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 March 31, 2017
	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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of May 2, 2017 was 15,642,457.

STELLUS CAPITAL INVESTMENT CORPORATION

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Consolidated Statements of Assets and Liabilities as of March 31, 2017 (unaudited) and December 31, 2016	2
	Consolidated Statements of Operations for the three-month periods ended March 31, 2017 and 2016 (unaudited)	3
	Consolidated Statements of Changes in Net Assets for the three-month periods ended March 31, 2017 and 2016 (unaudited)	4
	Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2017 and 2016 (unaudited)	5
	Consolidated Schedules of Investments as of March 31, 2017 (unaudited) and December 31 2016	6
	Notes to Unaudited Financial Statements	22
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	50
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65
Item 4.	Controls and Procedures	65
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	66
Item 1A.	Risk Factors	66
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 3.	Defaults Upon Senior Securities	66
Item 4.	Mine Safety Disclosures	66
Item 5.	Other Information	66

 i

PART I — FINANCIAL INFORMATION

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

	March 31,
	2017 (unaudited)			December 31, 2016
ASSETS
Non-controlled, affiliated investments, at fair value  (amortized cost of $1,010,518 and $0, respectively)	$	1,010,518		$	—
Non-controlled, non-affiliated investments, at fair value  (amortized cost of $344,717,004 and $362,217,251, respectively)		350,710,227			365,625,891
Cash and cash equivalents		11,488,905			9,194,129
Interest receivable		4,271,767			4,601,742
Deferred offering costs		81,813			—
Accounts receivable		8,042			748
Prepaid expenses		456,281			456,219
Total Assets	$	368,027,553		$	379,878,729
LIABILITIES
Notes Payable, net of deferred financing costs	$	24,612,560		$	24,565,891
Credit facility payable, net of prepaid loan structure fees		101,794,115			115,171,208
SBA Debentures, net of prepaid loan fees		63,422,247			63,342,036
Dividends payable		1,413,982			1,413,982
Base management fees payable		1,564,528			1,608,295
Incentive fees payable		1,223,621			1,353,271
Interest payable		423,474			973,812
Unearned revenue		18,169			19,955
Administrative services payable		303,869			272,511
Deferred Tax Liability		—			8,593
Other accrued expenses and liabilities		586,354			267,390
Total Liabilities	$	195,362,919		$	208,996,944
Net Assets	$	172,664,634		$	170,881,785
NET ASSETS
Common Stock, par value $0.001 per share (100,000,000 shares authorized, 12,479,957 and 12,479,959 shares issued and outstanding, respectively)	$	12,480		$	12,480
Paid-in capital		180,994,723			180,994,723
Accumulated Net Realized Loss		(13,801,722	)		(13,089,671	)
Distributions in excess of net investment income		(534,070	)		(435,794	)
Net unrealized appreciation on investments and cash  equivalents, net of provision for taxes of $0 and $8,593, respectively		5,993,223			3,400,047
Net Assets	$	172,664,634		$	170,881,785
Total Liabilities and Net Assets	$	368,027,553		$	379,878,729
Net Asset Value Per Share	$	13.84		$	13.69

2

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

	For the			For the
	three months			three months
	ended			ended
	March 31,			March 31,
	2017			2016
INVESTMENT INCOME
Interest income	$	9,476,252		$	9,374,737
Other income		387,728			93,096
Total Investment Income	$	9,863,980		$	9,467,833
OPERATING EXPENSES
Management fees	$	1,564,528		$	1,548,373
Valuation fees		166,089			132,466
Administrative services expenses		309,098			287,300
Incentive fees		1,021,227			1,024,822
Professional fees		227,677			192,111
Directors’ fees		92,000			92,000
Insurance expense		109,252			118,026
Interest expense and other fees		2,068,630			1,879,843
Other general and administrative expenses		161,852			93,602
Total Operating Expenses	$	5,720,353		$	5,368,543
Net Investment Income	$	4,143,627		$	4,099,290
Net Realized Gain (Loss) on Investments and Cash
Equivalents		(712,051	)		894
Net Change in Unrealized Appreciation (Depreciation) on  Investments and Cash Equivalents		2,584,583			(1,743,674	)
Benefit for taxes on net realized loss or net unrealized gain on investments at Taxable Subsidiaries		8,593			167,339
Net Increase in Net Assets Resulting from Operations	$	6,024,752		$	2,523,849
Net Investment Income Per Share	$	0.33		$	0.33
Net Increase in Net Assets Resulting from Operations  Per Share	$	0.48		$	0.20
Weighted Average Shares of Common Stock  Outstanding		12,479,957			12,479,960
Distributions Per Share	$	0.34		$	0.34

3

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (unaudited)

	For the			For the
	three months			three months
	ended			ended
	March 31,			March 31,
	2017			2016
Increase in Net Assets Resulting from Operations
Net investment income	$	4,143,627		$	4,099,290
Net realized gain (loss) on investments and cash equivalents		(712,051	)		894
Net change in unrealized appreciation (depreciation) on investments and cash equivalents		2,584,583			(1,743,674	)
Benefit for taxes on net realized loss or net unrealized gain on investments at Taxable Subsidiaries		8,593			167,339
Net Increase in Net Assets Resulting from Operations	$	6,024,752		$	2,523,849
Stockholder distributions from:
Net investment income		(4,241,903	)		(4,242,443	)
Total Distributions	$	(4,241,903	)	$	(4,242,443	)
Total increase (decrease) in net assets	$	1,782,849		$	(1,718,594	)
Net assets at beginning of period	$	170,881,785		$	164,651,104
Net assets at end of period (includes $534,070 and $922,796 of distributions in excess of net investment income, respectively)	$	172,664,634		$	162,932,510

4

STELLUS CAPITAL INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	For the			For the
	three months			three months
	ended			ended
	March 31, 2017			March 31, 2016
Cash flows from operating activities
Net increase in net assets resulting from operations	$	6,024,752		$	2,523,849
Adjustments to reconcile net increase in net assets resulting  from operations to net cash provided by (used in) operating activities:
Purchases of investments		(23,151,902	)		(5,367,633	)
Proceeds from sales and repayments of investments		39,279,309			513,365
Net change in unrealized depreciation (appreciation) on investments		(2,584,583	)		1,743,674
Deferred tax (benefit)		(8,593	)		(167,339	)
Increase in investments due to PIK		(82,119	)		(54,729	)
Amortization of premium and accretion of discount, net		(267,611	)		(289,807	)
Amortization of loan structure fees		122,908			130,423
Amortization of deferred financing costs		46,669			81,101
Amortization of loan fees on SBIC debentures		80,211			47,184
Net realized (gain) loss on investments		712,051			(894	)
Changes in other assets and liabilities
Decrease in interest receivable		329,975			108,022
Increase in accounts receivable		(7,294	)		7,684
Increase in prepaid expenses and fees		(62	)		12,586
Increase (decrease) in management fees payable		(43,767	)		29,594
Increase (decrease) in incentive fees payable		(129,650	)		623,279
Increase in administrative services payable		31,358			71,425
Decrease in interest payable		(550,338	)		(199,796	)
Decrease in unearned revenue		(1,786	)		(3,618	)
Increase in other accrued expenses and liabilities		318,964			82,341
Net cash provided by (used in) operating activities	$	20,118,492		$	(109,289	)
Cash flows from financing activities
Offering costs paid for common stock issued		(81,813	)		—
Stockholder distributions paid		(4,241,903	)		(4,242,443	)
Borrowings under credit facility		9,000,000			—
Repayments of credit facility		(22,500,000	)		—
Net cash used in financing activities	$	(17,823,716	)	$	(4,242,443	)
Net increase (decrease) in cash and cash equivalents		2,294,776			(4,351,732	)
Cash and cash equivalents balance at beginning of period		9,194,129			10,875,790
Cash and cash equivalents balance at end of period	$	11,488,905		$	6,524,058
Supplemental and non-cash financing activities
Interest expense paid	$	2,369,181		$	1,820,930
Excise tax paid	$	37,648		$	—
Conversion from debt to equity	$	864,101		$	—

5

Stellus Capital Investment Corporation

Consolidated Schedule of Investments – (unaudited)

