020, $5.0 million and $3.3 million of prepaid financing costs had yet to be amortized, respectively. These prepaid financing costs are presented on the consolidated statement of assets and liabilities as a deduction from the debt liability. The following table summarizes the interest expense and amortized fees on the SBA-guaranteed debentures for the three and six months ended June 30, 2021 and 2020 (in millions): For the three months ended For the six months ended June 30, June 30, June 30, June 30, 2021 2020 2021 2020 Interest expense $ 1.6 $ 1.3 $ 3.0 $ 2.7 Debenture fee amortization 0.3 0.2 0.5 0.3 Total interest and financing expenses $ 1.9 $ 1.5 $ 3.5 $ 3.0 Weighted average interest rate 2.9 % 3.3 % 2.9 % 3.3 % Effective interest rate (including fee amortization) 3.3 % 3.8 % 3.4 % 3.8 % Average debt outstanding $ 224.1 $ 161.0 $ 207.2 $ 161.0 Cash paid for interest $ - $ - $ 2.7 $ 2.7 Notes Offering On August 21, 2017, we issued $42.5 million in aggregate principal amount of 5.75% fixed-rate notes due September 15, 2022 (the “2022 Notes”). On September 8, 2017, we issued an additional $6.38 million in aggregate principal amount of the 2022 Notes pursuant to a full exercise of the underwriters’ overallotment option. On January 13, 2021, we caused notices to be issued to the holders of its 2022 Notes regarding the Company’s exercise of its option to redeem all of the issued and outstanding 2022 Notes, pursuant to the Second Supplemental Indenture dated as of August 21, 2017, between the Company and U.S. Bank National Association, as trustee. We redeemed all $48.875 million in aggregate principal amount of the 2022 Notes on February 12, 2021. The 2022 Notes were redeemed at 100% of their principal amount, plus the accrued and unpaid interest thereon through the redemption date. As a result of the redemption, we recognized a loss on debt extinguishment of $0.5 million due to the write off of the remaining deferred financing costs on the 2022 Notes. This loss is included in the Consolidated Statement of Operations for the three months ended June 30, 2021. 73 The following table summarizes the interest expense and deferred financing costs on the 2022 Notes for the three and six months ended June 30, 2021 and 2020 (dollars in millions): For the three months ended For the six months ended June 30, June 30, June 30, June 30, 2021 2020 2021 2020 Interest expense $ - $ 0.7 $ 0.3 $ 1.4 Deferred financing costs - 0.1 0.1 0.2 Total interest and financing expenses $ - $ 0.8 $ 0.4 $ 1.6 Loss on extinguishment of debt (1) - - 0.5 - Weighted average interest rate (2) 0.0 % 5.8 % 5.7 % 5.8 % Effective interest rate (including fee amortization) (2) 0.0 % 6.4 % 6.4 % 6.5 % Average debt outstanding (3) $ - $ 48.9 $ 48.9 $ 48.9 Cash paid for interest $ - $ 0.7 $ 0.5 $ 1.4 (1) The loss on debt extinguishment is not included in interest expense or net investment income (2) Excludes the loss on debt extinguishment (3) For the six months ended June 30, 2021, the average is calculated for the period January 1, 2021 through February 12, 2021; the repayment date of the 2022 Notes On January 14, 2021, we issued $100.0 million in aggregate principal amount of 4.875% fixed-rate notes due 2026 (the “2026 Notes”). The 2026 Notes will mature on March 30, 2026, and may be redeemed in whole or in part at any time or from time to time at our option on or after December 31, 2025 at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest is payable semi-annually beginning September 30, 2021 We used the net proceeds from this offering to fully redeem the 2022 Notes and repay a portion of the amount outstanding under the Credit Facility. As of June 30, 2021, the aggregate carrying amount of the 2026 Notes were approximately $100.0 million. Prior to their redemption on February 12, 2021, the 2022 Notes were listed on New York Stock Exchange under the trading symbol “SCA”. As of December 31, 2020, the fair value of the 2022 Notes was $49.2 million. The carrying value of the 2026 Notes approximates fair value. In connection with the issuance of the 2026 Notes, we have incurred $2.3 million of fees which are being amortized over the term of the 2026 Notes, of which $2.1 million remains to be amortized as of June 30, 2021. These financing costs are presented on the consolidated statement of assets and liabilities as a deduction from the debt liability. 74 The following table summarizes the interest expense and deferred financing costs on the 2026 Notes for the three and six months ended June 30, 2021 and 2020 (dollars in millions): For the three months ended For the six months ended June 30, June 30, June 30, June 30, 2021 2020 2021 2020 Interest expense $ 1.2 $ - $ 2.3 $ - Deferred financing costs 0.1 - 0.2 - Total interest and financing expenses $ 1.3 $ - $ 2.5 $ - Weighted average interest rate 4.9 % 0.0 % 4.9 % 0.0 % Effective interest rate (including fee amortization) 5.3 % 0.0 % 5.4 % 0.0 % Average debt outstanding (1) $ 100.0 $ - $ 100.0 $ - (1) Calculated for the period from January 14, 2021, the date of the 2026 Notes offering, through June 30, 2021. Off-Balance Sheet Arrangements We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of June 30, 2021 and December 31, 2020, our off-balance sheet arrangements consisted of $25.7 million and $28.9 million, respectively, of unfunded commitments to provide debt financing to 27 and 19 of our portfolio companies, respectively. As of June 30, 2021, we had sufficient liquidity to fund such unfunded commitments (through cash on hand and available borrowings under the Credit Facility) should the need arise. Regulated Investment Company Status and Dividends We have elected to be treated as a RIC under Subchapter M of the Code and intend to operate in a manner to qualify annually for the tax treatment applicable to RICs. So long as we maintain our qualification as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders as dividends on a timely basis. