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, 2016

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)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨
(do not check if a smaller reporting company)

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, outstanding as of August 3, 2016 was 12,479,959.

STELLUS CAPITAL INVESTMENT CORPORATION

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Consolidated Statements of Assets and Liabilities as of June 30, 2016 and December 31, 2015 (unaudited)	1
	Consolidated Statements of Operations for the three and six-month periods ended June 30, 2016 and 2015 (unaudited)	2
	Consolidated Statements of Changes in Net Assets for the six-month periods ended June 30, 2016 and 2015 (unaudited)	3
	Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2016 and 2015 (unaudited)	4
	Consolidated Schedules of Investments as of June 30, 2016 (unaudited) and December 31, 2015	5
	Notes to Unaudited Financial Statements	16
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
Item 4.	Controls and Procedures	57
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	58
Item 1A.	Risk Factors	58
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3.	Defaults Upon Senior Securities	58
Item 4.	Mine Safety Disclosures	58
Item 5.	Other Information	58

 i

PART I — FINANCIAL INFORMATION

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES (unaudited)

	June 30,			December 31,
	2016			2015
ASSETS
Non-controlled, non-affiliated investments, at fair value (amortized cost of $366,819,533 and $364,212,459, respectively)	$	350,809,617		$	349,017,697
Cash and cash equivalents		10,834,194			10,875,790
Receivable for sales and repayments of investments		—			10,000
Interest receivable		4,197,307			4,720,031
Deferred offering costs		—			261,761
Accounts receivable		—			7,684
Prepaid expenses		297,699			475,449
Total Assets	$	366,138,817		$	365,368,412
LIABILITIES
Notes Payable, net of deferred financing costs	$	24,469,817		$	24,381,108
Credit facility payable, net of prepaid loan structure fees		108,958,219			108,197,373
SBA Debentures, net of prepaid loan fees		63,178,049			63,015,846
Dividends payable		1,413,982			1,413,982
Base management fees payable		1,550,841			1,518,779
Incentive fees payable		1,319,029			607,956
Interest payable		842,369			570,189
Directors’ fees payable		86,000			—
Unearned revenue		23,593			36,877
Administrative services payable		234,248			397,799
Deferred tax liability		59,572			381,723
Other accrued expenses and liabilities		282,597			195,676
Total Liabilities	$	202,418,316		$	200,717,308
Commitments and contingencies (Note 5)
Net Assets	$	163,720,501		$	164,651,104
NET ASSETS
Common Stock, par value $0.001 per share (100,000,000 shares authorized, 12,479,959 and 12,479,960 shares issued and outstanding, respectively)	$	12,480		$	12,480
Paid-in capital		180,994,749			180,994,752
Accumulated undistributed net realized gain		2,380			—
Distributions in excess of net investment income		(1,219,620	)		(779,643	)
Net unrealized depreciation on investments and cash equivalents, net of provision for taxes of $59,572 and $381,723, respectively.		(16,069,488	)		(15,576,485	)
Net Assets	$	163,720,501		$	164,651,104
Total Liabilities and Net Assets	$	366,138,817		$	365,368,412
Net Asset Value Per Share	$	13.12		$	13.19

 1

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

	For the		For the			For the			For the
	three months		three months			six months			six months
	ended		ended			ended			ended
	June 30,		June 30,			June 30,			June 30,
	2016		2015			2016			2015
INVESTMENT INCOME
Interest income	$	9,328,416	$	8,635,047		$	18,703,153		$	17,266,343
Other income		294,753		55,415			387,849			138,210
Total Investment Income	$	9,623,169	$	8,690,462		$	19,091,002		$	17,404,553
OPERATING EXPENSES
Management fees	$	1,550,841	$	1,446,330		$	3,099,214		$	2,860,464
Valuation fees		67,701		41,324			200,167			188,799
Administrative services expenses		250,627		296,827			537,927			576,027
Incentive fees		986,276		998,871			2,011,098			1,959,725
Professional fees		195,203		67,794			387,314			362,355
Directors’ fees		86,000		95,000			178,000			184,000
Insurance expense		118,027		118,242			236,053			235,186
Interest expense and other fees		2,015,189		1,514,055			3,895,032			2,964,547
Deferred offering costs		261,761		—			261,761			—
Other general and administrative expenses		146,442		116,532			240,044			234,548
Total Operating Expenses	$	5,678,067	$	4,694,975		$	11,046,610		$	9,565,651
Net Investment Income	$	3,945,102	$	3,995,487		$	8,044,392		$	7,838,902
Net Realized Gain on Investments and Cash Equivalents	$	1,486	$	289,548		$	2,380		$	292,717
Net Change in Unrealized Appreciation (Depreciation) on Investments and Cash Equivalents	$	928,520	$	(236,062	)	$	(815,154	)	$	1,377,006
Benefit (provision) for taxes on unrealized gain on investments	$	154,812	$	(47,980	)	$	322,151		$	(114,258	)
Net Increase in Net Assets Resulting from Operations	$	5,029,920	$	4,000,993		$	7,553,769		$	9,394,367
Net Investment Income Per Share	$	0.32	$	0.32		$	0.64		$	0.63
Net Increase (Decrease) in Net Assets Resulting from Operations Per Share	$	0.41	$	0.32		$	0.61		$	0.75
Weighted Average Shares of Common Stock Outstanding		12,479,959		12,479,962			12,479,959			12,479,962
Distributions Per Share	$	0.34	$	0.34		$	0.68		$	0.68

 2

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (unaudited) 

	For the			For the
	six months			six months
	ended			ended
	June 30,			June 30,
	2016			2015
Increase in Net Assets Resulting from Operations
Net investment income	$	8,044,392		$	7,838,902
Net realized gain on investments and cash equivalents		2,380			292,717
Net change in unrealized appreciation (depreciation) on investments and cash equivalents		(815,154	)		1,377,006
Benefit (provision) for taxes on unrealized appreciation on investments		322,151			(114,258	)
Net Increase in Net Assets Resulting from Operations	$	7,553,769		$	9,394,367
Stockholder distributions from:
Net investment income		(8,484,372	)		(8,484,513	)
Total Distributions	$	(8,484,372	)	$	(8,484,513	)
Total increase (decrease) in net assets	$	(930,603	)	$	909,854
Net assets at beginning of period	$	164,651,104		$	173,949,452
Net assets at end of period (includes $1,219,620 and $1,425,235 of distributions in excess of net investment income, respectively)	$	163,720,501		$	174,859,306

 3

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) 

	For the			For the
	six months			six months
	ended			ended
	June 30, 2016			June 30, 2015
Cash flows from operating activities
Net increase in net assets resulting from operations	$	7,553,769		$	9,394,367
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:
Purchases of investments		(17,899,868	)		(59,970,381	)
Proceeds from sales and repayments of investments		15,972,633			53,942,696
Net change in unrealized depreciation (appreciation) on investments		815,154			(1,377,006	)
Deferred tax provision (benefit)		(322,151	)		114,258
Increase in investments due to PIK		(109,619	)		(337,295	)
Amortization of premium and accretion of discount, net		(557,840	)		(469,646	)
Amortization of loan structure fees		260,846			260,094
Amortization of deferred financing costs		162,203			117,173
Amortization of loan fees on SBIC debentures		88,709			77,851
Net realized gain on investments		(2,380	)		(292,717	)
Deferred offering costs		261,761			—
Changes in other assets and liabilities
Increase (decrease) in interest receivable		522,724			989,471
Increase in accounts receivable		7,684			(185,336	)
Decrease in prepaid expenses and fees		177,750			136,169
Increase in management fees payable		32,062			86,311
Increase in directors' fees payable		86,000			184,000
Increase (decrease) in incentive fees payable		711,073			107,295
Increase (decrease) in administrative services payable		(163,551	)		(220,417	)
Increase in interest payable		272,180			43,227
Decrease in unearned revenue		(13,284	)		(113,213	)
Increase (decrease) in other accrued expenses and liabilities		86,921			92,185
Net cash provided by operating activities	$	7,942,776		$	2,579,086
Cash flows from financing activities
Proceeds from SBA Debentures		—			9,750,000
Financing costs paid on SBA Debentures		—			(561,438	)
Stockholder distributions paid		(8,484,372	)		(8,484,513	)
Borrowings under credit facility		18,500,000			53,750,000
Repayments of credit facility		(18,000,000	)		(53,250,000	)
Net cash provided (used) by financing activities	$	(7,984,372	)	$	1,204,049
Net increase (decrease) in cash and cash equivalents		(41,596	)		3,783,135
Cash and cash equivalents balance at beginning of period		10,875,790			2,046,563
Cash and cash equivalents balance at end of period	$	10,834,194		$	5,829,698
Supplemental and non-cash financing activities
Interest expense paid	$	3,106,094		$	2,461,204