March 31, 2017

Investments	Footnotes	Lien	Coupon	LIBOR floor	Cash	PIK	Maturity	Headquarters/ Industry	Principal Amount/ Shares	Amortized Cost	Fair Value (1)	% of Net Assets
Non-controlled, affiliated investments
Glori Energy Production Inc.								Houston, TX
Glori Energy Production, LLC Class A Common Units	(4)(7)	Equity						Energy: Oil & Gas	1,000 shares	$1,010,518	$1,010,518	0.59	%
Subtotal Affiliate Investments										$1,010,518	$1,010,518	0.59	%
Non-controlled, non-affiliated investments	(2)
Abrasive Products & Equipment, LLC, et al								Deer Park, TX
Term Loan (SBIC)	(2)(12)	Second Lien	L+10.50%	1.00%	11.65%		3/5/2020	Chemicals, Plastics, & Rubber	$5,325,237	$5,257,197	$5,264,907	3.05	%
APE Holdings, LLC Class A Units	(4)	Equity							375,000 units	375,000	338,302	0.20	%
Total										5,632,197	5,603,209	3.25	%
Apex Environmental Resources Holdings, LLC								Amsterdam, OH
Common Units	(4)	Equity						Environmental Industries	614 shares	614	890	0.00	%
Preferred Units	(4)	Equity							614 shares	614,427	890,144	0.52	%
Total										615,041	891,034	0.52	%
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	7,935,547	8,000,000	4.63	%
Beneplace, LLC								Austin TX
Term Loan (SBIC)	(2)(12)	Second Lien	L+10.00%	1.00%	11.16%		9/27/2022	FIRE: Insurance	$5,000,000	4,900,000	4,900,000	2.84	%
Beneplace Holdings, LLC Preferred Units	(4)	Equity							500,000 units	500,000	500,000	0.29	%
Total										5,400,000	5,400,000	3.13	%
Binder & Binder National Social Security Disability Advocates, LLC	(8)							Hauppauge, NY
Residual claim from Term Loan	(4)	Unsecured						Services: Consumer	$850,000	850,000	733,578	0.42	%
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	7,429,990	7,485,691	4.34	%
Managed Mobility Holdings, LLC Partnership Units	(4)	Equity							8,932 units	525,000	177,136	0.10	%
Total										7,954,990	7,662,827	4.44	%
C.A.R.S. Protection Plus, Inc.								Murrysville, PA
Term Loan	(12)	First Lien	L+8.50%	0.50%	9.28%		12/31/2020	Automotive	$101,911	100,295	101,911	0.06	%
Term Loan (SBIC)	(2)(12)	First Lien	L+8.50%	0.50%	9.28%		12/31/2020		$7,949,027	7,788,618	7,949,027	4.60	%

6

Stellus Capital Investment Corporation

Consolidated Schedule of Investments – (unaudited)

March 31, 2017

CPP Holdings LLC Class A Common Units	(4)	Equity							149,828 shares	149,828	257,012	0.15	%
Total										8,038,741	8,307,950	4.81	%
Catapult Learning, LLC et al								Camden, NJ
Term Loan	(13)	First Lien	L+6.50%	1.00%	9.00%		7/16/2020	Education	$12,500,000	12,410,390	12,500,000	7.24	%
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	12,417,639	12,498,930	7.24	%
Delay Draw Term Loan #2	(5)	Unsecured	12.00%		12.00%		5/31/2018		$2,000,000	1,983,413	1,999,829	1.16	%
Delay Draw Term Loan #4	(5)	Unsecured	12.00%		12.00%		5/31/2018		$5,000,000	4,966,674	4,999,572	2.90	%
Colford Capital Holdings, LLC Preferred Units	(4)(5)	Equity							38,893 units	557,143	600,059	0.35	%
Total										19,924,869	20,098,390	11.65	%
Doskocil Manufacturing Company, Inc.								Arlington, TX
Term Loan (SBIC)	(2)(13)	First Lien	L+6.00%	1.00%	9.50%		11/10/2020	Consumer goods: non-durable	$8,750,000	8,632,867	8,750,000	5.07	%
Douglas Products & Packaging Company, LLC								Liberty, MO
Term Loan (SBIC)	(2)(12)	Second Lien	L+10.50%	0.50%	11.65%		12/31/2020	Chemicals, Plastics, & Rubber	$9,000,000	8,882,400	9,000,000	5.21	%
Fumigation Holdings, Inc. Class A Common Stock	(4)	Equity							250 shares	250,000	528,156	0.31	%
Total										9,132,400	9,528,156	5.52	%
Eating Recovery Center, LLC								Denver, CO
Term Loan	(6)	Unsecured	13.00%		12.00%	1.00%	6/28/2018	Healthcare & Pharmaceuticals	$18,400,000	18,291,079	18,360,065	10.63	%
ERC Group Holdings LLC Class A Units	(4)	Equity							17,820 units	1,655,274	3,033,552	1.76	%
Total										19,946,353	21,393,617	12.39	%
Empirix Inc.								Billerica, MA
Term Loan	(3)	Second Lien	L+9.50%	1.00%	10.50%		5/1/2020	Software	$11,657,850	11,526,777	11,657,850	6.75	%
Term Loan (SBIC)	(2)(3)	Second Lien	L+9.50%	1.00%	10.50%		5/1/2020		$9,750,000	9,639,129	9,750,000	5.65	%
Empirix Holdings I, Inc. Common Shares, Class A	(4)	Equity							1,304 shares	1,304,232	1,729,676	1.00	%

7

Stellus Capital Investment Corporation

Consolidated Schedule of Investments – (unaudited)

March 31, 2017

Empirix Holdings I, Inc. Common Shares, Class B	(4)	Equity							1,317,406 shares	13,174	17,471	0.01	%
Total										22,483,312	23,154,997	13.41	%
Energy Labs Inc.								Houston, TX
Term Loan (SBIC)	(2)(13)	First Lien	L+7.00%	0.50%	11.12%		9/29/2021	Energy: Oil & Gas	$5,300,000	5,201,967	5,300,000	3.07	%
Energy Labs Holding Corp. Common Stock	(4)	Equity							500 shares	500,000	453,606	0.26	%
Total										5,701,967	5,753,606	3.33	%
EOS Fitness OPCO Holdings, LLC								Phoenix, AZ
Term Loan (SBIC)	(2)(12)	First Lien	L+8.75%	0.75%	9.54%		12/30/2019	Hotel, Gaming, & Leisure	$3,309,309	3,268,980	3,309,309	1.92	%
EOS Fitness Holdings, LLC Class A Preferred Units	(4)	Equity							118 shares	117,670	153,503	0.09	%
EOS Fitness Holdings, LLC Class B Common Units	(4)	Equity							3,017 shares	3,017	3,936	0.00	%
Total										3,389,667	3,466,748	2.01
Furniture Factory Outlet, LLC								Fort Smith, AR
Term Loan	(12)	First Lien	L+9.00%	0.50%	10.15%		6/10/2021	Consumer Goods: Durable	$9,812,500	9,642,015	9,812,500	5.68	%
Furniture Factory Holdings, LLC Term Loan	(6)(14)	Unsecured	11.00%			11.00%	2/3/2021		$122,823	122,823	122,823	0.07	%
Sun Furniture Factory, LP Common Units	(4)	Equity							13,445 shares	94,569	104,026	0.06	%
Total										9,859,407	10,039,349	5.81	%
GK Holdings, Inc.								Cary, NC
Term Loan	(12)	Second Lien	L+10.25%	1.00%	11.40%		1/30/2022	Education	$5,000,000	4,923,297	5,000,000	2.90	%
Good Source Solutions, Inc.								Carlsbad, CA
Term Loan	(13)	First Lien	L+7.25%	0.50%	11.50%		7/15/2021	Beverage, Food, & Tobacco	$1,350,000	1,326,061	1,350,000	0.78	%
Term Loan (SBIC)	(2)(13)	First Lien	L+7.25%	0.50%	11.50%		7/15/2021		$1,200,000	1,178,721	1,200,000	0.69	%

8

Stellus Capital Investment Corporation

Consolidated Schedule of Investments – (unaudited)

March 31, 2017

Good Source Holdings, LLC Class A Preferred Units	(4)	Equity							159 shares	159,375	139,785	0.08	%
Good Source Holdings, LLC Class B Common Units	(4)	Equity							4,482 shares	0	0	0.00	%
Total										2,664,157	2,689,785	1.55	%
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	$4,800,000	4,780,871	4,681,273	2.71	%
Term Loan		Second Lien	13.75%		13.75%		7/31/2018		$4,000,000	3,935,464	3,535,591	2.05	%
Total										8,716,335	8,216,864	4.76	%
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	7,215,785	7,286,790	4.22	%
Dream II Holdings, LLC Class A Common Units	(4)	Equity							250,000 units	242,304	248,081	0.14	%
Total										7,458,089	7,534,871	4.36	%
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	6,665,740	5,760,168	3.34	%
HUF Worldwide, LLC								Los Angeles, CA
Revolver	(9)(12)	First Lien	L+9.00%	0.50%	10.00%		10/22/2019	Retail	$375,000	375,000	375,000	0.22	%
Term Loan	(12)	First Lien	L+9.00%	0.50%	10.00%		10/22/2019		$3,651,709	3,607,014	3,651,709	2.11	%
Term Loan (SBIC)	(2)(12)	First Lien	L+9.00%	0.50%	10.00%		10/22/2019		$6,138,648	6,069,652	6,138,648	3.56	%
HUF Holdings, LLC Common Class A Units	(4)	Equity							616,892 units	624,427	370,258	0.21	%
Total										10,676,093	10,535,615	6.10	%
Keais Records Service, LLC								Houston, TX
Term Loan	(12)	Second Lien	L+10.50%	0.50%	11.65%		6/30/2022	Services: Business	$7,750,000	7,624,251	7,673,015	4.44	%
Keais Holdings, LLC Class A Units	(4)	Equity							148,335 units	775,000	775,000	0.45	%
Total										8,399,251	8,448,015	4.89	%
KidKraft, Inc.								Dallas, TX
Term Loan	(6)	Second Lien	12.00%		11.00%	1.00%	3/30/2022	Consumer Goods: Durable	$9,245,867	9,073,643	9,008,595	5.22	%
Livingston International, Inc.								Toronto, Ontario
Term Loan	(3)(5)	Second Lien	L+8.25%	1.25%	9.50%		4/18/2020	Transportation: Cargo	$6,841,739	6,770,381	6,841,739	3.96	%