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Distributions declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital. To qualify for RIC tax treatment, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). If we maintain our qualification as a RIC, we must also satisfy certain distribution requirements each calendar year in order to avoid a U.S. federal excise tax on our undistributed earnings of a RIC. As of December 31, 2020, the Company had $21,051,549 of undistributed taxable income that was carried forward toward distributions paid during the year ending December 31, 2021. We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, the covenants contained in the Credit Facility may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement. In addition, we may retain for investment some or all of our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividends for that fiscal year, a portion of those dividend distributions may be deemed a return of capital to our stockholders. 75 We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a business development company under the 1940 Act and due to provisions in the Credit Facility. We cannot assure stockholders that they will receive any distributions or distributions at a particular level. In accordance with certain applicable U.S. Treasury regulations and private letter rulings issued by the Internal Revenue Service (the “IRS”), a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash, except as described below. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our stock in accordance with these U.S. Treasury regulations or private letter rulings. However, we continue to monitor the Company’s liquidity position and the overall economy and will continue to assess whether it would be in the best interests of the Company and its shareholders’ to take advantage of the IRS rulings. Recent Accounting Pronouncements See Note 1 to the Consolidated Financial Statements contained herein for a description of recent accounting pronouncements, if any, including the expected dates of adoption and the anticipated impact on the financial statements. Critical Accounting Policies See Note 1 to the Consolidated Financial Statements contained herein for a description of critical accounting policies. Subsequent Events Investment Portfolio On July 16, 2021, we received full repayment on the first lien term loan of Software Luxembourg Acquisition S.A.R.L. for total proceeds of $2.0 million. On July 30, 2021, we invested $10.0 million in the first lien term loan and committed $0.1 million in the unfunded revolver of a provider of software solutions to automotive dealerships. Additionally, we invested $0.8 million in the equity of the company. Credit Facility The outstanding balance under the Credit Facility as of August 2, 2021 was $187.0 million. SBA-guaranteed Debentures The total consolidated balance of SBA-guaranteed debentures outstanding as of August 2, 2021 was $250.0 million. 76 Dividend Declared On July 19, 2021, our Board declared a regular monthly dividend and supplemental dividend for each of July 2021, August 2021 and September 2021 as follows: Ex-Dividend Record Payment Regular Supplemental Total Declared Date Date Date Amount per Share Amount per Share per Share 7/19/2021 7/29/2021 7/30/2021 8/13/2021 $ 0.09 $ 0.01 $ 0.10 7/19/2021 8/30/2021 8/31/2021 9/15/2021 $ 0.09 $ 0.01 $ 0.10 7/19/2021 9/29/2021 9/30/2021 10/15/2021 $ 0.09 $ 0.01 $ 0.10 Item 3. Quantitative and Qualitative Disclosures About Market Risk We are subject to financial market risks, including changes in interest rates. As of June 30, 2021 and December 31, 2020, 96% and 93% of the loans in our portfolio bore interest at floating rates, respectively. These floating rate loans typically bear interest in reference to LIBOR, and are indexed to 30-day, 90-day or 120-day LIBOR rates, subject to an interest rate floor. As of June 30, 2021 and December 31, 2020, the weighted average interest rate floor on our floating rate loans was 1.17% and 1.21%, respectively. Assuming that the Statement of Assets and Liabilities as of June 30, 2021 were to remain constant and no actions were taken to alter the existing interest rate sensitivity, the following table shows the annual impact on net income of changes in interest rates: ($ in millions) Change in Basis Points (2) Interest Income Interest Expense (3) Net Interest Income (1) Up 200 basis points $ 7.6 (3.9 ) $ 3.7 Up 150 basis points 4.2 (2.9 ) 1.3 Up 100 basis points 1.6 (1.9 ) (0.3 ) Up 50 basis points 0.5 (1.0 ) (0.5 ) Down 25 basis points 0 0 0 (1) Excludes the impact of incentive fees based on pre-incentive fee net investment income. See Note 2 to the Consolidated Financial Statements for more information on the incentive fee. (2) The three month LIBOR rate at June 30, 2021 was 15 basis points. This table assumes LIBOR would not fall below zero. (3) Includes the impact of the 25 basis points LIBOR floor in place on the Credit Facility. Although we believe that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet and other business developments that could affect net increase in net assets resulting from operations. