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

 

FORM 10-Q

 

(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

OR

o		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 o

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 o No o

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

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

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

The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of August 7, 2013 was 12,066,019.

TABLE OF CONTENTS

STELLUS CAPITAL INVESTMENT CORPORATION

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			1
Statements of Assets and Liabilities as of June 30, 2013 (unaudited) and December 31, 2012			1
Statements of Operations for the three and six months ended June 30, 2013 and 2012 (unaudited)			2
Statements of Changes in Net Assets for the six months ended June 30, 2013 and 2012 (unaudited)			3
Statements of Cash Flows for the six months ended June 30, 2013 and 2012 (unaudited)			4
Schedules of Investments as of June 30, 2013 (unaudited) and December 31, 2012			5
Notes to Unaudited Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of   Operations			25
Item 3. Quantitative and Qualitative Disclosures About Market Risk			37
Item 4. Controls and Procedures			38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			39
Item 1A. Risk Factors			39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 3. Defaults Upon Senior Securities			39
Item 4. Mine Safety Disclosures			39
Item 5. Other Information			39
Item 6. Exhibits			40
SIGNATURES			41

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

STELLUS CAPITAL INVESTMENT CORPORATION
 
STATEMENTS OF ASSETS AND LIABILITIES

		June 30, 2013 (Unaudited)				December 31, 2012
ASSETS
Non-controlled, non-affiliated investments, at fair value (amortized cost of $260,614,004 and $195,455,671, respectively)		$	262,185,828			$	195,451,256
Cash and cash equivalents			10,982,998				62,131,686
Interest receivable			4,110,605				2,573,831
Prepaid loan structure fees			1,716,629				1,947,820
Prepaid expenses			183,491				438,384
Total Assets			279,179,551				262,542,977
LIABILITIES
Payable for investments purchased			—				4,750,000
Credit facility payable			91,000,000				38,000,000
Short-term loan			8,999,899				45,000,943
Base management fees payable			1,041,199				527,034
Incentive fees payable			1,250,375				—
Accrued offering costs			—				147,123
Interest payable			197,081				66,477
Directors' fees payable			89,000				29,452
Other accrued expenses and liabilities			495,440				175,993
Total Liabilities			103,072,994				88,697,022
Net Assets		$	176,106,557			$	173,845,955
NET ASSETS
Common Stock, par value $0.001 per share (100,000,000 shares authorized, 12,066,019 and 12,035,023 shares issued and outstanding, respectively)		$	12,066			$	12,035
Paid-in capital			175,154,696				174,714,838
Accumulated undistributed net realized gain			1,002,917				—
Distributions in excess of net investment income			(1,403,946	)			(874,986	)
Unrealized appreciation (depreciation) on investments and cash equivalents			1,340,824				(5,932	)
Net Assets		$	176,106,557			$	173,845,955
Total Liabilities and Net Assets		$	279,179,551			$	262,542,977
Net Asset Value Per Share		$	14.60			$	14.45

 
 
See Notes to Unaudited Consolidated Financial Statements.

TABLE OF CONTENTS

STELLUS CAPITAL INVESTMENT CORPORATION
 
STATEMENTS OF OPERATIONS (unaudited)

		For the three months ended June 30, 2013				For the period from inception (May 18, 2012) through June 30, 2012				For the six months ended June 30, 2013				For the period from inception (May 18, 2012) through June 30, 2012
INVESTMENT INCOME
Interest income		$	6,710,905			$	—			$	13,035,629			$	—
Other Income			630,322				—				752,038				—
Total Investment Income			7,341,227				—				13,787,667				—
OPERATING EXPENSES
Management fees		$	1,041,199			$	—			$	1,925,202			$	—
Valuation fees			113,710				—				203,710				—
Administrative services expenses			228,535				—				399,576				—
Incentive fees			867,096				—				1,550,236				—
Professional fees			107,516				126,628				223,462				126,628
Directors' fees			89,000				—				178,000				—
Insurance expense			118,268				—				235,238				—
Interest expense and other fees			718,219				—				1,284,759				—
Other general and administrative expenses			85,026				—				127,444				—
Total Operating Expenses		$	3,368,569			$	126,628			$	6,127,627			$	126,628
Net Investment Income (Loss)		$	3,972,658			$	(126,628	)		$	7,660,040			$	(126,628	)
Net Realized Gain on Investments and Cash Equivalents		$	99,995			$	—			$	1,002,917			$	—
Net Change in Unrealized Appreciation on Investments and Cash Equivalents		$	404,942			$	—			$	1,346,756			$	—
Net Increase (Decrease) in Net Assets Resulting from Operations		$	4,477,595			$	(126,628	)		$	10,009,713			$	(126,628	)
Net Investment Income Per Share		$	0.33			$	—			$	0.64			$	—
Net Increase in Net Assets Resulting from Operations Per Share		$	0.37			$	—			$	0.83			$	—
Weighted Average Shares of Common Stock Outstanding			12,050,618				—				12,043,117				—