9

Stellus Capital Investment Corporation

Consolidated Schedule of Investments – (unaudited)

March 31, 2017

Madison Logic, Inc.								New York, NY
Term Loan (SBIC)	(2)(12)	First Lien	L+8.00%	0.50%	8.98%		11/30/2021	Media: Broadcasting & Subscription	$4,968,750	4,921,744	4,921,744	2.85	%
Madison Logic Holdings, Inc. Common Stock (SBIC)	(2)(4)	Equity							5,000 shares	50,000	58,412	0.03	%
Madison Logic Holdings, Inc. Series A Preferred Stock (SBIC)	(2)(4)	Equity							4,500 shares	450,000	525,704	0.30	%
Total										5,421,744	5,505,860	3.18	%
Mobileum, Inc.								Santa Clara, CA
Term Loan	(12)	Second Lien	L+10.25%	0.75%	11.40%		5/1/2022	Software	$9,000,000	8,830,045	8,830,045	5.11	%
Mobile Acquisition Holdings, LP Class A-2 Common Units	(4)	Equity							750 units	750,000	894,772	0.52	%
Total										9,580,045	9,724,817	5.63	%
MBS Holdings, Inc.								Birmingham, AL
Series E Preferred Stock	(4)	Equity						Media: Broadcasting & Subscription	2,774,695 shares	1,000,000	1,428,434	0.83	%
Series F Preferred Stock	(4)	Equity							399,308 shares	206,682	295,232	0.17	%
Total										1,206,682	1,723,666	1.00	%
MTC Parent, L.P.								Oak Brook, IL
Class A-2 Common Units	(4)	Equity						Finance	750,000 shares	28,842	1,127,410	0.65	%
National Trench Safety, LLC, et al								Houston, TX
Term Loan (SBIC)	(2)	Second Lien	11.50%		11.50%		3/31/2022	Construction & Building	$10,000,000	9,825,000	9,825,000	5.69	%
NTS Investors, LP Class A Common Units	(4)	Equity							2,335 units	500,000	500,000	0.29	%
Total										10,325,000	10,325,000	5.98	%
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	3,982,935	4,028,288	2.33	%
OGS Holdings, Inc. Series A Convertible Preferred Stock	(4)	Equity							11,521 shares	50,001	91,719	0.05	%
Total										4,032,936	4,120,007	2.38	%
Refac Optical Group, et al								Blackwood, NJ

10

Stellus Capital Investment Corporation

Consolidated Schedule of Investments – (unaudited)

March 31, 2017

Revolver	(10)(12)	First Lien	L+8.00%		8.98%		9/30/2018	Retail	$880,000	880,000	880,000	0.51	%
Term A Loan	(11)(12)	First Lien	L+8.00%		8.98%		9/30/2018		$1,372,427	1,372,427	1,372,427	0.79	%
Term B Loan	(6)(11)(12)	First Lien	L+10.75%		9.98%	1.75%	9/30/2018		$6,418,528	6,418,528	6,418,528	3.72	%
Total										8,670,955	8,670,955	5.02
Sitel Worldwide Corporation								Nashville, TN
Term Loan	(12)	Second Lien	L+9.50	1.00%	10.56%		9/18/2022	High Tech Industries	$10,000,000	9,831,073	9,633,300	5.58	%
Skopos Financial, LLC								Irving, TX
Term Loan	(5)	Unsecured	12.00%		12.00%		1/31/2019	Finance	$20,000,000	19,814,447	19,705,304	11.41	%
Skopos Financial Group, LLC Class A Units	(4)(5)	Equity							1,120,684 units	1,162,544	829,407	0.48	%
Total										20,976,991	20,534,711	11.89	%
SPM Capital, LLC								Bloomington, MN
Term Loan	(3)	First Lien	L+5.50	1.50%	7.00%		10/31/2017	Healthcare & Pharmaceuticals	$5,716,034	5,700,177	5,716,034	3.31	%
SQAD, LLC								Tarrytown, NY
Term Loan (SBIC)	(2)(6)	Unsecured	12.25%		11.00%	1.25%	4/30/2019	Media: Broadcasting & Subscription	$7,268,386	7,208,875	7,253,978	4.20	%
SQAD Holdco, Inc. Preferred Shares, Series A (SBIC)	(2)(4)	Equity							5,624 shares	562,368	818,006	0.47	%
SQAD Holdco, Inc. Common Shares (SBIC)	(2)(4)	Equity							5,800 shares	62,485	90,890	0.05	%
Total										7,833,728	8,162,874	4.72	%
Stratose Intermediate Holdings, II, LLC, et al								Atlanta, GA
Term Loan	(12)	Second Lien	L+9.50%	1.00%	10.65%		7/26/2022	Services: Business	$15,000,000	14,715,760	15,000,000	8.69	%
Atmosphere Aggregator Holdings II, LP Common Units	(4)	Equity							254,250 units	254,250	686,026	0.40	%
Atmosphere Aggregator Holdings, LP Common Units	(4)	Equity							750,000 units	750,000	2,023,676	1.17	%
Total										15,720,010	17,709,702	10.26	%
Telecommunications Management, LLC								Sikeston, MO

11

Stellus Capital Investment Corporation

Consolidated Schedule of Investments – (unaudited)

March 31, 2017

Term Loan	(12)	Second Lien	L+8.00%	1.00%	9.03%		10/30/2020	Media: Broadcasting & Subscription	$5,000,000	4,972,189	5,000,000	2.90	%
Time Manufacturing Acquistion, LLC								Waco, TX
Term Loan	(6)	Unsecured	11.50%		10.75%	0.75%	8/3/2023	Capital Equipment	$6,337,649	6,213,183	6,213,183	3.60	%
Time Manufacturing Investments, LLC Class A Common Units	(4)	Equity							5,000 units	500,000	500,000	0.29	%
Total										6,713,183	6,713,183	3.89	%
TFH Reliability, LLC								Houston, TX
Term Loan (SBIC)	(2)(12)	Second Lien	L+10.75%	0.50%	11.90%		4/21/2022	Chemicals, Plastics, & Rubber	$5,875,000	5,763,802	5,875,000	3.40	%
TFH Reliability Group, LLC Class A Common Units	(4)	Equity							250,000 shares	250,000	278,396	0.16	%
Total										6,013,802	6,153,396	3.56	%
U.S. Auto Sales, Inc. et al								Lawrenceville, GA
Term Loan	(3)(5)	Second Lien	L+11.75%	1.00%	12.75%		6/8/2020	Finance	$4,500,000	4,468,540	4,500,000	2.61	%
USASF Blocker II, LLC Common Units	(4)(5)	Equity							441 units	441,000	433,321	0.25	%
USASF Blocker LLC Common Units	(4)(5)	Equity							9,000 units	9,000	8,843	0.01	%
Total										4,918,540	4,942,164	2.87	%
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	2,486,413	2,500,000	1.45	%
Vision Media Management & Fulfillment, LLC								Valencia, CA
Term Loan (SBIC)	(2)(13)	First Lien	L+8.50%	1.00%	10.19%		1/27/2021	Media: Broadcasting & Subscription	$1,604,089	1,576,173	1,604,089	0.93	%
Wise Holding Corporation								Salt Lake City, UT
Term Loan	(12)	Unsecured	L+10.00%	1.00%	11.15%		12/31/2021	Beverage, Food, & Tobacco	$1,250,000	1,233,135	1,199,482	0.69	%
WCI Holdings LLC Class A Preferred Units	(4)	Equity							56 units	55,550	36,993	0.02	%
WCI Holdings LLC Class B Common Units	(4)	Equity							3,044 units	3,044	2,027	0.00	%
Total										1,291,729	1,238,502	0.71	%
Zemax, LLC								Redmond, WA

12

Stellus Capital Investment Corporation

Consolidated Schedule of Investments – (unaudited)

 March 31, 2017

Term Loan (SBIC)	(2)(3)	Second Lien	L+10.00%	1.00%	11.00%	4/23/2020	Software	$3,962,500	3,912,058	3,962,500	2.29	%
Zemax Software Holdings, LLC Preferred Units (SBIC)	(2)(4)	Equity						24,500 units	5,000	6,459	0.00	%
Zemax Software Holdings, LLC Common Units (SBIC)	(2)(4)	Equity						5,000 shares	245,000	316,485	0.18	%
Total									4,162,058	4,285,444	2.47	%
Total Non-controlled, non-affiliated investments									344,717,004	350,710,227	203.11	%
Net Investments									345,727,522	351,720,745	203.70	%
LIABILITIES IN EXCESS OF OTHER ASSETS										(179,056,111)	(103.70)	%
NET ASSETS										$172,664,634	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 nonaffiliated investments and cash and cash equivalents, but exclude $8,329,751 of cash and $96,775,799 of investments (at par) that are held by Stellus Capital SBIC LP.

(3) These loans have LIBOR or Euro Floors which are higher than the current applicable LIBOR or Euro 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 as of March 31, 2017.

(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) During the three months ended March 31, 2017, the Company realized a $760,149 loss on conversion of its term loan in Glori Energy Production, Inc., which was on non-accrual at the time of conversion, to equity. In the first quarter of 2017, the Company foreclosed on the equity of Glori Energy Production, Inc. The Company accepted 100% of the equity interests in Glori Holdings Inc. in full satisfaction of the original loan obligation.