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate. We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contacts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. For the three and six months ended June 30, 2021 and 2020, we did not engage in hedging activities. 77 Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures The Company’s management, under the supervision and with the participation of various members of management, including its Chief Executive Officer and its Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Securities and Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report. (b) Changes in Internal Control Over Financial Reporting The Company’s management did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2021 that has materially affected, or is reasonable likely to materially affect, the Company’s internal control over financial reporting. 78 PART II — OTHER INFORMATION Item 1. Legal Proceedings We and our subsidiaries are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us or our subsidiaries. From time to time, we, or our subsidiaries may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations. Item 1A. Risk Factors There have been no material changes in the information provided under the heading “Risk Factors” in our Annual Report on Form 10-K as of December 31, 2020. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially affect our business, financial condition and/or operating results. The COVID-19 pandemic has caused severe disruptions in the global economy, which has had, and may continue to have, a negative impact on our portfolio companies and our business and operations. As of the filing date of this Quarterly Report, there is a continued outbreak of the COVID-19 pandemic, for which the World Health Organization has declared a global pandemic, the United States has declared a national emergency, and for the first time in its history, every state in the United States is under a federal disaster declaration. Many states, including those in which we and our portfolio companies operate, have issued orders requiring the closure of, or certain restrictions on the operation of, non-essential businesses and/or requiring residents to stay at home. The COVID-19 pandemic and restrictive measures taken to contain or mitigate its spread have caused, and are continuing to cause, business shutdowns, or the re-introduction of business shutdowns, cancellations of events and restrictions on travel, significant reductions in demand for certain goods and services, reductions in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability both globally and in the United States. Such effects will likely continue for the duration of the pandemic, which is uncertain, and for some period thereafter. While several countries, as well as certain states, counties and cities in the United States, began to relax the early public health restrictions with a view to partially or fully reopening their economies, many cities, both globally and in the United States, have since experienced a surge in the reported number of cases, hospitalizations and deaths related to the COVID-19 pandemic. This recent increase in cases led to the re-introduction of restrictions and business shutdowns in certain states, counties and cities in the United States and globally and could continue to lead to such restrictions elsewhere. Beginning in December 2020, the U.S. Food and Drug Administration authorized certain vaccines for emergency use. However, it remains unclear how quickly the vaccines will be distributed or when “herd immunity” will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. Delays in distributing the vaccines or an actual or perceived failure to achieve “herd immunity” could lead people to continue to refrain from participating in the economy at pre-pandemic levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience a recession, and our business and operations, as well as the business and operations of our portfolio companies, could be materially adversely affected by a prolonged recession in the U.S. and other major markets. The COVID-19 pandemic (including the restrictive measures taken in response thereto) has to date (i) created significant business disruption issues for certain of our portfolio companies, and (ii) materially and adversely impacted the value and performance of certain of our portfolio companies. The COVID-19 pandemic is having a particularly adverse impact on industries in which certain of our portfolio companies operate, including energy, hospitality, travel, retail and restaurants. Certain of our portfolio companies in other industries have