 
 
See Notes to Unaudited Consolidated Financial Statements.

TABLE OF CONTENTS

STELLUS CAPITAL INVESTMENT CORPORATION
 
STATEMENTS OF CHANGES IN NET ASSETS

		For the six months ended June 30, 2013 (Unaudited)				For the Period from inception (May 18, 2012) through June 30, 2012 (Unaudited)
Increase in Net Assets Resulting from Operations
Net investment income (loss)		$	7,660,040			$	(126,628	)
Net realized gain on investments and cash equivalents			1,002,917				—
Net change in unrealized appreciation on investments and cash equivalents			1,346,756				—
Net Increase (Decrease) in Net Assets Resulting from Operations			10,009,713				(126,628	)
Stockholder distributions
Distributions			(8,189,000	)			—
Capital share transactions
Issuance of common stock			439,889				—
Net increase in net assets resulting from capital share transactions			439,889				—
Total increase (decrease) in net assets			2,260,602				(126,628	)
Net assets at beginning of period			173,845,955				—
Net assets at end of period		$	176,106,557			$	(126,628	)

 
 
See Notes to Unaudited Consolidated Financial Statements.

TABLE OF CONTENTS

STELLUS CAPITAL INVESTMENT CORPORATION
 
STATEMENTS OF CASH FLOWS

		For the six months ended June 30, 2013 (Unaudited)				For the Period from Inception (May 18, 2012) through June 30, 2012 (Unaudited)
Cash flows from operating activities
Net increase (decrease) in net assets resulting from operations		$	10,009,713			$	(126,628	)
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:
Purchases of investments			(112,467,250	)			—
Proceeds from sales and repayments of investments			48,792,161				—
Net change in unrealized appreciation on investments			(1,345,238	)			—
Increase in investments due to PIK			(523,926	)			—
Accretion of discount			(184,489	)			—
Net realized gain on investments			(1,005,830	)			—
Changes in other assets and liabilities
Increase in interest receivable			(1,536,774	)			—
Decrease in prepaid expenses and fees			486,084				—
Decrease in payable for investments purchased			(4,750,000	)			—
Increase in management fees payable			514,165				—
Increase in directors' fees payable			59,548				—
Increase in incentive fees payable			1,250,375				—
Increase in interest payable			130,604				—
Increase in other accrued expenses and liabilities			319,447				126,628
Net cash (used in) provided by operating activities		$	(60,251,410	)		$	126,628
Cash flows from financing activities
Offering costs paid			(147,123	)			—
Stockholder distributions paid			(7,749,111	)			—
Borrowings under credit facility			53,000,000				—
Borrowings under short-term loan			(36,001,044	)			—
Net cash provided by financing activities			9,102,722				—
Net increase (decrease) in cash and cash equivalents			(51,148,688	)			—
Cash and cash equivalents balance at beginning of period			62,131,686				—
Cash and cash equivalents balance at end of period		$	10,982,998				—
Non-cash items
Common stock issued in connection with dividend reinvestments		$	439,889			$	—

 
 
See Notes to Unaudited Consolidated Financial Statements.