(8) In the fourth quarter of 2016, Binder & Binder National Social Security Disability, emerged from Chapter 11 Bankruptcy in the U.S. Bankruptcy Court, Southern District of New York. The investment’s fair value has been adjusted to reflect the court-approved unsecured claim distribution proceeds that have been awarded to the Company. As of this time the Company does not expect to receive any additional repayment other than what the court has awarded.

13

Stellus Capital Investment Corporation

Consolidated Schedule of Investments – (unaudited)

March 31, 2017

(9) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $875,000, with an interest rate of LIBOR plus 9.00% 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 $520,000, with an interest rate of LIBOR plus 8.00% 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) These loans have LIBOR floors which are lower than the applicable LIBOR rates; therefore, the floors are not in effect.

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

(14) Interest compounds annually on this loan at a rate of 11%. The interest des not increase the principal balance.

Abbreviation Legend

PIK — Payment-In-Kind

L — LIBOR

Euro — Euro Dollar

14

Stellus Capital Investment Corporation

Consolidated Schedule of Investments

December 31, 2016

									Principal			% of
				LIBOR				Headquarters/	Amount/	Amortized	Fair	Net
Investments	Footnotes	Lien	Coupon	floor	Cash	PIK	Maturity	Industry	Shares	Cost	Value(1)	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	$ 5,252,426	$ 5,277,059	3.09	%
APE Holdings, LLC Class A Units	(4)	Equity							375,000 units	375,000	399,550	0.23	%
Total										5,627,426	5,676,609	3.32	%
Apex Environmental Resources Holdings, LLC								Amsterdam, OH
Common Units	(4)	Equity						Environmental Industries	517 shares	517	525	0.00	%
Preferred Units	(4)	Equity							517 shares	517,439	524,911	0.31	%
Total										517,956	525,436	0.31	%
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	7,928,373	8,000,000	4.68	%
Binder & Binder National Social Security Disability Advocates, LLC								Hauppauge, NY
Residual Claim From Term Loan	(4)(14)	Unsecured						Services: Consumer	$ 1,000,000	1,000,000	722,059	0.42	%
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	7,422,928	7,441,535	4.35	%
Managed Mobility Holdings, LLC Partnership Units	(4)	Equity							8,932 units	525,000	152,855	0.09	%
Total										7,947,928	7,594,390	4.44	%
C.A.R.S. Protection Plus, Inc								Murrysville, PA
Term Loan	(12)	First Lien	L+8.50%	0.50%	9.03%		12/31/2020	Automotive	$ 101,911	100,207	101,911	0.06	%
Term Loan (SBIC)	(2)(12)	First Lien	L+8.50%	0.50%	9.03%		12/31/2020		$ 7,949,027	7,785,147	7,949,027	4.65	%
CPP Holdings LLC Class A Common Units	(4)	Equity							149,828 shares	149,828	250,166	0.15	%
Total										8,035,182	8,301,104	4.86	%
Catapult Learning, LLC et al								Camden, NJ
Term Loan	(13)	First Lien	L+6.50%	1.00%	8.99%		7/16/2020	Education	$12,500,000	12,404,725	12,498,701	7.31	%
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	12,401,505	12,477,883	7.30	%
Delay Draw Term Loan #2	(5)	Unsecured	12.00%		12.00%		5/31/2018		$ 2,000,000	1,980,173	1,996,461	1.17	%
Delay Draw Term Loan #4	(5)	Unsecured	12.00%		12.00%		5/31/2018		$ 5,000,000	4,960,146	4,991,153	2.92	%
CC Blocker 1, LLC Preferred Units	(4)(5)	Equity							38,893 units	557,143	671,462	0.39	%
Total										19,898,967	20,136,959	11.78	%

15

Stellus Capital Investment Corporation

Consolidated Schedule of Investments — (continued)

December 31, 2016

									Principal			% of
				LIBOR				Headquarters/	Amount/	Amortized	Fair	Net
Investments	Footnotes	Lien	Coupon	floor	Cash	PIK	Maturity	Industry	Shares	Cost	Value(1)	Assets
Doskocil Manufacturing Company, Inc.								Arlington, TX
Term Loan (SBIC)	(2)(13)	First Lien	L+6.00%	1.00%	9.40%		11/10/2020	Consumer goods: non-durable	$ 8,750,000	$ 8,626,143	$ 8,750,000	5.12	%
Douglas Products & Packaging Company, LLC								Liberty, MO
Term Loan (SBIC)	(2)(12)	Second Lien	L+10.50%	0.50%	11.50%		12/31/2020	Chemicals, Plastics, & Rubber	$ 9,000,000	8,876,203	9,000,000	5.27	%
Fumigation Holdings, Inc. Class A Common Stock	(4)	Equity							250 shares	250,000	478,950	0.28	%
Total										9,126,203	9,478,950	5.55	%
Eating Recovery Center, LLC								Denver, CO
Term Loan	(6)	Unsecured	13.00%		12.00%	1.00%	6/28/2018	Healthcare & Pharmaceuticals	$18,400,000	18,271,406	18,348,093	10.74	%
ERC Group Holdings LLC Class A Units	(4)	Equity							17,820 units	1,655,274	2,631,558	1.54	%
Total										19,926,680	20,979,651	12.28	%
Empirix Inc.								Billerica, MA
Term Loan	(3)	Second Lien	L+9.50%	1.00%	10.50%		5/1/2020	Software	$11,657,850	11,517,953	11,582,173	6.78	%
Term Loan (SBIC)	(2)(3)	Second Lien	L+9.50%	1.00%	10.50%		5/1/2020		$ 9,750,000	9,631,895	9,686,708	5.67	%
Empirix Holdings I, Inc. Common Shares, Class A .	(4)	Equity							1,304 shares	1,304,232	1,659,024	0.97	%
Empirix Holdings I, Inc. Common Shares, Class B .	(4)	Equity							1,317,406 shares	13,174	16,758	0.01	%
Total										22,467,254	22,944,663	13.43	%
Energy Labs Inc.								Houston, TX
Term Loan (SBIC)	(2)(13)	First Lien	L+7.00%	0.50%	11.03%		9/29/2021	Energy: Oil & Gas	$ 5,300,000	5,197,928	5,290,561	3.10	%
Energy Labs Holding Corp. Common Stock	(4)	Equity							500 shares	500,000	500,000	0.29	%
Total										5,697,928	5,790,561	3.39	%
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	$ 3,331,184	3,287,412	3,331,184	1.95	%
EOS Fitness Holdings, LLC Class A Preferred Units	(4)	Equity							118 shares	117,670	77,414	0.05	%
EOS Fitness Holdings, LLC Class B Common Units	(4)	Equity							3,017 shares	3,017	1,985	0.00	%
Total										3,408,099	3,410,583	2.00
Furniture Factory Outlet, LLC								Fort Smith, AR
Term Loan	(12)	First Lien	L+9.00%	0.50%	10.00%		6/10/2021	Consumer goods: Durable	$ 9,875,000	9,695,423	9,809,056	5.74	%
Furniture Factory Holdings, LLC Term Loan	(6)	Unsecured	11.00%			11.00%	2/3/2021		$ 122,823	122,823	122,823	0.07	%
Sun Furniture Factory, LP Common Units	(4)	Equity							13,445 shares	94,569	170,404	0.10	%
Total										9,912,815	10,102,283	5.91	%

16

Stellus Capital Investment Corporation

Consolidated Schedule of Investments — (continued)