 4

Stellus Capital Investment Corporation
 
Consolidated Schedule of Investments – (unaudited)
June 30, 2016

Investments		Footnotes	Lien	Coupon	LIBOR floor	Cash	PIK	Maturity	Headquarters/ Industry	Principal Amount/ Shares	Amortized Cost	Fair Value (1)	% of Net Assets
Non-controlled, non-affiliated investments		(2)
Abrasive Products & Equipment, LLC, et al									Deer Park, TX
	Term Loan (SBIC)	(2)(3)	Second Lien	L+10.50%	1.00%	11.50%		3/5/2020	Chemicals, Plastics, & Rubber	$5,325,237	$5,243,301	$5,112,535	3.12	%
	APE Holdings, LLC Class A Units	(4)	Equity							375,000 units	375,000	501,000	0.31	%
	Total										5,618,301	5,613,535	3.43	%
PE II Apex Environmental, LLC									Amsterdam, OH
	Term Loan	(3)	First Lien	L+9.50%	0.50%	10.00%		10/30/2020	Environmental Industries	$750,000	736,781	750,000	0.46	%
	Term Loan (SBIC)	(2)(3)	First Lien	L+9.50%	0.50%	10.00%		10/30/2020		$9,750,000	9,578,156	9,750,000	5.96	%
	Apex Environmental Resources Holdings, LLC Common Units	(4)	Equity							295 shares	295	15	0.00	%
	Apex Environmental Resources Holdings, LLC Preferred Units	(4)	Equity							295 shares	295,017	14,578	0.01	%
	Total										10,610,249	10,514,593	6.43	%
Atkins Nutritionals Holdings II, Inc.									Denver, CO
	Term Loan	(3)	Second Lien	L+8.50%	1.25%	9.75%		4/3/2019	Beverage, Food, & Tobacco	$8,000,000	7,914,558	8,000,000	4.89	%
Binder & Binder National Social Security Disability Advocates, LLC									Hauppauge, NY
	Term Loan	(4)(6)(7)	Unsecured	17.00%		15.00%	2.00%	2/27/2016	Services: Consumer	$13,200,354	13,200,354	606,436	0.37	%
Blackhawk Mining, LLC									Lexington, KY
	Term Loan		First Lien	13.50%		13.50%		10/28/2020	Metals & Mining	$4,452,397	4,253,604	3,439,864	2.10	%
	Blackhawk Mining, LLC Class B Units	(4)	Equity							36 units	214,286	0	0.00	%
	Total										4,467,890	3,439,864	2.10	%
Calero Software, LLC et al									Rochester, NY
	Term Loan	(3)	Second Lien	L+9.50%	1.00%	10.50%		6/5/2019	Telecommunications	$7,500,000	7,409,370	7,260,381	4.43	%
	Managed Mobility Holdings, LLC Partnership Units	(4)	Equity							8,932 units	525,000	190,486	0.12	%
	Total										7,934,370	7,450,867	4.55	%
C.A.R.S. Protection Plus, Inc.									Murrysville, PA
	Term Loan	(3)	First Lien	L+8.50%	0.50%	9.00%		12/31/2020	Automotive	$124,375	122,087	124,375	0.08	%
	Term Loan (SBIC)	(2)(3)	First Lien	L+8.50%	0.50%	9.00%		12/31/2020		$9,701,250	9,514,553	9,701,250	5.93	%
	CPP Holdings LLC Common Shares, Class A	(4)	Equity							149,828 shares	149,828	197,619	0.12	%
	Total										9,786,468	10,023,244	6.13	%
Catapult Learning, LLC et al									Camden, NJ
	Term Loan	(3)(14)	First Lien	L+6.50%	1.00%	9.03%		7/16/2020	Education	$12,500,000	12,393,782	12,166,255	7.43	%
Colford Capital Holdings, LLC									New York, NY
	Delay Draw Term Loan #1	(5)	Unsecured	12.00%		12.00%		5/31/2018	Finance	$12,500,000	12,370,714	12,396,359	7.57	%
	Delay Draw Term Loan #2	(5)	Unsecured	12.00%		12.00%		5/31/2018		$2,000,000	1,973,999	1,983,417	1.21	%
	Delay Draw Term Loan #4	(5)	Unsecured	12.00%		12.00%		5/31/2018		$5,000,000	4,947,688	4,958,544	3.03	%
	Colford Capital Holding, LLC Preferred Units	(4)(5)	Equity							38,893 units	557,143	652,813	0.40	%
	Total										19,849,544	19,991,133	12.21	%

 5

Stellus Capital Investment Corporation
 
Consolidated Schedule of Investments – (unaudited)
June 30, 2016

Doskocil Manufacturing Company, Inc. (Petmate)									Arlington, TX
	Term Loan (SBIC)	(2)(3)(14)	First Lien	L+6.00%	1.00%	9.45%		11/10/2020	Consumer goods: non-durable	$8,750,000	8,613,185	8,600,390	5.25	%
Douglas Products & Packaging Company, LLC									Liberty, MO
	Term Loan (SBIC)	(2)(12)	Second Lien	L+10.50%	0.50%	11.14%		12/31/2020	Chemicals, Plastics, & Rubber	$9,000,000	8,864,324	9,000,000	5.50	%
	Fumigation Holdings, Inc. Class A Common Stock	(4)	Equity							250 shares	250,000	552,487	0.34	%
	Total										9,114,324	9,552,487	5.84	%
Eating Recovery Center, LLC									Denver, CO
	Term Loan	(6)	Unsecured	13.00%		12.00%	1.00%	6/28/2018	Healthcare & Pharmaceuticals	$18,400,000	18,233,988	18,203,106	11.12	%
	ERC Group Holdings LLC Class A Units	(4)	Equity							17,820 units	1,655,274	2,551,268	1.56	%
	Total										19,889,262	20,754,374	12.68	%
Empirix Inc.									Billerica, MA
	Term Loan	(3)	Second Lien	L+9.50%	1.00%	10.50%		5/1/2020	Software	$11,657,850	11,501,011	11,258,940	6.88	%
	Term Loan (SBIC)	(2)(3)	Second Lien	L+9.50%	1.00%	10.50%		5/1/2020		$9,750,000	9,618,003	9,416,373	5.75	%
	Empirix Holdings I, Inc. Common Shares, Class A	(4)	Equity							1,304 shares	1,304,232	1,084,683	0.66	%
	Empirix Holdings I, Inc. Common Shares, Class B	(4)	Equity							1,317,406 shares	13,174	10,956	0.01	%
	Total										22,436,420	21,770,952	13.30	%
EOS Fitness OPCO Holdings, LLC									Phoenix, AZ
	Term Loan (SBIC)	(2)(3)	First Lien	L+8.75%	0.75%	9.50%		12/30/2019	Hotel, Gaming, & Leisure	$3,374,934	3,324,386	3,304,216	2.02	%
	EOS Fitness Holdings, LLC Class A Preferred Units	(4)	Equity							118 shares	117,670	65,010	0.04	%
	EOS Fitness Holdings, LLC Class B Common Units	(4)	Equity							3,017 shares	3,020	1,668	0.00	%
	Total										3,445,076	3,370,894	2.06
Furniture Factory Outlet, LLC									Fort Smith, AR
	Term Loan	(12)	First Lien	L+9.00%	0.50%	9.66%		6/10/2021	Consumer goods: non-durable	$10,000,000	9,802,529	9,802,529	5.99	%
	Furniture Factory Holdings, LLC Term Loan	(6)	Unsecured	11.00%			11.00%	2/3/2021		$122,823	122,823	122,823	0.08	%
	Sun Furniture Factory, LP Common LP/LLC Units	(4)	Equity							13,445 Shares	94,569	94,569	0.06	%
	Total										10,019,921	10,019,921	6.13	%
GK Holdings, Inc.									Cary, NC
	Term Loan	(3)	Second Lien	L+9.50%	1.00%	10.50%		1/30/2022	Services: Business	$5,000,000	4,914,605	4,890,072	2.99	%
Glori Energy Production Inc.									Houston, TX
	Term Loan	(3)	First Lien	L+10.00%	1.00%	11.00%		3/14/2017	Energy: Oil & Gas	$1,691,917	1,683,336	1,536,305	0.94	%
Grupo HIMA San Pablo, Inc., et al									San Juan, PR
	Term Loan	(3)	First Lien	L+7.00%	1.50%	8.50%		1/31/2018	Healthcare & Pharmaceuticals	$4,837,500	4,801,942	4,774,603	2.92	%
	Term Loan		Second Lien	13.75%		13.75%		7/31/2018		$4,000,000	3,904,450	3,839,945	2.35	%
	Total										8,706,392	8,614,548	5.27	%