TABLE OF CONTENTS

STELLUS CAPITAL INVESTMENT CORPORATION
 
SCHEDULE OF INVESTMENTS (unaudited)
JUNE 30, 2013

Investments		Headquarters/Industry				Principal Amount/Shares				Amortized Cost				Fair Value(1)				% of Net Assets
Non-controlled, non-affiliated investments
Aderant North America, Inc. Term Loan-Second Lien, L + 8.75%, LIBOR floor 1.25%, due 6/20/2019			Atlanta, GA/ Software			$	1,500,000			$	1,478,798			$	1,545,000				0.88	%
Ascend Learning, Inc. Term Loan-Second Lien, Euro + 10.00%, Euro floor 1.50%, due 12/6/2017			Burlington, MA/ Software			$	10,000,000				10,000,000				10,081,300				5.72	%
Atkins Nutritional Holdings II, Inc. Term Loan-Second Lien, L + 8.50%, LIBOR floor 1.25%, due 4/3/2019			Denver, CO/ Beverage, Food, & Tobacco			$	17,000,000				16,669,216				17,212,500				9.77	%
ATX Networks Corp. Term Loan-Unsecured, 12.00% cash, 2.00% PIK, due 5/12/2016(2)(3)			West Ajax, Ontario/ High Tech Industries			$	20,989,080				20,989,080				20,989,080				11.92	%
Baja Broadband, LLC Term Loan-Second Lien, L + 11.00%, LIBOR floor 1.50%, due 12/20/2017			Fort Mill, SC/ Media: Broadcasting & Subscription			$	15,000,000				15,000,000				15,231,000				8.65	%
Binder and Binder Term Loan-Unsecured, 13.00% cash, 2.00% PIK, due 2/27/2016(2)			Hauppauge, New York/ Services: Business			$	13,000,000				13,000,000				13,000,000				7.38	%
Blackhawk Mining, LLC Term Loan-First Lien, 12.50%, due 10/9/2016			Lexington, KY/ Metals & Mining			$	5,000,000				4,577,420				4,577,420				2.60	%
Common Shares, Class B(4)							36 shares				214,286				214,286				0.12	%
Total											4,791,706				4,791,706				2.72	%
Colford Capital Holdings, LLC(5) Term Loan-Senior Secured, 12.25%, due 5/31/2018(3)			New York, NY/ Finance			$	12,500,000				12,222,365				12,222,365				6.94	%
ConvergeOne Holdings Corp. Term Loan-First Lien, L + 8.00%, LIBOR floor 1.25%, due 5/8/2019			Eagan, MN/ Telecommunications			$	13,000,000				12,808,345				12,805,000				7.27	%
Eating Recovery Center, LLC Mezzanine Term Loan-Unsecured, 12.00% cash, 1.00% PIK, due 6/28/18(2)			Denver, CO/ Healthcare & Pharmaceuticals			$	18,400,000				18,053,319				17,704,480				10.05	%
Common Shares, Series A(4)							86,667 shares				1,500,000				1,500,000				0.85	%
Total											19,553,319				19,204,480				10.90	%
Grupo HIMA San Pablo, Inc. Term Loan-First Lien, L + 7.00%, LIBOR floor 1.50%, due 1/31/18			San Juan, PR/ Healthcare & Pharmaceuticals			$	4,987,500				4,894,360				4,831,624				2.74	%
Term Loan-Second Lien, 13.75%, due 7/31/18						$	4,000,000				3,810,080				3,900,000				2.22	%
Total											8,704,440				8,731,624				4.96	%
Holley Performance Products Term Loan-First Lien, Prime + 6.00%, Prime floor 3.50%, due 11/30/2017			Bowling Green, KY/ Automotive			$	12,343,750				12,203,449				12,203,449				6.93	%
Livingston International, Inc. Term Loan-Second Lien, L + 7.75%, LIBOR floor 1.25%, due 4/18/2020(3)			Toronto, Ontario/ Services: Business			$	7,000,000				6,862,839				7,096,250				4.03	%
ProPetro Services Inc. Term Loan-First Lien, 10%, due 6/30/2015			Midland, TX/ Energy: Oil & Gas			$	10,000,000				9,952,567				9,975,000				5.66	%
Refac Optical Group(6) Term A Loan-First Lien, L + 7.50%, due 3/23/2016			Blackwood, NJ/ Retail			$	3,146,371				3,146,371				3,146,371				1.79	%
Term B Loan-First Lien, L + 8.50% cash, 1.75% PIK, due 3/23/2016(2)						$	6,122,484				6,122,484				6,122,484				3.48	%
Total											9,268,855				9,268,855				5.27	%
Securus Technologies Holdings Term Loan-Second Lien, L + 7.75%, LIBOR floor 1.25%, due 4/30/2021			Dallas, TX/ Telecommunications			$	7,000,000				6,931,318				7,032,830				3.99%