December 31, 2016

									Principal			% of
				LIBOR				Headquarters/	Amount/	Amortized	Fair	Net
Investments	Footnotes	Lien	Coupon	floor	Cash	PIK	Maturity	Industry	Shares	Cost	Value(1)	Assets
GK Holdings, Inc.								Cary, NC
Term Loan	(3)	Second Lien	L+9.50%	1.00%	10.50%		1/30/2022	Education	$5,000,000	$ 4,920,321	$ 5,000,000	2.93	%
Glori Energy Production Inc.								Houston, TX
Term Loan	(3)(4)(6) (7)(8)	First Lien	L+12.00%	1.00%	11.00%	2.00%	3/14/2017	Energy: Oil & Gas	$1,624,250	1,622,130	864,101	0.51	%
Good Source Solutions, Inc.								Carlsbad, CA
Term Loan	(13)	First Lien	L+7.25%	0.50%	11.38%		7/15/2021	Beverage, Food, & Tobacco	$1,350,000	1,325,011	1,346,203	0.79	%
Term Loan (SBIC)	(2)(13)	First Lien	L+7.25%	0.50%	11.38%		7/15/2021		$1,200,000	1,177,788	1,196,625	0.70	%
Good Source Holdings, LLC Class A Preferred Units	(4)	Equity							159 shares	159,375	136,633	0.08	%
Good Source Holdings, LLC Class B Common Units	(4)	Equity							4,482 shares	0	0	0.00	%
Total										2,662,174	2,679,461	1.57	%
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	$4,812,500	4,787,801	4,693,463	2.75	%
Term Loan		Second Lien	13.75%		13.75%		7/31/2018		$4,000,000	3,924,736	3,535,591	2.07	%
Total										8,712,537	8,229,054	4.82	%
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	7,211,543	7,286,790	4.26	%
Dream II Holdings, LLC Class A Common Units	(4)	Equity							250,000 units	242,304	145,030	0.08	%
Total										7,453,847	7,431,820	4.34	%
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	6,661,202	5,832,000	3.41	%
HUF Worldwide, LLC								Los Angeles, CA
Revolver	(9)(12)	First Lien	L+9.00%	0.50%	9.85%		10/22/2019	Retail	$ 375,000	375,000	375,000	0.22	%
Term Loan	(12)	First Lien	L+9.00%	0.50%	9.85%		10/22/2019		$3,651,709	3,603,959	3,651,709	2.14	%
Term Loan (SBIC)	(2)(12)	First Lien	L+9.00%	0.50%	9.85%		10/22/2019		$6,138,648	6,063,652	6,138,648	3.59	%
HUF Holdings, LLC Common Class A Units	(4)	Equity							616,892 units	624,427	624,427	0.37	%
Total										10,667,038	10,789,784	6.32	%
Keais Records Service, LLC								Houston, TX
Term Loan	(12)	Second Lien	L+10.50%	0.50%	11.50%		6/30/2022	Services: Business	$7,750,000	7,620,000	7,620,000	4.46	%
Keais Holdings, LLC Class A Units	(4)	Equity							148,335 units	775,000	775,000	0.45	%
Total										8,395,000	8,395,000	4.91	%
KidKraft, Inc.								Dallas, TX
Term Loan	(6)	Second Lien	12.00%		11.00%	1.00%	3/30/2022	Consumer Goods: Durable	$9,222,874	9,044,671	9,044,671	5.29	%
Livingston International, Inc.								Toronto, Ontario
Term Loan	(3)(5)	Second Lien	L+8.25%	1.25%	9.50%		4/18/2020	Transportation: Cargo	$6,841,739	6,765,448	6,692,648	3.92	%

17

Stellus Capital Investment Corporation

Consolidated Schedule of Investments — (continued)

December 31, 2016

									Principal			% of
				LIBOR				Headquarters/	Amount/	Amortized	Fair	Net
Investments	Footnotes	Lien	Coupon	floor	Cash	PIK	Maturity	Industry	Shares	Cost	Value(1)	Assets
Madison Logic, Inc.								New York, NY
Term Loan (SBIC)	(2)(12)	First Lien	L+8.00%	0.50%	8.76%		11/30/2021	Media: Broadcasting & Subscription	$ 5,000,000	$ 4,950,667	$ 4,950,667	2.90	%
Madison Logic Holdings, Inc. Common Stock (SBIC)	(2)(4)	Equity							5,000 shares	50,000	50,000	0.03	%
Madison Logic Holdings, Inc. Series A Preferred Stock (SBIC)	(2)(4)	Equity							4,500 shares	450,000	450,000	0.26	%
Total										5,450,667	5,450,667	3.19	%
Mobileum, Inc.								Santa Clara, CA
Term Loan	(12)	Second Lien	L+10.25%	0.75%	11.25%		5/1/2022	Software	$ 9,000,000	8,823,965	8,823,965	5.16	%
Mobile Acquisition Holdings, LP Class A-2 Common Units	(4)	Equity							750 units	750,000	750,000	0.44	%
Total										9,573,965	9,573,965	5.60	%
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	$ 6,468,196	6,395,759	6,403,563	3.75	%
Term Loan (SBIC)	(2)(3)	First Lien	L+8.50%	1.00%	9.50%		3/10/2019		$ 8,687,486	8,589,400	8,600,676	5.03	%
MBS Holdings, Inc. Series E Preferred Stock	(4)	Equity							2,774,695 shares	1,000,000	1,309,492	0.77	%
MBS Holdings, Inc. Series F Preferred Stock	(4)	Equity							399,308 shares	206,682	270,648	0.16	%
Total										16,191,841	16,584,379	9.71	%
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	564,899	575,000	0.34	%
Term Loan (SBIC)	(2)(3)	Second Lien	L+9.50%	1.00%	10.50%		5/31/2022		$ 9,750,000	9,578,720	9,750,000	5.71	%
MTC Parent, L.P. Class A-2 Common Units	(4)	Equity							750,000 shares	750,000	1,433,281	0.84	%
Total										10,893,619	11,758,281	6.89	%
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	3,979,529	3,992,337	2.34	%
OGS Holdings, Inc. Series A Convertible Preferred Stock	(4)	Equity							11,521 shares	50,001	68,182	0.04	%
Total										4,029,530	4,060,519	2.38	%
Refac Optical Group, et al								Blackwood, NJ
Revolver	(10)(12)	First Lien	L+8.00%		8.77%		9/30/2018	Retail	$ 400,000	400,000	400,000	0.23	%
Term A Loan	(11)(12)	First Lien	L+8.00%		8.77%		9/30/2018		$ 1,502,736	1,502,736	1,502,736	0.88	%
Term B Loan	(6)(11)(12)	First Lien	L+10.75%		9.77%	1.75%	9/30/2018		$ 6,403,267	6,403,267	6,403,267	3.75	%
Total										8,306,003	8,306,003	4.86
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	8,455,863	8,415,000	4.92	%
Sitel Worldwide Corporation								Nashville, TN
Term Loan	(3)	Second Lien	L+9.50	1.00%	10.50%		9/18/2022	High Tech Industries	$10,000,000	9,825,536	9,550,000	5.59	%

18

Stellus Capital Investment Corporation

Consolidated Schedule of Investments — (continued)

December 31, 2016

									Principal			% of
				LIBOR				Headquarters/	Amount/	Amortized	Fair	Net
Investments	Footnotes	Lien	Coupon	floor	Cash	PIK	Maturity	Industry	Shares	Cost	Value(1)	Assets
Skopos Financial, LLC								Irving, TX
Term Loan	(5)	Unsecured	12.00%		12.00%		1/31/2019	Finance	$20,000,000	$19,791,938	$19,618,086	11.48	%
Skopos Financial Group, LLC Class A Units	(4)(5)	Equity							1,120,684 units	1,162,544	1,012,266	0.59	%
Total										20,954,482	20,630,352	12.07	%
SPM Capital, LLC								Bloomington, MN
Term Loan	(3)	First Lien	L+5.50	1.50%	7.00%		10/31/2017	Healthcare & Pharmaceuticals	$ 6,387,916	6,362,834	6,374,800	3.73	%
SQAD, LLC								Tarrytown, NY
Term Loan (SBIC)	(2)(6)	Unsecured	12.25%		11.00%	1.25%	4/30/2019	Media: Broadcasting & Subscription	$ 7,245,241	7,179,977	7,206,517	4.22	%
SQAD Holdco, Inc. Preferred Shares, Series A (SBIC)	(2)(4)	Equity							5,624 shares	562,368	738,067	0.43	%
SQAD Holdco, Inc. Common Shares (SBIC)	(2)(4)	Equity							5,800 shares	62,485	82,007	0.05	%
Total										7,804,830	8,026,591	4.70	%
Stratose Intermediate Holdings, II, LLC								Atlanta, GA
Term Loan	(3)	Second Lien	L+9.50%	1.00%	10.50%		7/26/2022	Services: Business	$15,000,000	14,705,967	15,000,000	8.78	%
Atmosphere Aggregator Holdings II, LP Common Units	(4)	Equity							254,250 units	254,250	630,373	0.37	%
Atmosphere Aggregator Holdings, LP Common Units	(4)	Equity							750,000 units	750,000	1,859,506	1.09	%
Total										15,710,217	17,489,879	10.24	%
360 Holdings III Corp								Irvine, CA Consumer goods:
Term Loan	(3)	First Lien	L+9.00%	1.00%	10.00%		10/1/2021	non-durable	$ 3,950,000	3,811,652	3,950,000	2.31	%
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	4,970,522	4,962,649	2.90	%
TFH Reliability, LLC		Second						Houston, TX
Term Loan (SBIC)	(2)(12)	Lien	L+10.75%	0.50%	11.75%		4/21/2022	Chemicals, Plastics, & Rubber	$ 5,875,000	5,759,983	5,759,983	3.37	%
TFH Reliability Group, LLC Class A Common Units	(4)	Equity							250,000 shares	250,000	250,000	0.15	%
Total										6,009,983	6,009,983	3.52	%
U.S. Auto Sales, Inc. et al								Lawrenceville, GA
Term Loan	(3)(5)	Second Lien	L+11.75%	1.00%	12.75%		6/8/2020	Finance	$ 4,500,000	4,466,518	4,500,000	2.63	%
USASF Blocker II, LLC Common Units	(4)(5)	Equity							441 units	441,000	469,751	0.27	%
USASF Blocker LLC Common Units	(4)(5)	Equity							9,000 units	9,000	9,587	0.01	%
Total										4,916,518	4,979,338	2.91	%
Vandelay Industries Finance, LLC, et al								La Vergne, TN
		Second						Construction &
Term Loan	(6)	Lien	11.75%		10.75%	1.00%	11/12/2019	Building	$ 2,500,000	2,485,347	2,495,701	1.46	%
Vision Media Management & Fulfillment, LLC								Valencia, CA
Term Loan (SBIC)	(2)(13)	First Lien	L+8.50%	1.00%	10.22%		1/27/2021	Media: Broadcasting & Subscription	$ 1,613,517	1,584,016	1,613,517	0.94	%