also been significantly impacted. The COVID-19 pandemic is continuing as of the filing date of this Quarterly Report, and its extended duration may have further adverse impacts on our portfolio companies after June 30, 2021, including for the reasons described below. Although the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020, which contains provisions intended to mitigate the adverse economic effects of the COVID-19 pandemic, and a second and third stimulus package on December 27, 2020 and March 11, 2021, respectively, which provided $900 billion and $1.9 trillion, respectively, in resources to small businesses and individuals as well as certain industries and state and local governments that have been adversely affected by the COVID-19 pandemic, it is uncertain whether, or how much, our portfolio companies have benefited or may benefit from such legislation or any other subsequent legislation intended to provide financial relief or assistance. As a result of this disruption and the pressures on their liquidity, certain of our portfolio companies have drawn, particularly in the beginning of the COVID-19 pandemic, on a higher percentage of the available revolving loans made available by us. While the levels of draw on available revolving loans have generally returned to pre-COVID-19 pandemic levels, some of our portfolio companies with such available revolving loans may draw or continue to draw on such loans at a higher level than before the COVID-19 pandemic, subject to availability under the terms of such loans. 79 The impact of the COVID-19 pandemic may not yet be fully reflected in the fair value of our investments as our valuations, and particularly valuations of private investments and private companies, are inherently uncertain, may fluctuate over short periods of time and are often based on estimates, comparisons and qualitative evaluations of private information that is often from a time period earlier, generally two to three months, than the quarter for which we are reporting. Additionally, we may not have yet received information or certifications from our portfolio companies that indicate the full and ongoing extent of declining performance or non-compliance with debt covenants, as applicable, as a result of the COVID-19 pandemic. As a result, our valuations, including those reported as of June 30, 2021, may not show the complete or continuing impact of the COVID-19 pandemic and the resulting restrictive measures taken in response thereto. In addition, write downs in the value of our investments have reduced, and any additional write downs may further reduce, our net asset value (and, as a result, our asset coverage calculation). Accordingly, we may incur additional net unrealized or realized losses after June 30, 2021, which could have a material adverse effect on our business, financial condition and results of operations. Despite actions of the U.S. federal government and foreign governments, the uncertainty surrounding the COVID-19 pandemic, including uncertainty regarding new variants of COVID-19 that have emerged, and other factors have contributed to significant volatility in the global public equity markets and global debt capital markets, including the market price of shares of our common stock. Market conditions may make it difficult for us to raise equity capital because, subject to some limited exceptions, as a BDC, we are generally not able to issue additional shares of our common stock at a price less than net asset value without first obtaining approval for such issuance from our stockholders and our independent directors. Pursuant to approval granted at a special meeting of stockholders, held on June 24, 2021, we are permitted to sell or otherwise issue shares of our common stock at a price below net asset value, subject to certain limitations and determinations that must be made by our board of directors. This stockholder approval expires on June 24, 2022, the one-year anniversary of our 2021 annual stockholders meeting. Moreover, these market conditions may make it difficult to access or obtain new indebtedness with similar terms to our existing indebtedness or otherwise have a negative effect on our cost of capital. See “Risk Factors-Risks Relating to Our Business and Structure” in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 4, 2021. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Mine Safety Disclosures Not applicable. Item 5. Other Information None. 80 Item 6. EXHIBITS. The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits filed with the SEC: Exhibit Number Description 31.1 Chief Executive Officer Certification pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 31.2 Chief Financial Officer Certification pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 32.1 Chief Executive Officer Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* 32.2 Chief Financial Officer Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* * Filed herewith 81 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: August 2, 2021 STELLUS CAPITAL INVESTMENT CORPORATION By: /s/ Robert T. Ladd Name: Robert T. Ladd Title: Chief Executive Officer and President By: /s/ W. Todd Huskinson Name: W. Todd Huskinson Title: Chief Financial Officer 82