 
 
See Notes to Unaudited Consolidated Financial Statements.

TABLE OF CONTENTS

Investments		Headquarters/Industry				Principal Amount/Shares				Amortized Cost				Fair Value(1)				% of Net Assets
Snowman Holdings, LLC Term Loan-Unsecured, 11.00% cash, 2.00% PIK, due 1/11/2017(2)			Lebanon, IN/ Transportation: Cargo			$	9,060,881				9,060,881				9,060,881				5.15	%
SPM Capital, LLC Term Loan-First Lien, L + 5.50%, LIBOR floor 1.50%, due 10/31/2017			Bloomington, MN/ Healthcare & Pharmaceuticals			$	7,443,750				7,308,853				7,404,298				4.20	%
Sportsmans Warehouse Holdings, Inc. Term Loan-First Lien, L + 7.00%, LIBOR floor 1.50%, due 11/13/2018			Midvale, UT/ Retail			$	9,950,000				9,858,883				9,999,750				5.68	%
Studer Group, LLC (The) Term Loan-Unsecured, 12.00% cash, 2.00% PIK, due 3/29/2017(2)			Gulf Breeze, FL/ Services: Business			$	16,808,553				16,808,553				16,808,553				9.55	%
Telecommunications Management, LLC Term Loan-Second Lien, L + 8.00%, LIBOR floor 1.00%, due 10/30/20			Sikeston, MO/ Media: Broadcasting & Subscription			$	8,000,000				7,921,322				8,100,000				4.60	%
Telular Corp. Term Loan-Second Lien, Euro + 8.00%, Euro floor 1.25%, due 6/24/2020			Chicago, IL/ High Tech Industries			$	7,500,000				7,387,759				7,387,759				4.20	%
Transaction Network Services, Inc. Term Loan-Second Lien, L + 8.00%, LIBOR floor 1.00%, due 8/14/2020			Reston, VA/ Telecommunications			$	2,550,000				2,513,091				2,576,571				1.46	%
Varel International Energy Funding Corp. Term Loan-First Lien, L + 7.75%, LIBOR floor 1.50%, due 7/17/2017			Dallas, TX/ Energy: Oil & Gas			$	9,850,000				9,668,577				9,668,577				5.49	%
Woodstream Group, Inc. Subordinated Debt-Unsecured, 11.00%, due 2/28/2017			Lititz, PA/ Consumer Goods: Non-Durable			$	862,279				837,708				844,085				0.48	%
Woodstream Corp. Senior Subordinated Note-Unsecured, 11.00%, due 2/27/2017			Lititz, PA/ Consumer Goods: Non-Durable			$	9,137,721				8,812,080				8,944,915				5.08	%
Total Non-controlled, non-affiliated investments										$	260,614,004			$	262,185,828				148.88	%
LIABILITIES IN EXCESS OF OTHER ASSETS															(86,079,271)				(48.88)%
NET ASSETS														$	176,106,557				100.00%

Abbreviation Legend
PIK — Payment-In-Kind

 
 
See Notes to Unaudited Consolidated Financial Statements.