19

Stellus Capital Investment Corporation

Consolidated Schedule of Investments — (continued)

December 31, 2016

									Principal			% of
				LIBOR				Headquarters/	Amount/	Amortized	Fair	Net
Investments	Footnotes	Lien	Coupon	floor	Cash	PIK	Maturity	Industry	Shares	Cost	Value(1)	Assets
Wise Holding Corporation								Salt Lake City, UT
Term Loan	(3)	Unsecured	L+10.00%	1.00%	11.00%		12/31/2021	Beverage, Food, & Tobacco	$1,250,000	$ 1,232,489	$ ,250,000	0.73	%
WCI Holdings LLC Class A Preferred Units	(4)	Equity							56 units	55,550	58,579	0.03	%
WCI Holdings LLC Class B Common Units	(4)	Equity							3,044 units	3,044	3,210	0.00	%
Total										1,291,083	1,311,789	0.76	%
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	3,908,696	3,941,705	2.31	%
Zemax Software Holdings, LLC Preferred Units (SBIC)	(2)(4)	Equity							24,500 units	5,000	5,406	0.00	%
Zemax Software Holdings, LLC Common Units (SBIC)	(2)(4)	Equity							5,000 shares	245,000	264,879	0.16	%
Total										4,158,696	4,211,990	2.47	%
Total Non-controlled, non-affiliated investments										362,217,251	365,625,891	214	%
Net Investments										362,217,251	365,625,891	185.52	%
LIABILITIES IN EXCESS OF OTHER ASSETS											(194,744,106)	(85.52)	%
NET ASSETS											$ 170,881,785	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 nonaffiliated investments and cash and cash equivalents, but exclude $3,457,351 of cash and cash equivalents and $100,252,693 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 or Euro Floors which are higher than the current applicable LIBOR or Euro 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 85% 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 since December 1, 2016.

(8) Investment is in payment default.

(9) Excluded from the investment is an undrawn revolver commitment in an amount not to exceed $875,000, with an interest rate of LIBOR plus 9.00% 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 $1,000,000, with an interest rate of LIBOR plus 8.00% 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.

20

Stellus Capital Investment Corporation

Consolidated Schedule of Investments — (continued)

December 31, 2016

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

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

(14) In the fourth quarter of 2016 Binder, emerged from Chapter 11 Bankruptcy in the U.S. Bankruptcy Court, Southern District of New York. The investment’s cost has been adjusted to reflect the court-approved unsecured claim distribution proceeds that have been awarded to the Company. As of this time we do not expect to receive any additional repayment other than what the court has awarded.

Abbreviation Legend

PIK — Payment-In-Kind
L — LIBOR

Euro — Euro Dollar

21

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(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. Including the Offering, the Company has raised $151,250,000 including (i) $500,010 of seed capital contributed by Stellus Capital and (ii) $12,749,990 in a private placement to certain purchasers, including persons and entities associated with Stellus Capital. 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 wholly owned subsidiaries: SCIC — Consolidated Blocker 1, Inc., SCIC — CC Blocker 1, Inc., SCIC — ERC Blocker 1, Inc., SCIC — SKP Blocker 1, Inc. and SCIC — APE Blocker 1, Inc., SCIC — HUF Blocker 1, Inc. and SCIC — Hollander Blocker 1, Inc., which are structured as Delaware entities, to hold equity or equity-like investments in portfolio companies organized as limited liability companies, or LLCs (or other forms of pass-through entities) (collectively, the “Taxable Subsidiaries”). The Taxable Subsidiaries are consolidated for U.S. generally accepted accounting principles (“U.S. GAAP”) reporting purposes, and the portfolio investments held by them are included in the consolidated financial statements.

On June 14, 2013, we formed Stellus Capital SBIC, LP (the “SBIC subsidiary”), a Delaware limited partnership, and its general partner, Stellus Capital SBIC GP, LLC, a Delaware limited liability company, as wholly owned subsidiaries of the Company. 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, subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with 10-year maturities. The SBA, as a creditor, will have a superior claim to the SBIC’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-guaranteed 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 $150.0 million when it has at least $75.0 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 March 31, 2017 and December 31, 2016, the SBIC subsidiary had $38.0 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 March 31, 2017 and December 31, 2016, the SBIC subsidiary had $65.0 million of SBA-guaranteed debentures outstanding.

22

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(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. It 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. 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 months ended March 31, 2017 and March 31, 2016 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, 2016. In accordance with Regulation S-X under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (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 March 31, 2017, cash balances totaling $3,037,446 exceeded FDIC insurance protection levels of $250,000 by $2,787,446, subjecting the Company to risk related to the uninsured balance. In addition, at March 31, 2017, the Company held $8,451,459 in cash equivalents. All of the Company’s cash deposits are held at large established high credit quality financial institutions and management believes that risk of loss associated with any uninsured balances is remote.

Cash consists of bank demand deposits. We deem certain U.S. Treasury Bills and other high-quality, short-term debt securities as cash equivalents. 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 March 31, 2017 and December 31, 2016, we held no U.S. Treasury Bills.

23

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(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-Guaranteed Debentures and Prepaid Loan Structure Fees

Deferred financing costs, prepaid loan fees on SBA-guaranteed debentures and prepaid loan structure fees consist of fees and expenses paid in connection with the closing of our credit facility, notes and SBA-guaranteed 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 March 31, 2017, the Company incurred costs related to the preparation of a shelf registration statement. As a result, the Company capitalized $81,813 related to the offering cost.

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 the board of directors, the Company intends to value investments for which market quotations are readily available at such market quotations. The Company will obtain these market values from an independent pricing service or at the median between the bid and ask prices obtained from at least two brokers or dealers (if available, otherwise by a principal market maker or a primary market dealer). Debt and equity securities that are not publicly traded or whose market prices are not readily available will be valued at fair value as determined in good faith by our board of directors. Such determination of fair values may involve subjective judgments and estimates. The Company also engages independent valuation providers to review the valuation of each portfolio investment that does not have a readily available market quotation at least twice annually.

Investments purchased within 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, including the advice of our independent valuation advisors. 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 our portfolio, the Company expects to value most of our 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;

· applicable market yields and multiples;

· security covenants;

· call protection provisions;

24

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(Unaudited)

· 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.

Fair Value Measurements

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

Revenue Recognition

We record interest income on an accrual basis to the extent such interest is deemed collectible. For loan and debt securities with contractual payment-in-kind (‘‘PIK’’) interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, we do not accrue PIK interest if the portfolio company valuation indicates that such PIK interest is not 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, sale or disposition and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

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.

25

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(Unaudited)

U.S. Federal Income Taxes

The Company has elected to be treated as a RIC under Subchapter M of the Code of 1986, as amended, and to operate in a manner so as 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 investors and will not be reflected in the consolidated financial statements of the Company.

To avoid a 4% U.S federal excise tax on undistributed earnings, the Company is required to distribute each calendar year the sum of (i) 98% of its ordinary income for such calendar year (ii) 98.2% of its net capital gains for the one-year period ending December 31 (iii) any income recognized, but not distributed, in preceding years and on which the Company paid no federal income tax or the Excise Tax Avoidance Requirement. For this purpose, however, any net ordinary income or capital gain net income retained by us that is subject to corporate income tax for the tax year ending in that calendar year will be considered to have been distributed by year end (or earlier if estimated taxes are paid). The Company, at its discretion, may choose not to distribute all of its taxable income for the calendar year and pay a non-deductible 4% excise tax on this income. If the Company chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to stockholders. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes on estimated excess taxable income as taxable income is earned. Included in other general and administrative expenses for the three months ended March 31, 2017 is an additional estimate of $14,985 related to the estimated excise tax. $22,663 was accrued as of December 31, 2016 and $37,648 was paid during the quarter ending March 31, 2017.

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.

As of March 31, 2017 and December 31, 2016, the Company had not recorded a liability for any unrecognized tax positions. Management’s evaluation of uncertain tax positions may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof. The Company’s policy is to include interest and penalties related to income taxes, if applicable, in general and administrative expenses. Any expenses for the three months ended March 31, 2017 and 2016 were de minimis.

The Taxable Subsidiaries are direct wholly owned subsidiaries of the Company that have elected to be taxable entities. The Taxable Subsidiaries permit the Company to hold equity investments in portfolio companies 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.

26

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(Unaudited)

For the three months ended March 31, 2017 and 2016, the Company recorded deferred income tax benefit of $8,593 and $167,339, respectively, related to the Taxable Subsidiaries. In addition, as of March 31, 2017 and December 31, 2016, the Company had a deferred tax liability of $0 and $8,593, respectively.

Earnings per Share

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

Paid In Capital

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

Recently Issued Accounting Standards

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this ASU supersedes the revenue recognition requirements in Revenue Recognition (Topic 605). Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company has assessed the revenue recognition guidance (Topic 605) and does not anticipate a material change in recognition due to the limited revenue streams and the overall basic requirements for recognition. As such, interest income and other income, the Company’s two revenue streams, will be limited in impact by the aforementioned guidance.

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.

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 guidance was effective for the Company January 1, 2017. The Company has adopted the guidance as of January 1, 2017 and there is no material impact on its consolidated financial statement.