 6

Stellus Capital Investment Corporation
 
Consolidated Schedule of Investments – (unaudited)
June 30, 2016

Hollander Sleep Products, LLC									Boca Raton, FL
	Term Loan	(3)	First Lien	L+8.00%	1.00%	9.00%		10/21/2020	Services: Consumer	$7,286,790	7,203,348	7,087,809	4.33	%
	Dream II Holdings, LP Class A LP/LLC Units	(4)	Equity							250,000 units	242,304	117,743	0.07	%
	Total										7,445,652	7,205,552	4.40	%
Hostway Corporation									Chicago, IL
	Term Loan	(3)	Second Lien	L+8.75%	1.25%	10.00%		12/13/2020	High Tech Industries	$6,750,000	6,652,471	5,535,000	3.38	%
HUF Worldwide, LLC		(9)							Los Angeles, CA
	Term Loan	(12)	First Lien	L+9.00%	0.50%	9.63%		10/22/2019	Retail	$4,782,057	4,712,137	4,670,594	2.85	%
	Term Loan (SBIC)	(2)(12)	First Lien	L+9.00%	0.50%	9.63%		10/22/2019		$8,038,802	7,925,451	7,851,429	4.80	%
	HUF Holdings, LLC Common Class A Units	(4)	Equity							556,948 units	556,090	600,296	0.37	%
	Total										13,193,678	13,122,319	8.02	%
Keais Records Service, LLC									Houston, TX
	Term Loan	(3)	Second Lien	L+10.25%	0.50%	10.75%		12/30/2021	Services: Business	$1,250,000	1,225,000	1,225,000	0.75	%
Livingston International, Inc.									Toronto, Ontario
	Term Loan	(3)(5)	Second Lien	L+7.75%	1.25%	9.00%		4/18/2020	Transportation: Cargo	$6,841,739	6,755,920	6,239,639	3.81	%
Momentum Telecom Inc., et al									Birmingham, AL
	Term Loan	(3)	First Lien	L+8.50%	1.00%	9.50%		3/10/2019	Media: Broadcasting & Subscription	$7,548,474	7,448,543	7,298,929	4.46	%
	Term Loan (SBIC)	(2)(3)	First Lien	L+8.50%	1.00%	9.50%		3/10/2019		$9,491,102	9,369,212	9,177,337	5.61	%
	MBS Holdings, Inc. Series E Preferred Stock	(4)	Equity							2,774,695 shares	1,000,000	1,264,694	0.77	%
	MBS Holdings, Inc. Series F Preferred Stock	(4)	Equity							399,308 shares	206,682	261,389	0.16	%
	Total										18,024,437	18,002,349	11.00	%
MTC Intermediate Holdco, Inc.									Oak Brook, IL
	Term Loan	(3)	Second Lien	L+9.50%	1.00%	10.50%		5/31/2022	Finance	$575,000	564,234	575,000	0.35	%
	Term Loan (SBIC)	(2)(3)	Second Lien	L+9.50%	1.00%	10.50%		5/31/2022		$9,750,000	9,567,425	9,750,000	5.96	%
	MTC Parent, LP Class A-2 Common Units	(4)	Equity							750,000 shares	750,000	1,023,152	0.62	%
	Total										10,881,659	11,348,152	6.93	%
NetMotion Wireless, Inc., et al									Milpitas, CA
	Term Loan	(3)(13)	Second Lien	L+12.50%	1.00%	13.50%		8/19/2020	Services: Business	$9,000,000	8,855,732	8,744,148	5.34	%
	Term Loan (SBIC)	(2)(3)(13)	Second Lien	L+12.50%	1.00%	13.50%		8/19/2020		$1,000,000	983,970	971,572	0.59	%
	Endpoint Security Holdings, LLC	(6)	Unsecured	15.00%			15.00%	10/3/2016		$113,405	112,843	112,305	0.07	%
	Endpoint Security Holdings, LLC Class A Common Stock	(4)	Equity							9,174 shares	293,103	113,399	0.07	%
	Endpoint Security Holdings, LLC Class B Common Stock	(4)	Equity							9,174 shares	706,897	273,494	0.17	%
	Total										10,952,545	10,214,918	6.24	%
OG Systems, LLC									Chantilly, Virginia
	Term Loan	(3)(6)	Unsecured	L+11.00%	1.00%	11.00%	1.00%	1/22/2020	Services: Government	$4,028,288	3,973,028	3,886,943	2.37	%
	OGS Holdings, Inc. Series A Convertible Preferred Stock	(4)	Equity							11,521 shares	50,000	49,606	0.03	%
	Total										4,023,028	3,936,549	2.40	%

 7

Stellus Capital Investment Corporation
 
Consolidated Schedule of Investments – (unaudited)
June 30, 2016

Refac Optical Group, et al									Blackwood, NJ
	Revolver	(10)(11)	First Lien	L+7.50%		7.97%		9/30/2018	Retail	$400,000	400,000	399,410	0.24	%
	Term A Loan	(11)	First Lien	L+7.50%		7.97%		9/30/2018		$1,799,966	1,799,966	1,797,310	1.10	%
	Term B Loan	(6)(11)	First Lien	L+10.25%		8.97%	1.75%	9/30/2018		$6,372,639	6,372,639	6,314,072	3.86	%
	Total										8,572,605	8,510,792	5.20
Securus Technologies Holdings, Inc.									Dallas, TX
	Term Loan	(3)	Second Lien	L+7.75	1.25%	9.00%		4/30/2021	Telecommunications	$8,500,000	8,451,805	7,664,153	4.68	%
Sitel Worldwide Corporation									Nashville, TN
	Term Loan	(3)	Second Lien	L+9.50	1.00%	10.50%		9/18/2022	Services: Business	$10,000,000	9,814,904	9,866,306	6.03	%
Skopos Financial, LLC									Irving, TX
	Term Loan	(5)	Unsecured	12.00%		12.00%		1/31/2019	Finance	$20,000,000	19,748,985	19,460,145	11.89	%
	Skopos Financial Group, LLC Class A Units	(4)(5)	Equity							1,120,684 units	1,162,544	934,904	0.57	%
	Total										20,911,529	20,395,049	12.46	%
SPM Capital, LLC									Bloomington, MN
	Term Loan	(3)	First Lien	L+5.50	1.50%	7.00%		10/31/2017	Healthcare & Pharmaceuticals	$6,421,391	6,381,785	6,340,437	3.87	%
SQAD, LLC									Tarrytown, NY
	Term Loan (SBIC)	(2)(6)	Unsecured	12.25%		11.00%	1.25%	4/30/2019	Media: Broadcasting & Subscription	$7,199,422	7,123,181	7,126,777	4.35	%
	SQAD Holdco, Inc. Preferred Shares, Series A (SBIC)	(2)(4)	Equity							5,624 shares	562,368	718,879	0.44	%
	SQAD Holdco, Inc. Common Shares (SBIC)	(2)(4)	Equity							5,800 shares	62,485	79,875	0.05	%
	Total										7,748,034	7,925,531	4.84	%
Stratose Intermediate Holdings, II, LLC et al									Atlanta, GA
	Term Loan	(3)	Second Lien	L+9.50%	1.00%	10.50%		7/26/2022	Services: Business	$15,000,000	14,687,164	15,000,000	9.16	%
	Atmosphere Aggregator Holdings, LP Common Units	(4)	Equity							750,000 units	750,000	1,561,706	0.95	%
	Atmosphere Aggregator Holdings II, LP Common Units	(4)	Equity							254,250 units	254,250	529,419	0.32	%
	Total										15,691,414	17,091,125	10.43	%
360 Holdings III Corp									Irvine, CA
	Term Loan	(3)	First Lien	L+9.00%	1.00%	10.00%		10/1/2021	Consumer goods: non-durable	$3,970,000	3,820,769	3,949,770	2.41	%
T2 Systems, Inc.									Indianapolis, IN
	Term Loan	(3)(8)	First Lien	L+9.50%	1.00%	10.50%		1/31/2019	Transportation & Logistics	$4,688,301	4,629,593	4,653,474	2.84	%
T2 Systems Canada, Inc.									Burnaby, British Columbia
	Term Loan	(3)(5)(8)	First Lien	L+9.50%	1.00%	10.50%		1/31/2019	Transportation & Logistics	$2,624,199	2,601,461	2,604,705	1.59	%
Telecommunications Management, LLC									Sikeston, MO
	Term Loan	(3)	Second Lien	L+8.00%	1.00%	9.00%		10/30/2020	Media: Broadcasting & Subscription	$5,000,000	4,967,302	4,684,676	2.86	%
U.S. Auto Sales, Inc. et al									Lawrenceville, GA
	Term Loan	(3)(5)	Second Lien	L+10.50%	1.00%	11.50%		6/8/2020	Finance	$4,500,000	4,462,648	4,396,035	2.69	%
	USASF Blocker II, LLC Common Units	(4)(5)	Equity							441 units	441,000	483,885	0.30	%
	USASF Blocker LLC Common Units	(4)(5)	Equity							9,000 units	9,000	9,875	0.01	%
	Total										4,912,648	4,889,795	3.00	%