TABLE OF CONTENTS

Stellus Capital Investment Corporation
 
Schedule of Investments
December 31, 2012

Investments		Headquarters/Industry				Principal Amount/Shares				Cost				Fair Value(1)				% of Net Assets
Non-controlled, non-affiliated investments
Aderant North America Inc. Term Loan-Second Lien, Prime + 7.75%, due 6/20/2019(2)			Atlanta, GA/ Services: Business			$	1,500,000			$	1,477,622			$	1,477,622				0.85	%
Ascend Learning, Inc. Term Loan-Second Lien, Euro + 10.00%, Euro 1.50%, due 12/6/2017(2)			Burlington, MA/ High Tech Industries			$	10,000,000				10,000,000				10,000,000				5.75	%
ATX Networks Term Loan-Unsecured, 12.00% cash, 2.00% PIK, due 5/12/2016(2)(3)(4)			West Ajax, Ontario/ High Tech Industries			$	20,778,456				20,778,456				20,778,456				11.95	%
Baja Broadband, LLC Term Loan-Second Lien, L + 11.00%, LIBOR 1.50%, due 12/20/2017(2)			Fort Mill, SC/ Media: Broadcasting & Subscription			$	15,000,000				15,000,000				15,000,000				8.63	%
Binder and Binder Senior Subordinated Note-Unsecured, 13.00% cash, 2.00% PIK, due 2/27/2016(3)			Hauppauge, New York/ Services: Business			$	13,000,000				13,000,000				13,000,000				7.48	%
Blackhawk Mining, LLC Term Loan-First Lien, 12.50%, due 10/5/2016(7)			Lexington, KY/ Metals & Mining			$	5,000,000				4,535,714				4,535,714				2.61	%
Common Shares, Class B(5)(6)							36 shares				214,286				214,286				0.12	%
Total											4,750,000				4,750,000				2.73	%
Eating Recovery Center, LLC Mezzanine Term Loan-Unsecured, 12.00% cash, 1.00% PIK, due 12/28/2018(2)(3)			Denver, CO/ Healthcare & Pharmaceuticals			$	18,400,000				18,032,633				18,032,633				10.37	%
Common Shares, Series A(5)							86,667 shares				1,500,000				1,500,000				0.86	%
Total											19,532,633				19,532,633				11.23	%
Holley Performance Products Term Loan-First Lien, Prime + 6.00%, Prime 3.50%, due 11/30/2017(2)			Bowling Green, KY/ Automotive			$	12,500,000				12,345,646				12,345,646				7.10	%
Refac Optical Group(8) Term A Loan-First Lien, L + 7.50%, LIBOR 0.2077%, due 3/23/2016(2)			Blackwood, NJ/ Retail			$	3,780,408				3,780,408				3,780,408				2.18	%
Term B Loan-First Lien, L + 8.50%, LIBOR 0.2077%, 1.75% PIK, due 3/23/2016(2)(3)						$	6,098,781				6,098,781				6,098,781				3.51	%
Total											9,879,189				9,879,189				5.69	%
Securus Technologies Holdings Term Loan-Second Lien, Euro + 9.00%, Euro 1.75%, due 6/1/2018(2)			Dallas, TX/ Telecommunications			$	12,000,000				12,119,671				12,120,000				6.97	%
Snowman Holdings, LLC Term Loan-Unsecured, 11.00% cash, 2.00% PIK, due 1/11/2017(3)			Lebanon, IN/ Transportation: Cargo			$	8,969,955				8,969,955				8,969,955				5.16	%
SPM Capital, LLC Term Loan-First Lien, Euro + 5.50%, Euro 1.50%, due 10/31/2017(2)			Stamford, CT/ Capital Markets			$	7,500,000				7,351,604				7,351,604				4.23	%
Sportsmans Warehouse Holdings, Inc. Term Loan-First Lien, L + 7.00%, LIBOR 1.50%, due 11/13/2018(2)			Midvale, UT/ Retail			$	10,000,000				9,902,063				9,902,062				5.70	%
Studer Group, LLC (The) Term Loan-Unsecured, 12.00% cash, 2.00% PIK, due 3/29/2017(3)			Gulf Breeze, FL/ Services: Business			$	16,639,880				16,639,880				16,639,880				9.57	%
Woodstream Corp. Subordinated Debt-Unsecured, 12.00%, due 2/27/2015(2)			Lititz, PA/ Consumer Goods: Non-Durable			$	3,017,977				2,910,987				2,906,244				1.67	%
Woodstream Group, Inc. Senior Subordinated Note-Unsecured, 12.00%, due 2/27/2015			Lititz, PA/ Consumer Goods: Non-Durable			$	31,982,023				30,797,965				30,797,965				17.72	%
Total Non-controlled, non-affiliated investments										$	195,455,671			$	195,451,256				112.43	%
LIABILITIES IN EXCESS OF OTHER ASSETS															(21,605,301	)			(12.43	)%
NET ASSETS														$	173,845,955				100.00	%

 
 
See Notes to Unaudited Consolidated Financial Statements.