In August 2016, the FASB issued ASU 2016-15 — Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The new guidance addresses the classification of various transactions including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, distributions received from equity method investments, beneficial interests in securitization transactions, and others. The update is effective for annual periods beginning after December 31, 2017, and interim periods within those annual periods. The Company has adopted the guidance as of January 1, 2017 and there is no material impact of this new standard on our consolidated financial statements.

27

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(Unaudited)

Additionally, in May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which includes amendments for enhanced clarification of the guidance. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. While the Company is currently assessing the impact of the guidance we do not expect the impact of this new standard on our consolidated financial statements to be material. 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. We believe the impact of the recently issued standards and any that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.

28

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(Unaudited)

NOTE 2 — RELATED PARTY ARRANGEMENTS

Investment Advisory Agreement

The Company entered into an investment advisory agreement with Stellus Capital. Pursuant to this agreement, the Company has agreed to pay to Stellus Capital a base annual 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 months ended March 31, 2017 and 2016, the Company recorded an expense for base management fees of $1,564,528 and $1,548,373, respectively. As of March 31, 2017 and December 31, 2016, $1,564,528 and $1,608,295, respectively, were payable to Stellus Capital.

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

Investment Income Incentive Fee

The investment income component (“Investment Income Incentive Fee”) is calculated, and payable to the Advisor, quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter, subject to a cumulative total return requirement and to deferral of non-cash amounts. The pre-incentive fee net investment income, 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. Such amount, however, is accrued during the period any may be paid to the manager in a future period once the total return requirement is met. 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.

29

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(Unaudited)

For the three months ended March 31, 2017 and March 31, 2016, the Company incurred $1,021,227 and $1,024,822, respectively, of Investment Income Incentive Fees. As of March 31, 2017 and December 31, 2016, $1,223,621 and $1,353,271, respectively, of such incentive fees were payable to the Advisor, of which $1,034,639 and $1,162,713, respectively, are currently payable (as explained below). As of March 31, 2017 and December 31, 2016, $188,982 and $190,557, respectively, of 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 amounts are received in cash.

Capital Gains Incentive Fee

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

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 (the “Capital Gains Incentive Fee”). 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 months ended March 31, 2017 and 2016, the Company incurred no incentive fees related to the Capital Gains Incentive Fee. As of March 31, 2017 and December 31, 2016, 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
	March 31
	2017		2016
Investment Income Incentive Fees Incurred	$	1,021,227	$	1,024,822
Capital Gains Incentive Fee Incurred		—		—
Incentive Fee Expense	$	1,021,227	$	1,024,822

	March 31,		December 31,
	2017		2016
Investment Income Incentive Fee Currently Payable	$	1,034,639	$	1,162,714
Investment Income Incentive Fee Deferred		188,982		190,557
Incentive Fee Payable	$	1,223,621	$	1,353,271

Director Fees

For both the three months ended March 31, 2017 and 2016, the Company recorded an expense relating to director fees of $92,000. As of both March 31, 2017 and December 31, 2016, no fees were payable relating to our directors.

30

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(Unaudited)

Co-Investment Pursuant to SEC Order

The Company has received exemptive relief from the SEC to co-invest with investment funds managed by Stellus Capital where doing so is consistent with its 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 the Company’s independent directors must make certain conclusions in connection with a co-investment transaction, including (1) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to the Company and its stockholders and do not involve overreaching of the Company or its stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of the Company’s stockholders and is consistent with its investment objectives and strategies. The Company intends to co-invest, subject to the conditions included in the exemptive order the Company received from the SEC, with a private credit fund managed by Stellus Capital that has an investment strategy that is identical to the Company’s investment strategy. The Company believes that such co-investments may afford it additional investment opportunities and an ability to achieve greater diversification.

Administrative Agent

The Company serves as the administrative agent on certain investment transactions. As of March 31, 2017, $175,957 is included in “Other Accrued Expenses and Liability” on the Consolidated Statement of Assets and Liabilities related to interest paid by a borrower to the Company as administrative agent.

License Agreement

The Company has entered into a license agreement with Stellus Capital under which Stellus Capital has agreed to grant the Company a non-exclusive, royalty-free license to use the name “Stellus Capital.” Under this agreement, the Company has a right to use the “Stellus Capital” name for so long as Stellus Capital or one of its affiliates remains its investment advisor. Other than with respect to this limited license, the Company has no legal right to the “Stellus Capital” name. This license agreement will remain in effect for so long as the investment advisory agreement with Stellus Capital is in effect.

Administration Agreement

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

For the three months ended March 31, 2017 and 2016, the Company recorded expenses of $279,922 and $254,153 respectively, relating to the administration agreement. As of March 31, 2017 and December 31, 2016, $279,922 and $232,169, respectively, remained payable to Stellus Capital under 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.

31

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(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 distributions declared and paid or to be paid on its common stock since Inception:

32

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(Unaudited)

Date Declared	Record Date	Payment Date	Per Share
Fiscal 2012
December 7, 2012	December 21, 2012	December 27, 2012	$	0.1812
Fiscal 2013
March 7, 2013	March 21, 2013	March 28, 2013	$	0.3400
June 7, 2013	June 21, 2013	June 28, 2013	$	0.3400
August 21, 2013	September 5, 2013	September 27, 2013	$	0.3400
November 22, 2013	December 9, 2013	December 23, 2013	$	0.3400
Fiscal 2014
December 27, 2013	January 15, 2014	January 24, 2014	$	0.0650
January 20, 2014	January 31, 2014	February 14, 2014	$	0.1133
January 20, 2014	February 28, 2014	March 14, 2014	$	0.1133
January 20, 2014	March 31, 2014	April 15, 2014	$	0.1133
April 17, 2014	April 30, 2014	May 15, 2014	$	0.1133
April 17, 2014	May 30, 2014	June 16, 2014	$	0.1133
April 17, 2014	June 30, 2014	July 15, 2014	$	0.1133
July 7, 2014	July 31, 2014	August 15, 2014	$	0.1133
July 7, 2014	August 29, 2014	September 15, 2014	$	0.1133
July 7, 2014	September 30, 2014	October 15, 2014	$	0.1133
October 15, 2014	October 31, 2014	November 14, 2014	$	0.1133
October 15, 2014	November 28, 2014	December 15, 2014	$	0.1133
October 15, 2014	December 31, 2014	January 15, 2015	$	0.1133
Fiscal 2015
January 22, 2015	February 2, 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 8, 2015	July 31, 2015	August 14, 2015	$	0.1133
July 8, 2015	August 31, 2015	September 15, 2015	$	0.1133
July 8, 2015	September 20, 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
Fiscal 2016
January 13, 2016	January 29, 2016	February 15, 2016	$	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
July 7, 2016	July 29, 2016	August 15, 2016	$	0.1133
July 7, 2016	August 31, 2016	September 15, 2016	$	0.1133
July 7, 2016	September 30, 2016	October 14, 2016	$	0.1133
October 7, 2016	October 31, 2016	November 15, 2016	$	0.1133
October 7, 2016	November 30, 2016	December 15, 2016	$	0.1133
October 7, 2016	December 30, 2016	January 13, 2017	$	0.1133
Fiscal 2017
January 13, 2017	January 31, 2017	February 15, 2017	$	0.1133
January 13, 2017	February 28, 2017	March 15, 2017	$	0.1133
January 13, 2017	March 31, 2017	April 14, 2017	$	0.1133
Total			$	6.0249

33

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(Unaudited)

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 months ended March 31, 2017 and 2016.

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;

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 March 31, 2017, the Company had investments in 46 portfolio companies. The composition of our investments as of March 31, 2017 is as follows:

	Cost		Fair Value
Senior Secured – First Lien(a)	$	92,467,285	$	93,318,989
Senior Secured – Second Lien		159,368,696		159,003,401
Unsecured Debt		77,084,203		77,115,032
Equity		16,807,338		22,283,323
Total Investments	$	345,727,522	$	351,720,745

(a) Includes unitranche investments, which account for 9% of our portfolio at fair value.

34

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(Unaudited)

At December 31, 2016, the Company had investments in 45 portfolio companies. The composition of our investments as of December 31, 2016 was as follows:

	Cost		Fair Value
Senior Secured – First Lien(a)	$	113,264,200	$	113,482,205
Senior Secured – Second Lien		163,112,172		162,486,388
Unsecured Debt		70,919,986		70,725,412
Equity		14,920,893		18,931,886
Total Investments	$	362,217,251	$	365,625,891

(a) Includes unitranche investments, which account for 8% of our portfolio at fair value.

35

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(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 both March 31, 2017 and December 31, 2016,the Company had two such investments with aggregate unfunded commitments of $1,395,000 and $1,875,000, respectively.