 8

Stellus Capital Investment Corporation
 
Consolidated Schedule of Investments – (unaudited)
June 30, 2016

Vandelay Industries Finance, LLC, et al									La Vergne, TN
	Term Loan	(6)	Second Lien	11.75%		10.75%	1.00%	11/12/2019	Construction & Building	$2,500,000	2,483,308	2,489,478	1.52	%
Vision Media Management & Fulfillment, LLC									Valencia, CA
	Term Loan (SBIC)	(2)(3)(14)	First Lien	L+8.50%	1.00%	10.47%		1/27/2021	Media: Broadcasting & Subscription	$650,000	637,853	650,000	0.40	%
Wise Holding Corporation									Salt Lake City, UT
	Term Loan (SBIC)	(2)(3)	Unsecured	L+10.00%	1.00%	11.00%		12/31/2021	Beverage, Food, & Tobacco	$1,250,000	1,231,250	1,231,250	0.75	%
	WCI Holdings, LLC Class A Preferred LP/LLC Units	(4)	Equity							55 units	55,550	55,550	0.03	%
	WCI Holdings, LLC Class B LP/LLC Common Units	(4)	Equity							3,044 units	3,044	3,044	0.00	%
	Total										1,289,844	1,289,844	0.78	%
Zemax, LLC									Redmond, WA
	Term Loan (SBIC)	(2)(3)	Second Lien	L+10.00%	1.00%	11.00%		4/23/2020	Software	$3,962,500	3,902,252	3,841,026	2.35	%
	Zemax Software Holdings, LLC Preferred LP/LLC Units (SBIC)	(2)(4)	Equity							24,500 units	245,000	213,746	0.13	%
	Zemax Software Holdings, LLC Common LP/LLC Units (SBIC)	(2)(4)	Equity							5,000 shares	5,000	4,362	0.00	%
	Total										4,152,252	4,059,134	2.48	%
Total Non-controlled, non-affiliated investments											$366,819,533	$350,809,617	214	%
Net Investments											$366,819,533	$350,809,617	214.00	%
LIABILITIES IN EXCESS OF OTHER ASSETS												$(187,089,116)	(114.27)	%
NET ASSETS												$163,720,501	100.00	%

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

(2) The Company’s obligations to the lenders of the Credit Facility are secured by a first priority security interest in all non-controlled non-affiliated investments and cash, but exclude $2,801,078 of cash and $96,618,101 of investments (at par) that are held by Stellus Capital SBIC LP. See Note 1 of the Notes to the Consolidated Financial Statements for a discussion.

(3) These loans have LIBOR Floors which are higher than the current applicable LIBOR rates; therefore, the floors are in effect.

(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 84% of the Company’s total assets.

(6) Represents a payment-in-kind security. At the option of the issuer, interest can be paid in cash or cash and PIK. The percentage of PIK shown is the maximum PIK that can be elected by the issuer.

(7) Investment has been on non-accrual status since January 1, 2014. The coupon rate on this investment includes 2% default interest.

(8) T2 Systems Canada, Inc. is the Canadian co-borrower of the term loan of T2 Systems, Inc.

(9) Excluded from the investment is an undrawn commitment in an amount not to exceed $1,250,000, with an interest rate of LIBOR plus 9.00% (0.50% LIBOR floor) and a maturity of October 22, 2019. This investment is accruing an unused commitment fee of 0.50% per annum.

(10) Excluded from the investment is an undrawn commitment in an amount not to exceed $1,600,000, with an interest rate of LIBOR plus 7.50% and a maturity of September 30, 2018. This investment is accruing an unused commitment fee of 0.50% per annum.

 9

Stellus Capital Investment Corporation
 
Consolidated Schedule of Investments – (unaudited)
June 30, 2016

(11) Variable rate loans bear interest at a rate that may be determined by reference to either LIBOR (which can include one-, two-, three- or six-month LIBOR) or an alternate base rate (which can include the Federal Funds Effective Rate or the Prime Rate), at the borrower’s option, which rates reset periodically based on the terms of the loan agreement.

(12) These loans have LIBOR floors which are lower than the applicable LIBOR rates; therefore, the floors are not in effect.

(13) The coupon rate on this investment includes 2% default interest.

(14) These loans are last-out term loans with contractual base rates higher than the applicable LIBOR rates; therefore, the floors are not in effect.

Abbreviation Legend

L — LIBOR

PIK — Payment-In-Kind

 10

Stellus Capital Investment Corporation
 
Consolidated Schedule of Investments
December 31, 2015

Investments		Footnotes	Lien	Coupon	LIBOR floor	Cash	PIK	Maturity	Headquarters/ Industry	Principal Amount/ Shares	Amortized Cost	Fair Value (1)	% of Net Assets
Non-controlled, non-affiliated investments		(2)
Abrasive Products & Equipment, LLC, et al									Deer Park, TX
	Term Loan (SBIC)	(2)(3)	Second Lien	L+10.50%	1.00%	11.50%		3/5/2020	Chemicals, Plastics, & Rubber	$4,507,500	$4,434,107	$4,359,514	2.65	%
	APE Holdings, LLC Class A Units	(4)	Equity							375,000 units	375,000	343,266	0.21	%
	Total										4,809,107	4,702,780	2.86	%
PE II Apex Environmental, LLC									Amsterdam, OH
	Term Loan	(3)	First Lien	L+9.50%	0.50%	10.00%		10/30/2020	Environmental Industries	$750,000	735,578	735,578	0.45	%
	Term Loan (SBIC)	(2)(3)	First Lien	L+9.50%	0.50%	10.00%		10/30/2020		$9,750,000	9,562,517	9,562,517	5.81	%
	Apex Environmental Resources Holdings, LLC Common Units	(4)	Equity							295 shares	295	295	0.00	%
	Apex Environmental Resources Holdings, LLC Preferred Units	(4)	Equity							295 shares	295,017	295,017	0.18	%
	Total										10,593,407	10,593,407	6.44	%
Atkins Nutritionals Holdings II, Inc.									Denver, CO
	Term Loan	(3)	Second Lien	L+8.50%	1.25%	9.75%		4/3/2019	Beverage, Food, & Tobacco	$8,000,000	7,901,427	8,000,000	4.86	%
Binder & Binder National Social Security Disability Advocates, LLC									Hauppauge, NY
	Debtor-In-Possession Loan	(15)	First Lien	12.00%		12.00%		3/31/2016	Services: Consumer	$4,500,000	4,472,680	4,472,680	2.72	%
	Term Loan	(4)(6)(7)	Unsecured	17.00%		15.00%	2.00%	2/27/2016		$13,200,354	13,200,354	4,668,833	2.84	%
	Total										17,673,034	9,141,513	5.56	%
Blackhawk Mining, LLC									Lexington, KY
	Term Loan		First Lien	13.50%		13.50%		10/28/2020	Metals & Mining	$4,474,770	4,258,720	4,186,037	2.54	%
	Blackhawk Mining, LLC Class B Units	(4)	Equity							36 units	214,286	332,851	0.20	%
	Total										4,473,006	4,518,888	2.74	%
Calero Software, LLC et al									Rochester, NY
	Term Loan	(3)	Second Lien	L+9.50%	1.00%	10.50%		6/5/2019	Telecommunications	$7,500,000	7,396,534	7,315,485	4.44	%
	Managed Mobility Holdings, LLC Partnership Units	(4)	Equity							8,932 units	525,000	261,982	0.16	%
	Total										7,921,534	7,577,467	4.60	%
C.A.R.S. Protection Plus, Inc.									Murrysville, PA
	Term Loan	(14)	First Lien	L+8.50%	0.50%	9.11%		12/31/2020	Services: Automotive	$125,000	122,500	122,500	0.07	%
	Term Loan (SBIC)	(2)(14)	First Lien	L+8.50%	0.50%	9.11%		12/31/2020		$9,750,000	9,555,000	9,555,000	5.80	%
	CPP Holdings LLC Common Shares, Class A	(4)	Equity							149,828 shares	149,828	149,828	0.09	%
	Total										9,827,328	9,827,328	5.96	%
Catapult Learning, LLC et al									Camden, NJ
	Term Loan	(3)(14)(16)	First Lien	L+6.50%	1.00%	9.08%		7/16/2020	Education	$12,500,000	12,383,339	12,081,063	7.34	%
Colford Capital Holdings, LLC									New York, NY
	Delay Draw Term Loan #1	(5)	Unsecured	12.00%		12.00%		5/31/2018	Finance	$12,500,000	12,341,796	12,167,408	7.39	%
	Delay Draw Term Loan #2	(5)	Unsecured	12.00%		12.00%		5/31/2018		$2,000,000	1,968,212	1,946,785	1.18	%
	Delay Draw Term Loan #4	(5)	Unsecured	12.00%		12.00%		5/31/2018		$5,000,000	4,935,988	4,866,963	2.96	%
	Colford Capital Holding, LLC Preferred Units	(4)(5)	Equity							35,945 units	557,143	637,114	0.39	%
	Total										19,803,139	19,618,270	11.92	%