TABLE OF CONTENTS

Abbreviation Legend
PIK — Payment-In-Kind

 
 
See Notes to Unaudited Consolidated Financial Statements.

TABLE OF CONTENTS

STELLUS CAPITAL INVESTMENT CORPORATION
  
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

NOTE 1 — NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Stellus Capital Investment Corporation (the “Company”) was formed as a Maryland corporation on May 18, 2012 (“Inception”) and is an externally managed, closed-end, non-diversified management investment company. The Company has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”) and intends to qualify as a regulated investment company (“RIC”) for U.S. federal income tax purposes. The Company’s investment activities are managed by 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. Through its initial public offering the Company sold 9,200,000 shares (including 1,200,000 shares through the underwriters’ exercise of the overallotment option) for gross proceeds of $138,000,000. As of June 30, 2013, the Company has raised $180,409,145 including (i) $500,010 of seed capital contributed by Stellus Capital, (ii) $12,749,990 in a private placement to certain purchasers, including persons and entities associated with Stellus Capital, and (iii) $29,159,145 in connection with the acquisition of the Company’s initial portfolio. The Company’s shares are currently listed on the New York Stock Exchange under the symbol “SCM”.

Immediately prior to the pricing of the Offering the Company acquired its initial portfolio of assets for $165,235,169 in cash and $29,159,145 in shares of the Company’s common stock, or $194,394,314 in total. The cash portion of the acquisition of the initial portfolio was financed by (i) borrowing $152,485,179 under a credit facility (“Bridge Facility”) with Sun Trust and (ii) using the $12,749,990 of proceeds received in connection with the private placement. The Bridge Facility had a maturity date of not more than 7 days after the pricing date of the Offering. Borrowings under the Bridge Facility bore interest at the highest of (i) a prime rate, (ii) the Federal Funds Rate plus 0.50% and (iii) LIBOR plus 1.00%. The Company used the net proceeds from the Offering together with borrowings under the Company’s Credit Facility (see Note 9) to repay in full the outstanding indebtedness under the Bridge Facility, at which point the Bridge Facility terminated.

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 its investment adviser 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 financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

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

The accounting records of the Company are maintained in U.S. dollars.

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STELLUS CAPITAL INVESTMENT CORPORATION
  
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

NOTE 1 — NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES  – (continued)

There were no shares of the Company outstanding for the period from Inception through June 30, 2012. As of June 30, 2012, the Company had not yet begun investment operations. Stellus Capital Management purchased the initial 100 shares for $500,010 in September, 2012. As such any per share data is not calculable as of June 30, 2012.

Portfolio Investment Classification

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

Cash and Cash Equivalents

At June 30, 2013, cash balances totaling $733,098 exceeded FDIC insurance protection levels, subjecting the Company to risk related to the uninsured balance. All of the Company’s cash deposits are held at a large established high credit quality financial institution 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 Internal Revenue 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 footnote 9). On June 30, 2013, we held $10 million of U.S. Treasury Bills with a 25 day maturity purchased using $1 million in margin cash and the proceeds from a $9 million short term loan from Raymond James. The loan had an effective annual interest rate of approximately 1%. On July 1, 2013, we sold the remaining Treasury Bills, repaid the remainder of the loan from Raymond James and received back the $1 million margin payment (net of fees and expenses of $938).

On December 31, 2012, we held $50 million of U.S. Treasury Bills with a 30 day maturity purchased using $5 million in cash and the proceeds from a $45 million short term loan from Raymond James. The loan had an effective annual interest rate of approximately 1%. On January 2, 2013, we sold the Treasury Bills, repaid the $45 million loan from Raymond James and received back the $5 million margin payment (net of fees and expenses of $8,943).

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially.