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 March 31, 2017 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	$	—	$	—	$	93,318,989	$	93,318,989
Senior Secured – Second Lien		—		9,633,300		149,370,101		159,003,401
Unsecured Debt		—		—		77,115,032		77,115,032
Equity		—		—		22,283,323		22,283,323
Total Investments	$	—	$	9,633,300	$	342,087,445	$	351,720,745

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, 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	$	—	$	—	$	113,482,205	$	113,482,205
Senior Secured – Second Lien		—		17,965,000		144,521,388		162,486,388
Unsecured Debt		—		—		70,725,412		70,725,412
Equity		—		—		18,931,886		18,931,886
Total Investments	$	—	$	17,965,000	$	347,660,891	$	365,625,891

36

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(Unaudited)

The aggregate values of Level 3 portfolio investments changed during the three months ended March 31, 2017 are as follows:

	Senior Secured			Senior Secured Loans-Second			Unsecured
	Loans-First Lien			Lien			Debt			Equity			Total
Fair value at beginning of period	$	113,482,205		$	144,521,388		$	70,725,412		$	18,931,886		$	347,660,891
Purchases of investments		480,000			14,725,000			6,203,400			1,743,502			23,151,902
Payment-in-kind interest		28,330			22,993			30,796			—			82,119
Sales and Redemptions		(19,888,834	)		(10,147,756	)		(150,000	)		(721,161	)		(30,907,751	)
Transfer from Term Loan to Equity		(864,101	)		—			—			864,101			—
Realized Loss		(627,051	)		—			—			—			(627,051	)
Change in unrealized depreciation  included in earnings		633,696			141,842			225,403			1,464,995			2,465,955
Amortization of premium and accretion of discount, net		74,744			106,614			80,022			—			261,380
Fair value at end of period	$	93,318,989		$	149,370,101		$	77,115,032		$	22,283,323		$	342,087,445
Change in unrealized depreciation on  Level 3 investments still held as of March 31, 2017	$	33,096		$	323,242		$	225,401		$	1,464,996		$	2,046,735

The aggregate values of Level 3 portfolio investments changed during the year ended December 31, 2016 are as follows:

	Senior Secured			Senior Secured Loans-Second			Unsecured
	Loans-First Lien			Lien			Debt			Equity			Total
Fair value at beginning of year	$	131,908,961		$	131,972,581		$	72,212,282		$	12,923,873		$	349,017,697
Purchases of investments		25,009,310			35,664,883			1,354,073			3,632,768			65,661,034
Payment-in-kind interest		112,952			22,874			107,940			—			243,766
Sales and Redemptions		(44,947,647	)		(9,850,061	)		(122,094	)		(1,019,375	)		(55,939,177	)
Realized Gains		(674,702	)		—			(12,200,353	)		(214,286	)		(13,089,341	)
Change in unrealized depreciation included in earnings		1,653,933			2,684,245			9,085,283			3,608,906			17,032,367
Amortization of premium and accretion of discount, net		419,398			392,196			288,281			—			1,099,875
Transfer from Level 2		—			(16,365,330	)		—			—			(16,365,330	)
Fair value at end of year	$	113,482,205		$	144,521,388		$	70,725,412		$	18,931,886		$	347,660,891
Change in unrealized depreciation on  Level 3 investments still held as  December 31, 2016	$	1,399,408		$	2,588,122		$	9,084,789		$	3,686,972		$	16,759,291

During the year ended December 31, 2016, there were two transfers from Level 3 to Level 2 as additional broker quotes

became available. Transfers are reflected at the value of the securities at the beginning of the period.

37

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(Unaudited)

The following is a summary of geographical concentration of our investment portfolio as of March 31, 2017:

					% of Total
	Cost		Fair Value		Investments
Texas		87,879,419		87,700,233		24.93	%
New York		41,985,331		42,163,529		11.99	%
Colorado		27,881,900		29,393,617		8.36	%
California		24,496,468		24,554,306		6.98	%
Massachusetts		22,483,312		23,154,997		6.58	%
Georgia		20,638,550		22,651,866		6.44	%
New Jersey		21,081,345		21,170,955		6.02	%
Missouri		14,104,589		14,528,156		4.13	%
Tennessee		12,317,486		12,133,300		3.45	%
Arkansas		9,859,407		10,039,349		2.85	%
Pennsylvania		8,038,741		8,307,950		2.36	%
Puerto Rico		8,716,335		8,216,864		2.34	%
Florida		7,458,089		7,534,871		2.14	%
Illinois		6,694,582		6,887,578		1.96	%
Canada		6,770,381		6,841,739		1.95	%
Minnesota		5,700,177		5,716,034		1.63	%
North Carolina		4,923,297		5,000,000		1.42	%
Washington		4,162,058		4,285,444		1.22	%
Virginia		4,032,936		4,120,007		1.17	%
Arizona		3,389,667		3,466,748		0.99	%
Alabama		1,206,682		1,723,666		0.49	%
Utah		1,291,729		1,238,502		0.35	%
Ohio		615,041		891,034		0.25	%
	$	345,727,522	$	351,720,745		100.00	%

38

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(Unaudited)

The following is a summary of geographical concentration of our investment portfolio as of December 31, 2016:

					% of Total
	Cost		Fair Value		Investments
Texas	$	74,433,626	$	73,576,277		20.13	%
New York		42,102,392		41,930,666		11.47	%
Colorado		27,855,053		28,979,651		7.93	%
California		28,298,845		28,606,727		7.82	%
Massachusetts		22,467,254		22,944,663		6.28	%
Georgia		20,626,735		22,469,217		6.15	%
New Jersey		20,710,728		20,804,704		5.69	%
Illinois		17,554,821		17,590,281		4.81	%
Alabama		16,191,841		16,584,379		4.54	%
Missouri		14,096,725		14,441,599		3.95	%
Tennessee		12,310,883		12,045,701		3.29	%
Arkansas		9,912,815		10,102,283		2.76	%
Pennsylvania		8,035,182		8,301,104		2.27	%
Puerto Rico		8,712,537		8,229,054		2.25	%
Florida		7,453,847		7,431,820		2.03	%
Canada		6,765,448		6,692,648		1.83	%
Minnesota		6,362,834		6,374,800		1.74	%
North Carolina		4,920,321		5,000,000		1.37	%
Washington		4,158,696		4,211,990		1.15	%
Virginia		4,029,530		4,060,519		1.11	%
Arizona		3,408,099		3,410,583		0.93	%
Utah		1,291,083		1,311,789		0.36	%
Ohio		517,956		525,436		0.14	%
	$	362,217,251	$	365,625,891		100.00	%

39

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(Unaudited)

The following is a summary of industry concentration of our investment portfolio as of March 31, 2017:

					% of Total
	Cost		Fair Value		Investments
Finance	$	45,849,242		46,702,675		13.27	%
Software		36,225,415		37,165,258		10.57	%
Healthcare & Pharmaceuticals		34,362,865		35,326,515		10.04	%
Services: Business		24,119,261		26,157,717		7.44	%
Media: Broadcasting & Subscription		21,010,516		21,996,489		6.25	%
Chemicals, Plastics, & Rubber		20,778,399		21,284,761		6.05	%
Retail		19,347,048		19,206,570		5.46	%
Consumer goods: non-durable		18,492,274		18,789,349		5.34	%
Education		17,333,687		17,500,000		4.98	%
High Tech Industries		16,496,813		15,393,468		4.38	%
Construction & Building		12,811,413		12,825,000		3.65	%
Beverage, Food, & Tobacco		11,891,433		11,928,287		3.39	%
Consumer Goods: Durable		9,073,643		9,008,595		2.56	%
Services: Consumer		8,038,741		8,307,950		2.36	%
Automotive		8,308,089		8,268,449		2.35	%
Telecommunications		7,954,990		7,662,827		2.18	%
Transportation: Cargo		6,770,381		6,841,739		1.95	%
Capital Equipment		6,712,485		6,764,124		1.92	%
Energy: Oil & Gas		6,713,183		6,713,183		1.91	%
FIRE: Insurance		5,400,000		5,400,000		1.54	%
Services: Government		4,032,936		4,120,007		1.17	%
Hotel, Gaming, & Leisure		3,389,667		3,466,748		0.99	%
Environmental Industries		615,041		891,034		0.25	%
	$	345,727,522		351,720,745		100.00	%

40

STELLUS CAPITAL INVESTMENT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(Unaudited)

The following is a summary of industry concentration of our investment portfolio as of December 31, 2016:

					% of Total
	Cost		Fair Value		Investments
Finance	$	56,663,586	$	57,504,930		15.73	%
Software		36,199,915		36,730,618		10.05	%
Media: Broadcasting & Subscription		36,001,876		36,637,803		10.02	%
Healthcare & Pharmaceuticals		35,002,051		35,583,505		9.73	%
Services: Business		24,105,217		25,884,879		7.08	%
Consumer goods: non-durable		20,763,612		21,165,542		5.79	%
Chemicals, Plastics, & Rubber		18,957,486		19,146,954		5.24	%
Retail		18,973,041		19,095,787		5.22	%
Education		17,325,046		17,498,701		4.79	%
Telecommunications		16,403,791		16,009,390		4.38	%
High Tech Industries		16,486,738		15,382,000		4.21	%
Beverage, Food, & Tobacco		12,437,795		12,700,000		3.47	%
Consumer Goods: Durable		11,881,630		11,991,250		3.28	%
Automotive		8,035,182		8,301,104		2.27	%
Services: Consumer		8,453,847		8,153,879		2.23	%
Transportation: Cargo		6,765,448		6,692,648		1.83	%
Energy: Oil & Gas		7,320,058		6,654,662		1.82	%
Services: Government		4,029,530		4,060,519		1.11	%
Hotel, Gaming, & Leisure		3,408,099		3,410,583		0.93	%
Construction & Building		2,485,347		2,495,701		0.68	%
Environmental Industries		517,956		525,436		0.14	%
	$	362,217,251		365,625,891		100.00	%