 11

Stellus Capital Investment Corporation
 
Consolidated Schedule of Investments
December 31, 2015

Doskocil Manufacturing Company, Inc. (Petmate)									Arlington, TX
	Term Loan (SBIC)	(2)(3)(16)	First Lien	L+6.00%	1.00%	9.50%		11/10/2020	Consumer goods: non-durable	$8,750,000	8,600,852	8,600,852	5.22	%
Douglas Products & Packaging Company, LLC									Liberty, MO
	Term Loan (SBIC)	(2)(14)	Second Lien	L+10.50%	0.50%	11.11%		12/31/2020	Chemicals, Plastics, & Rubber	$9,000,000	8,853,102	8,658,005	5.26	%
	Fumigation Holdings, Inc. Class A Common Stock	(4)	Equity							250 shares	250,000	334,846	0.20	%
	Total										9,103,102	8,992,851	5.46	%
Eating Recovery Center, LLC									Denver, CO
	Term Loan	(6)	Unsecured	13.00%		12.00%	1.00%	6/28/2018	Healthcare & Pharmaceuticals	$18,400,000	18,199,005	17,924,038	10.89	%
	ERC Group Holdings LLC Class A Units	(4)	Equity							17,820 units	1,674,649	2,795,034	1.70	%
	Total										19,873,654	20,719,072	12.59	%
Empirix Inc.									Billerica, MA
	Term Loan	(3)	Second Lien	L+9.50%	1.00%	10.50%		5/1/2020	Software	$11,657,850	11,484,965	11,336,359	6.89	%
	Term Loan (SBIC)	(2)(3)	Second Lien	L+9.50%	1.00%	10.50%		5/1/2020		$9,750,000	9,604,846	9,481,122	5.76	%
	Empirix Holdings I, Inc. Common Shares, Class A	(4)	Equity							1,304 shares	1,304,232	540,667	0.33	%
	Empirix Holdings I, Inc. Common Shares, Class B	(4)	Equity							1,317,406 shares	13,174	5,461	0.00	%
	Total										22,407,217	21,363,609	12.98	%
EOS Fitness OPCO Holdings, LLC									Phoenix, AZ
	Term Loan (SBIC)	(2)(3)	First Lien	L+8.75%	0.75%	9.50%		12/30/2019	Hotel, Gaming, & Leisure	$3,465,000	3,407,044	3,348,424	2.03	%
	EOS Fitness Holdings, LLC Class A Preferred Units	(4)	Equity							118 shares	117,670	83,596	0.05	%
	EOS Fitness Holdings, LLC Class B Common Units	(4)	Equity							3,017 shares	3,020	2,144	0.00	%
	Total										3,527,734	3,434,164	2.08
GK Holdings, Inc.									Cary, NC
	Term Loan	(3)	Second Lien	L+9.50%	1.00%	10.50%		1/30/2022	Services: Business	$5,000,000	4,909,192	4,760,844	2.89	%
Glori Energy Production Inc.									Houston, TX
	Term Loan	(3)	First Lien	L+10.00%	1.00%	11.00%		3/14/2017	Energy: Oil & Gas	$1,741,917	1,726,895	1,467,388	0.89	%
Grupo HIMA San Pablo, Inc., et al									San Juan, PR
	Term Loan	(3)	First Lien	L+7.00%	1.50%	8.50%		1/31/2018	Healthcare & Pharmaceuticals	$4,862,500	4,816,445	4,764,126	2.89	%
	Term Loan		Second Lien	13.75%		13.75%		7/31/2018		$4,000,000	3,885,629	3,838,742	2.33	%
	Total										8,702,074	8,602,868	5.22	%
Hollander Sleep Products, LLC									Boca Raton, FL
	Term Loan	(3)	First Lien	L+8.00%	1.00%	9.00%		10/21/2020	Services: Consumer	$7,443,750	7,350,520	7,130,895	4.33	%
	Dream II Holdings, LLC Class A Units	(4)	Equity							250,000 units	242,304	259,346	0.16	%
	Total										7,592,824	7,390,241	4.49	%
Hostway Corporation									Chicago, IL
	Term Loan	(3)	Second Lien	L+8.75%	1.25%	10.00%		12/13/2020	High Tech Industries	$6,750,000	6,644,181	6,581,989	4.00	%
HUF Worldwide, LLC		(9)							Los Angeles, CA
	Term Loan	(3)	First Lien	L+9.00%	0.50%	9.50%		10/22/2019	Retail	$4,838,524	4,760,081	4,785,640	2.91	%

 12

Stellus Capital Investment Corporation
 
Consolidated Schedule of Investments
December 31, 2015

	Term Loan (SBIC)	(2)(3)	First Lien	L+9.00%	0.50%	9.50%		10/22/2019		$8,133,726	8,004,462	8,044,826	4.89	%
	HUF Holdings, LLC Common Class A Units	(4)	Equity							556,948 units	556,090	384,110	0.23	%
	Total										13,320,633	13,214,576	8.03	%
Livingston International, Inc.									Toronto, Ontario
	Term Loan	(3)(5)	Second Lien	L+7.75%	1.25%	9.00%		4/18/2020	Transportation: Cargo	$6,841,739	6,746,827	5,660,744	3.44	%
Momentum Telecom Inc., et al									Birmingham, AL
	Term Loan	(3)	First Lien	L+8.50%	1.00%	9.50%		3/10/2019	Media: Broadcasting & Subscription	$7,702,069	7,584,195	7,464,720	4.53	%
	Term Loan (SBIC)	(2)(3)	First Lien	L+8.50%	1.00%	9.50%		3/10/2019		$9,684,225	9,540,113	9,385,794	5.70	%
	MBS Holdings, Inc. Series E Preferred Stock	(4)	Equity							2,774,695 shares	1,000,000	1,095,986	0.67	%
	MBS Holdings, Inc. Series F Preferred Stock	(4)	Equity							399,308 shares	206,682	206,682	0.13	%
	Total										18,330,990	18,153,182	11.03	%
MTC Intermediate Holdco, Inc.									Oak Brook, IL
	Term Loan	(3)	Second Lien	L+9.50%	1.00%	10.50%		5/31/2022	Services: Finance	$575,000	563,602	563,602	0.34	%
	Term Loan (SBIC)	(2)(3)	Second Lien	L+9.50%	1.00%	10.50%		5/31/2022		$9,750,000	9,556,727	9,556,727	5.80	%
	MTC Parent, LP Class A-2 Common Units	(4)	Equity							750,000 shares	750,000	750,000	0.46	%
	Total										10,870,329	10,870,329	6.60	%
NetMotion Wireless, Inc., et al									Milpitas, CA
	Term Loan	(3)	Second Lien	L+10.50%	1.00%	11.50%		8/19/2020	Services: Business	$9,000,000	8,842,425	8,755,915	5.32	%
	Term Loan (SBIC)	(2)(3)	Second Lien	L+10.50%	1.00%	11.50%		8/19/2020		$1,000,000	982,492	972,879	0.59	%
	Endpoint Security Holdings, LLC	(6)	Unsecured	15.00%			15.00%	10/3/2016		$105,501	103,885	103,391	0.06	%
	Endpoint Security Holdings, LLC Class A Common Stock	(4)	Equity							9,174 shares	293,103	281,233	0.17	%
	Endpoint Security Holdings, LLC Class B Common Stock	(4)	Equity							9,174 shares	706,897	678,268	0.41	%
	Total										10,928,802	10,791,686	6.55	%
OG Systems, LLC									Chantilly, Virginia
	Term Loan	(3)(6)	Unsecured	L+11.00%	1.00%	11.00%	1.00%	1/22/2020	Services: Government	$4,028,288	3,966,918	3,913,652	2.38	%
	OGS Holdings, Inc. Series A Convertible Preferred Stock	(4)	Equity							11,521 shares	50,000	49,253	0.03	%
	Total										4,016,918	3,962,905	2.41	%
Refac Optical Group, et al									Blackwood, NJ
	Revolver	(10)(11)	First Lien	L+7.50%		7.92%		9/30/2018	Retail	$400,000	400,000	398,270	0.24	%
	Term A Loan	(11)	First Lien	L+7.50%		7.92%		9/30/2018		$2,159,427	2,159,427	2,150,087	1.31	%
	Term B Loan	(6)(11)	First Lien	L+10.25%		8.92%	1.75%	9/30/2018		$6,342,590	6,342,590	6,314,455	3.84	%
	Total										8,902,017	8,862,812	5.39
Securus Technologies Holdings, Inc.									Dallas, TX
	Term Loan	(3)	Second Lien	L+7.75	1.25%	9.00%		4/30/2021	Telecommunications	$8,500,000	8,447,929	6,769,899	4.11	%
Sitel Worldwide Corporation									Nashville, TN
	Term Loan	(3)	Second Lien	L+9.50	1.00%	10.50%		9/18/2022	Services: Business	$10,000,000	9,804,834	9,595,431	5.83	%
Skopos Financial, LLC									Irving, TX
	Term Loan	(5)	Unsecured	12.00%		12.00%		1/31/2019	Finance	$20,000,000	19,708,633	19,647,860	11.93	%
	Skopos Financial Group, LLC Class A Units	(4)(5)	Equity							1,120,684 units	1,162,544	1,035,784	0.63	%
	Total										20,871,177	20,683,644	12.56	%
Software Paradigms International Group, LLC									Atlanta, GA
	Term Loan	(3)	First Lien	L+8.00%	1.00%	9.00%		5/22/2020	Retail	$7,175,141	7,063,528	6,966,429	4.23	%