Deferred Financing Costs

Deferred financing costs consist of fees and expenses paid in connection with the closing of credit facilities and are capitalized at the time of payment. Deferred financing costs are amortized using the straight line method over the term of the credit facility.

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STELLUS CAPITAL INVESTMENT CORPORATION
  
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

NOTE 1 — NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES  – (continued)

Investments

As a business development company, the Company generally invests in illiquid loans and securities including debt and equity securities of middle-market companies. Under procedures established by the board of directors, the Company values investments for which market quotations are readily available at such market quotations. The Company obtains these market values from an independent pricing service or at the mean 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 are 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, although 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 once quarterly. Investments purchased within 60 days of maturity are valued at cost plus accreted discount, or minus amortized premium, which approximates value. With respect to unquoted securities, our board of directors, together with our independent valuation advisors, values each investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies that are public and other factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the board uses the pricing indicated by the external event to corroborate and/or assist us in our valuation. Because there is not a readily available market for many of the investments in our portfolio, the fair value of most of our portfolio investments are 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 are taken into account in fair value pricing investments include, as relevant, but not be limited to:

Determination of fair values involves subjective judgments and estimates not susceptible to substantiation by auditing procedures. Under current auditing standards, the notes to our financial statements refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our financial statements.

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STELLUS CAPITAL INVESTMENT CORPORATION
  
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

NOTE 1 — NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES  – (continued)

Revenue Recognition

We record interest income on an accrual basis to the extent such interest is deemed collectible. For loans and debt securities with contractual 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 interest income. Dividend income, if any, will be recognized on the ex-dividend date.

Capital Gains Incentive Fee

Under GAAP, the Company calculates the capital gains incentive fee payable to the Advisor as if the Company had realized all investments at their fair values as of the reporting date. Accordingly, the Company accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. As the provisional incentive fee is subject to the performance of investments until there is a realization event, the amount of provisional capital gains incentive fee accrued at a reporting date may vary from capital gains incentive fee that is ultimately realized and the differences could be material.

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

We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

Payment-in-Kind Interest

We have investments in our portfolio that contain a 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 qualify 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.

Payable for Unsettled Securities Transaction

The Company records all investments on a trade date basis.

U.S. Federal Income Taxes

The Company intends to elect to be treated as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code of 1986, as amended (“Code”), 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

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STELLUS CAPITAL INVESTMENT CORPORATION
  
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

NOTE 1 — NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES  – (continued)

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 financial statements of the Company.

As of June 30, 2013 and December 31, 2012, the Company had $825,106 and $0, respectively, of undistributed ordinary income and capital gains. The character of the Company’s distributions is determined annually, based upon its taxable income for the full year and based upon distributions made for the full year. A determination of the character of distributions made on an interim basis may not be representative of the final determination based upon taxable income computed for the full year.

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

As of June 30, 2013 and December 31, 2012, the Company had not recorded a liability for any unrecognized tax positions. Management’s evaluation of uncertain tax positions may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof. The Company’s policy is to include interest and penalties related to income taxes, if applicable, in general and administrative expenses. There were no such expenses for the three months and six months ended June 30, 2013.

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 unvested shares as of June 30, 2013 or December 31, 2012. As a result, there is no difference between diluted earnings per share and basic per share amounts.

Recently Issued Accounting Standards

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standards setting bodies that are adopted by the Company as of the specified effective date. The Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial statements upon adoption.

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 consisting of two parts. The first part of the annual incentive fee, which is calculated and payable quarterly in arrears, equals 20.0% of the “pre-incentive fee net investment income” (as defined in the agreement) for the immediately preceding quarter, subject to a hurdle rate of 2.0% per quarter (8.0% annualized) and a “catch-up” feature. The net pre-incentive fee investment income used to calculate this part of the incentive fee is also included in the amount of our gross assets used to calculate the 1.75% base management fee.

For the three months and six months ended June 30, 2013, the Company incurred base management fees payable to the Advisor of $1,041,199 and $1,925,202, respectively.