 13

Stellus Capital Investment Corporation
 
Consolidated Schedule of Investments
December 31, 2015

	Term Loan	(3)(12)	Delay Draw	L+8.00%	1.00%	9.00%		5/22/2020		$2,417,454	2,383,713	2,347,134	1.43	%
	Total										9,447,241	9,313,563	5.66	%
SPM Capital, LLC									Bloomington, MN
	Term Loan	(3)	First Lien	L+5.50	1.50%	7.00%		10/31/2017	Healthcare & Pharmaceuticals	$6,939,068	6,881,287	6,839,308	4.15	%
SQAD, LLC									Tarrytown, NY
	Term Loan (SBIC)	(2)(6)	Unsecured	12.25%		11.00%	1.25%	4/30/2019	Media: Broadcasting & Subscription	$7,153,893	7,067,346	6,973,349	4.24	%
	SQAD Holdco, Inc. Preferred Shares, Series A (SBIC)	(2)(4)	Equity							5,624 shares	562,368	646,194	0.39	%
	SQAD Holdco, Inc. Common Shares (SBIC)	(2)(4)	Equity							5,800 shares	62,485	71,799	0.04	%
	Total										7,692,199	7,691,342	4.67	%
Stratose Intermediate Holdings, II, LLC									Atlanta, GA
	Term Loan	(3)	Second Lien	L+9.50%	1.00%	10.50%		12/30/2021	Services: Business	$11,250,000	10,994,047	10,736,692	6.52	%
	Atmosphere Aggregator Holdings, LP Common Units	(4)	Equity							750,000 units	750,000	946,969	0.58	%
	Total										11,744,047	11,683,661	7.10	%
360 Holdings III Corp									Irvine, CA
	Term Loan	(13)	First Lien	P+8.00%	2.00%	11.50%		10/1/2021	Consumer goods: non-durable	$3,990,000	3,830,000	3,830,000	2.33	%
T2 Systems, Inc.									Indianapolis, IN
	Term Loan	(3)(8)	First Lien	L+9.50%	1.00%	10.50%		1/31/2019	Transportation & Logistics	$4,808,514	4,739,046	4,715,703	2.86	%
T2 Systems Canada, Inc.									Burnaby, British Columbia
	Term Loan	(3)(5)(8)	First Lien	L+9.50%	1.00%	10.50%		1/31/2019	Transportation & Logistics	$2,691,486	2,664,358	2,639,536	1.60	%
Telecommunications Management, LLC									Sikeston, MO
	Term Loan	(3)	Second Lien	L+8.00%	1.00%	9.00%		10/30/2020	Media: Broadcasting & Subscription	$5,000,000	4,964,227	4,376,218	2.66	%
U.S. Auto Sales, Inc. et al									Lawrenceville, GA
	Term Loan	(3)(5)	Second Lien	L+10.50%	1.00%	11.50%		6/8/2020	Finance	$4,500,000	4,458,997	4,375,121	2.66	%
	USASF Blocker II, LLC Common Units	(4)(5)	Equity							441 units	441,000	464,075	0.28	%
	USASF Blocker LLC Common Units	(4)(5)	Equity							9,000 units	9,000	9,471	0.01	%
	Total										4,908,997	4,848,667	2.95	%
Vandelay Industries Finance, LLC, et al									La Vergne, TN
	Term Loan	(6)	Second Lien	11.75%		10.75%	1.00%	11/12/2019	Construction & Building	$2,500,000	2,481,388	2,455,931	1.49	%
Zemax, LLC									Redmond, WA
	Term Loan (SBIC)	(2)(3)	Second Lien	L+10.00%	1.00%	11.00%		4/23/2020	Software	$3,962,500	3,896,167	3,821,362	2.32	%
	Zemax Software Holdings, LLC Preferred Units (SBIC)	(2)(4)	Equity							24,500 units	245,000	257,352	0.16	%
	Zemax Software Holdings, LLC Common Units (SBIC)	(2)(4)	Equity							5,000 shares	5,000	5,252	0.00	%
	Total										4,146,167	4,083,966	2.48	%
Total Non-controlled, non-affiliated investments											$364,212,459	$349,017,697	212.00	%
Net Investments											$364,212,459	$349,017,697	185.52	%
LIABILITIES IN EXCESS OF OTHER ASSETS												$(184,366,593)	(85.52)	%
NET ASSETS												$164,651,104	100.00	%

 14

Stellus Capital Investment Corporation
 
Consolidated Schedule of Investments
December 31, 2015

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

(2) The Company’s obligations to the lenders of the Credit Facility are secured by a first priority security interest in all non-controlled nonaffiliated investments and cash, but exclude $3,012,259 of cash and $95,531,697 of investments (at par) that are held by Stellus Capital SBIC LP. See Note 1 of the Notes to the Consolidated Financial Statements for discussion.

(3) These loans have LIBOR Floors which are higher than the current applicable LIBOR rates; therefore, the floors are in effect.

(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 83% of the Company’s total assets.

(6) Represents a payment-in-kind security. At the option of the issuer, interest can be paid in cash or cash and PIK. The percentage of PIK shown is the maximum PIK that can be elected by the issuer.

(7) Investment has been on non-accrual status since January 1, 2014. The coupon rate on this investment includes 2% default interest.

(8) Digital Payment Technologies Corp. amended its name to T2 Systems Canada, Inc. and is the Canadian co-borrower of the term loan of T2 Systems, Inc.

(9) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $1,250,000, with an interest rate of LIBOR plus 9.00% (0.50% LIBOR floor) and a maturity of October 22, 2019. This investment is accruing an unused commitment fee of 0.50% per annum.

(10) Excluded from the investment is an undrawn commitment in an amount not to exceed $1,600,000, with an interest rate of LIBOR plus 7.50% and a maturity of September 30, 2018. This investment is accruing an unused commitment fee of 0.50% per annum.

(11) Variable rate loans bear interest at a rate that may be determined by reference to either LIBOR (which can include one-, two-, three- or six month LIBOR) or an alternate base rate (which can include the Federal Funds Effective Rate or the Prime Rate), at the borrower’s option, which rates reset periodically based on the terms of the loan agreement.

(12) Excluded from the investment is an undrawn commitment in an amount not to exceed $407,405, an interest rate of LIBOR Plus 8.00% and a maturity of May 22, 2020.

(13) This loan has a Prime floor of 2.00% which is lower than the current applicable Prime rate.

(14) These loans have LIBOR floors which are lower than the applicable LIBOR rates; therefore, the floors are not in effect.

(15) The coupon rate on this investment includes 2% default interest.

(16) These loans are last-out term loans with contractual base rates higher than the applicable LIBOR rates; therefore, the floors are not in effect.

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

 15

STELLUS CAPITAL INVESTMENT CORPORATION
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(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”).

On November 7, 2012, the Company priced its initial public offering (the “Offering”), at a price of $15.00 per share. In connection with the Offering, the Company sold 9,200,000 shares (including 1,200,000 shares pursuant to the underwriters’ exercise of the overallotment option) for gross proceeds of $138,000,000. Since Inception, the Company has raised $151,250,000 including (i) $500,010 of seed capital contributed by Stellus Capital, (ii) $12,749,990 in a private placement to certain purchasers, including persons and entities associated with Stellus Capital, and (iii) $138,000,000 in the Offering. In addition, in connection with the acquisition of the Company’s initial portfolio, the Company issued $29,159,145 in shares of the Company’s common stock. The Company’s shares are currently listed on the New York Stock Exchange under the symbol “SCM”.

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

On June 14, 2013, we formed Stellus Capital SBIC, LP (the “SBIC subsidiary”), a Delaware limited partnership, and its general partner, Stellus Capital SBIC GP, LLC, a Delaware limited liability company, as wholly owned subsidiaries of the Company. 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. 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.

The SBIC license allows the SBIC subsidiary to obtain leverage by issuing SBA-guaranteed debentures (“SBA Debentures”), subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA Debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA Debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA 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’s assets over the Company’s stockholders in the event the Company liquidates the SBIC subsidiary or the SBA exercises its remedies under the SBA Debentures issued by the SBIC subsidiary upon an event of default. See footnote (2) of the Consolidated Schedule of Investments. SBA regulations currently limit the amount that an SBIC may borrow to a maximum of $150 million when it has at least $75 million 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. As of June 30, 2016 and December 31, 2015, the SBIC subsidiary had $32.5 million of regulatory capital, as such term is defined by the SBA, and has received commitments from the SBA of $65.0 million. As of both June 30, 2016 and December 31, 2015, the SBIC subsidiary had $65.0 million of SBA Debentures outstanding.

 16

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

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 $5.0 million to $50.0 million of EBITDA (earnings before interest, taxes, depreciation and amortization)) through first lien, second lien, unitranche and mezzanine debt financing, with 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, 2016 and June 30, 2015 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, 2015. Certain reclassifications have been made to certain prior period balances to conform with current presentation. In accordance with Regulation S-X under the Securities Act of 1933, as amended, and the Exchange Act, the Company does not consolidate portfolio company investments. The accounting records of the Company are maintained in U.S. dollars.

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 or Affiliate Investments.

Cash and Cash Equivalents

At June 30, 2016, cash balances totaling $10,834,194 exceeded FDIC insurance protection levels of $250,000 by $10,584,194, subjecting the Company to risk related to the uninsured balance. 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. At the end of each fiscal quarter, we may take proactive steps to ensure we are in compliance with the RIC diversification requirements under Subchapter M of the Code, which are dependent upon the composition of our total assets at quarter end. We may accomplish this in several ways, including purchasing U.S. Treasury Bills and closing out positions after quarter-end or temporarily drawing down on the Credit Facility (see Note 7). On June 30, 2016 and December 31, 2015, we held no U.S. Treasury Bills.

 17

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

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, Prepaid Loan Fees on SBA Debentures and Prepaid Loan Structure Fees

Deferred financing costs, prepaid loan fees on SBA Debentures and prepaid loan structure fees consist of fees and expenses paid in connection with the closing of our Credit Facility, the Notes (See Note 8) and SBA Debentures and are capitalized at the time of payment. These are costs are presented as a direct deduction to the carrying amount of the respective liability and amortized using the straight line method over the term of the respective instrument.

Deferred Offering Costs

Deferred offering costs consist of fees and expenses incurred in connection with the offer and sale of the Company’s common stock and bonds, 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 becomes effective. During the quarter ended June 30, 2016, the Company determined that it was no longer likely to issue shares under its current shelf registration statement. As a result, as of June 30, 2016, the Company has expensed $261,761 of previously capitalized deferred offering costs.

Investments

As a BDC, the Company will generally invest in illiquid loans and securities including debt and equity securities of middle-market companies. Under procedures established by our board of directors, the Company intends to value investments for which market quotations are readily available at such market quotations. The Company will value these investments based on 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 of directors. Such determination of fair values may involve subjective judgments and estimates. The Company also engages independent third-party 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 90 days of the valuation date will be valued at cost plus accreted discount, or minus amortized premium, which approximates fair value. With respect to unquoted securities, our board of directors, will value each investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies that are public and other factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the board of directors will use the pricing indicated by the external event to corroborate and/or assist us in our valuation. Because the Company expects that there will not be a readily available market for many of the investments in its portfolio, the Company expects to value most of its portfolio investments at fair value as determined in good faith by the board of directors using a documented valuation policy and a consistently applied valuation process. 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;

 18

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

• 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

We record interest income on an accrual basis to the extent such interest is deemed collectible. We will not accrue interest on loans and debt securities if we have 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 ex-dividend date.

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

We measure realized gains or losses by the difference between the net proceeds from the repayment or sale 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.

Payment-in-Kind Interest

We have investments in our portfolio that contain a payment-in-kind (“PIK”) interest provision. Any PIK interest is added to the principal balance of such investments and is recorded as income, if the portfolio company valuation indicates that such PIK interest is collectible. In order to maintain our status as a RIC, substantially all of this income must be paid out to stockholders in the form of dividends, even if we have not collected any cash.

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.

U.S. Federal Income Taxes

The Company has elected to be treated as a RIC under Subchapter M of the Code, and to operate in a manner so as to continue to qualify for the tax treatment applicable to RICs. In order to qualify 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 stockholders and will not be reflected in the consolidated financial statements of the Company.

 19

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

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 October 31 of that calendar year (iii) any income recognized, but not distributed, in preceding years and on which the Company paid no federal income tax. 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. The Company incurred no excise tax expense for the three and six months ended June 30, 2016 and 2015.

The Company evaluates tax positions taken or expected to be taken in the course of preparing its tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the applicable period. Although the Company files U.S. federal and state tax returns, its major tax jurisdiction is U.S. federal. The 2012, 2013 and 2014 federal tax years for the Company remain subject to examination by the Internal Revenue Service.

As of June 30, 2016 and December 31, 2015, 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. There were no such expenses for the three and six months ended June 30, 2016 and 2015, respectively.

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, which are “pass through” entities for 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 the Company for 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.

For the three and six months ended June 30, 2016, the Company recorded deferred income tax benefit of $154,812 and $322,151, respectively, related to the Taxable Subsidiaries. For the three and six months ended June 30, 2015, the Company recorded deferred income tax provision of ($47,980) and ($114,258), respectively, related to the Taxable Subsidiaries. In addition, as of June 30, 2016 and December 31, 2015, the Company had a deferred tax liability of $59,572 and $381,723, 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. The individual quarters may not add to the cumulative year to date amount due to rounding.

 20

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

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.

Recently Issued Accounting Standards

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standards setting bodies that are adopted by the Company as of the specified effective date.

In June 2016, the FASB issued ASU 2016-13 - Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The update is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. The Company is currently assessing the impact of this guidance on its consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17 - Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU 2015-17 requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. It simplifies the current guidance, which requires entities to separately present deferred tax assets and liabilities as current or noncurrent in a classified balance sheet. The update is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, and early adoption is permitted. Entities are permitted to apply the amendments either prospectively or retrospectively. The Company believes that this guidance will not have an impact on its consolidated financial statements.

ASU No. 2015-03 - Simplifying the Presentation of Debt Issuance Costs was effective for the quarter ended March 31, 2016. The new guidance requires that debt issuance costs related to a recognized debt liability be presented as a deduction from the debt liability rather than as an asset. Accordingly, the Company has adopted the guidance as of January 1, 2016. Certain reclassifications have been made to prior period line items on the Company’s Consolidated Statement of Assets and Liabilities as the new guidance requires retrospective application. Therefore, the December 31, 2015 Consolidated Statement of Assets and Liabilities including the reclassifications must be presented as unaudited in this filing.

In August 2014, the FASB issued ASU No. 2014-15 - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. In connection with the preparation of interim and annual reports, the Company’s management will evaluate whether conditions or events exist that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date the financial statements are available to be issued, when applicable), and, if so, disclose that fact. Additionally, the Company’s management must evaluate and disclose whether its plans will alleviate that doubt. The guidance was effective for the Company beginning January 1, 2016. The Company has adopted the guidance as of January 1, 2016 and there is no impact on its consolidated financial statement.

NOTE 2 — RELATED PARTY ARRANGEMENTS

Investment Advisory Agreement

The Company has entered into an investment advisory agreement with Stellus Capital under which they serve as our investment advisor. 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 annual incentive fee.

For the three and six months ended June 30, 2016, the Company recorded an expense for base management fees of $1,550,841 and $3,099,214, respectively. For the three and six months ended June 30, 2015, the Company recorded an expense for base management fees of $1,446,330 and $2,860,464, respectively. As of June 30, 2016 and December 31, 2015, $1,550,841 and $1,518,779, respectively, were payable to Stellus Capital.

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

 21

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

Investment Income Incentive Fee

The investment income component (“Investment Income Incentive Fee”) is calculated, and payable, quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter, subject to a cumulative total return requirement and to deferral of non-cash amounts. The pre-incentive fee net investment income, which is expressed as a rate of return on the value of the Company’s net assets attributable to the Company’s common stock, for the immediately preceding calendar quarter, will have a 2.0% (which is 8.0% annualized) hurdle rate (also referred to as the “Hurdle”). Pre-incentive fee net investment income means interest income, dividend income and any other income accrued during the calendar quarter, minus the Company’s operating expenses for the quarter excluding the incentive fee. 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 incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre-incentive fee net investment income is payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding quarters. In other words, any 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 incentive fee that is attributable to deferred interest until the Company actually receives such interest in cash.

For the three and six months ended June 30, 2016, the Company incurred $986,276 and $2,011,098, respectively, of Investment Income Incentive Fees. For the three and six months ended June 30, 2015, the Company incurred $998,871 and $1,959,725, respectively, of Investment Income Incentive Fees. As of June 30, 2016 and December 31, 2015, $1,319,029 and $607,956, respectively, of such Investment Income Incentive Fees were payable to the Advisor, of which $1,095,660 and $401,573, respectively, were currently payable (as explained below). As of June 30, 2016 and December 31, 2015, $223,369 and $206,383, respectively, of Investment Income Incentive Fees incurred but not paid by the Company were generated from deferred interest (i.e. PIK, certain discount accretion and deferred interest) and are not payable until such deferred amounts are received in cash. As of June 30, 2016, $103,365 of the currently payable Investment Income Incentive Fee of $1,095,660 is further deferred due to the current and 11 preceding calendar quarter return requirement noted above. As of December 31, 2015, none of the currently payable fee of $401,573 was deferred due to the current and 11 preceding calendar quarter return requirement.

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 Gains Incentive Fees is subtracted from such Capital Gains Incentive Fee calculated.

 22

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

U.S. GAAP requires that the 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 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, would 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, 2016 and 2015, the Company incurred no Capital Gains Incentive Fee. As of June 30, 2016 and December 31, 2015, no Capital Gains Incentive Fees were payable to the Advisor, subject to the limitations set forth below.

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
Investment Income Incentive Fees Incurred	$	986,276	$	998,871	$	2,011,098	$	1,959,725
Capital Gains Incentive Fee Incurred		—		—		—		—
Incentive Fee Expense	$	986,276	$	998,871	$	2,011,098	$	1,959,725

	June 30,		December 31,
	2016		2015
Investment Income Incentive Fee Currently Payable(a)	$	1,095,660	$	401,573
Investment Income Incentive Fee Deferred		223,369		206,383
Incentive Fee Payable	$	1,319,029	$	607,956

(a) Included in the Investment Income Incentive Fee Currently Payable at June 30, 2016 and December 31, 2015 is $103,365 and $0, respectively, that is not owed currently due to the current and 11 preceding calendar quarter return requirements.

Director Fees

For the three and six months ended June 30, 2016, the Company recorded an expense relating to director fees of $86,000 and $178,000, respectively. For the three and six months ended June 30, 2015, the Company recorded an expense relating to director fees of $95,000 and $184,000, respectively. As of June 30, 2016 and December 31, 2015, $86,000 and $0 fees were payable relating to director fees. 

Co-Investments

We received exemptive relief from the SEC to co-invest with investment funds managed by Stellus Capital where doing so is consistent with our investment strategy as well as applicable law (including the terms and conditions of the exemptive order issued by the SEC). Under the terms of the relief permitting us to co-invest with other funds managed by Stellus Capital, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our 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 us and our stockholders and do not involve overreaching of us or our stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objectives and strategies. We intend to co-invest, subject to the conditions included in the exemptive order we received from the SEC, with private credit funds managed by Stellus Capital that has an investment strategy that is identical to our investment strategy. We believe that such co-investments may afford us additional investment opportunities and an ability to achieve greater diversification.

 23

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

License Agreement

We have entered into a license agreement with Stellus Capital under which Stellus Capital has agreed to grant us a non-exclusive, royalty-free license to use the name “Stellus Capital.” Under this agreement, we have a right to use the “Stellus Capital” name for so long as Stellus Capital or one of its affiliates remains our investment advisor. Other than with respect to this limited license, we have 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

We have entered into an administration agreement with Stellus Capital pursuant to which Stellus Capital will furnish us with office facilities and equipment and will provide us 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, our required administrative services, which includes, among other things, being responsible for the financial records which we are required to maintain and preparing reports to our stockholders and reports filed with the SEC.

For the three and six months ended June 30, 2016, the Company recorded expenses of $221,755 and $475,908, respectively, relating to the administration agreement, which are included in administrative services expenses on the consolidated statement of operations. For the three and six months ended June 30, 2015, the Company recorded expenses of $187,125 and $357,884, respectively, relating to the administration agreement. As of June 30, 2015 and December 31, 2015, $221,755 and $195,221, 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.

 24

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

NOTE 3 — DISTRIBUTIONS

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

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

Date Declared	Record Date	Payment Date	Per Share
January 22, 2015	February 02, 2015	February 13, 2015	$	0.1133
January 22, 2015	February 27, 2015	March 13, 2015	$	0.1133
January 22, 2015	March 31, 2015	April 15, 2015	$	0.1133
April 15, 2015	April 30, 2015	May 15, 2015	$	0.1133
April 15, 2015	May 29, 2015	June 15, 2015	$	0.1133
April 15, 2015	June 30, 2015	July 15, 2015	$	0.1133
July 08, 2015	July 31, 2015	August 14, 2015	$	0.1133
July 08, 2015	August 31, 2015	September 15, 2015	$	0.1133
July 08, 2015	September 30, 2015	October 15, 2015	$	0.1133
October 14, 2015	October 30, 2015	November 13, 2015	$	0.1133
October 14, 2015	November 30, 2015	December 15, 2015	$	0.1133
October 14, 2015	December 31, 2015	January 15, 2016	$	0.1133
January 13, 2016	January 29, 2016	February 12, 2015	$	0.1133
January 13, 2016	February 29, 2016	March 15, 2016	$	0.1133
January 13, 2016	March 31, 2016	April 15, 2016	$	0.1133
April 15, 2016	April 29, 2016	May 13, 2016	$	0.1133
April 15, 2016	May 31, 2016	June 15, 2016	$	0.1133
April 15, 2016	June 30, 2016	July 15, 2016	$	0.1133

Unless the stockholder elects to receive its distributions in cash, the Company intends to make such distributions in additional shares of the Company’s common stock under the Company’s dividend reinvestment plan. 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 dividend reinvestment plan 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 dividend reinvestment plan will increase the Company’s gross assets on which the base management fee and the incentive fee are determined and paid to Stellus Capital. No new shares were issued in connection with the distributions made during the three and six months ended June 30, 2016 and 2015.

NOTE 4 — 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;

 25

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(Unaudited) 

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.

At June 30, 2016, the Company had investments in 42 portfolio companies. The composition of our investments as of June 30, 2016 is as follows:

	Cost		Fair Value
Senior Secured – First Lien	$	128,127,098	$	126,745,063
Senior Secured – Second Lien		142,743,757		139,760,279
Unsecured Debt		83,038,853		70,088,105
Equity		12,909,825		14,216,170
Total Investments	$	366,819,533	$	350,809,617

At December 31, 2015, the Company had investments in 39 portfolio companies. The composition of our investments as of December 31, 2015 was as follows:

	Cost		Fair Value
Senior Secured – First Lien	$	133,344,891	$	131,908,961
Senior Secured – Second Lien		136,853,644		131,972,581
Unsecured Debt		81,492,139		72,212,282
Equity		12,521,785		12,923,873
Total Investments	$	364,212,459	$	349,017,697

 26

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

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, 2016 and December 31, 2015, the Company had two and three such investments with aggregate unfunded commitments of $2,850,000 and $3,257,405, respectively. The Company maintains sufficient liquidity to fund such unfunded loan commitments should the need arise.

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, 2016 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	$	—	$	—	$	126,745,063	$	126,745,063
Senior Secured – Second Lien		—		7,664,153		132,096,126		139,760,279
Unsecured Debt		—		—		70,088,105		70,088,105
Equity		—		—		14,216,170		14,216,170
Total Investments	$	—	$	7,664,153	$	343,145,464	$	350,809,617

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, 2015 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	$	—	$	—	$	131,908,961	$	131,908,961
Senior Secured – Second Lien		—		—		131,972,581		131,972,581
Unsecured Debt		—		—		72,212,282		72,212,282
Equity		—		—		12,923,873		12,923,873
Total Investments	$	—	$	—	$	349,017,697	$	349,017,697

 27

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

The aggregate values of Level 3 portfolio investments changed during the three and six months ended June 30, 2016 are as follows:

	Senior Secured			Senior Secured			Unsecured
	Loans-First Lien			Loans-Second Lien			Debt			Equity			Total
Fair value at beginning of period	$	131,908,963		$	131,972,581		$	72,212,282		$	12,923,871		$	349,017,697
Purchases of investments		10,437,000			5,701,383			1,354,073			407,412			17,899,868
Payment-in-kind interest		56,187			—			53,432			—			109,619
Sales and Redemptions		(15,943,258	)		—			—			(19,375	)		(15,962,633	)
Realized Gains		2,380			—			—			—			2,380
Change in unrealized depreciation included in earnings		53,891			1,007,208			(3,670,891	)		904,262			(1,705,530	)
Amortization of  premium and accretion of discount, net		229,900			184,853			139,209			—			553,962
Transfer to Level 2		—			(6,769,899	)		—			—			(6,769,899	)
Fair value at end of period	$	126,745,063		$	132,096,126		$	70,088,105		$	14,216,170		$	343,145,464
Change in unrealized depreciation on Level 3 investments still held as of June 30, 2016	$	(79,785	)	$	1,007,208		$	(3,670,891	)	$	904,261		$	(1,839,207	)

The aggregate values of Level 3 portfolio investments changed during the year ended December 31, 2015 are as follows:

Senior Secured	Senior Secured		Unsecured
Loans-First Lien	Loans-Second Lien	&nbs