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STELLUS CAPITAL INVESTMENT CORPORATION
  
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

NOTE 2 — RELATED PARTY ARRANGEMENTS  – (continued)

For the three and six months ended June 30, 2013, the Company incurred $766,109 and $1,081,487, respectively, of incentive fees related to pre-incentive fee net investment income. As of June 30, 2013, $734,098 of such incentive fees are currently payable to the Advisor, and $32,010 of pre-incentive fee net investment income incentive fees incurred by the Company were generated from deferred interest (i.e. PIK and certain discount accretion) and are not payable until such amounts are received in cash.

The second part of the annual incentive fee is calculated and payable in arrears as of the end of each calendar year (or, upon termination of the investment advisory agreement, as of the termination date) and equals 20.0% of the aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees. The capital gains incentive fee consists of fees related to both realized gains and unrealized gains (described in more detail below). For the three and six months ended June 30, 2013, the Company adjusted its capital gains incentive fee accrual related to realized gains by $163,973 and $187,176, respectively and related to unrealized gains by ($62,985) and $180,584, respectively.

The total capital gains incentive fee payable to the Company’s Advisor under the investment management agreement as of June 30, 2013 and December 31, 2012 was $468,748 and $0, respectively. The capital gains incentive fee related to realized gains payable to the Company’s Advisor under the investment management agreement as of June 30, 2013 and December 31, 2012 was $117,599 and $0, respectively.

With respect to the incentive fee expense accrual relating to the capital gains incentive fee, GAAP requires that the capital gains incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains incentive fee would be payable if such unrealized capital appreciation were realized, even though such unrealized capital appreciation is not permitted to be considered in calculating the fee actually payable under the investment management agreement. For accounting purposes in accordance with GAAP only, in order to reflect the potential capital gains incentive fee that would be payable for a given period as if all unrealized gains were realized, the Company’s accrual for capital gains incentive fees includes an amount related to unrealized capital appreciation of $351,149 and $0 as of June 30, 2013 and December 31, 2012, respectively. There can be no assurance that such unrealized capital appreciation will be realized in the future. Accordingly, such fee, as calculated and accrued would not necessarily be payable under the investment management agreement, and may never be paid based upon the computation of capital gains incentive fees in subsequent periods.

For the years ending December 31, 2012 and December 31, 2013, the Advisor has agreed to waive its incentive fee to the extent required to support an annualized dividend yield of 9.0% (to be paid on a quarterly basis) based on the price per share of our common stock in connection with the Offering.

As of June 30, 2013 and December 31, 2012, the Company was not due any amount from Stellus Capital for reimbursement of expenses paid for by the Company that were the responsibility of Stellus Capital. Any such amounts due to the Company would be included in the Statement of Assets and Liabilities.

As of June 30, 2013 and December 31, 2012, the Company owed its independent directors $89,000 and $29,452, respectively, in total for unpaid director fees.

As agreed to in the Amended and Restated Side Agreement made and entered into as of November 12, 2012 by and between Stellus Capital and Raymond James & Associates, Inc. and Stifel, Nicolaus & Company, Incorporated, Stellus Capital has agreed to pay on behalf of the Company, 2.41% of the 6% underwriters sales load, or $3,320,280 in total, in connection with the Offering. Of this amount, $1,940,280 was paid on November 14, 2012, $460,000 was paid on March 25, 2013, $460,000 was paid on June 28, 2013 and the remaining $460,000 is due on September 30, 2013.

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STELLUS CAPITAL INVESTMENT CORPORATION
  
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

NOTE 2 — RELATED PARTY ARRANGEMENTS  – (continued)

License Agreement

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

NOTE 3 — DISTRIBUTIONS

The Company intends to make quarterly distributions of available net investment income to its stockholders. The Company intends to distribute net capital gains (i.e., net capital gains in excess of net capital losses), if any, at least annually. The quarterly stockholder distributions, if any, will be determined by the board of directors. Any distribution to stockholders will be declared out of assets legally available for distribution.

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

Date Declared		Record Date		Payment Date		Amount Per Share
December 7, 2012(1)		December 21, 2012		December 27, 2012		$0.18
March 7, 2013		March 21, 2013		March 28, 2013		$0.34
June 7, 2013		June 21, 2013		June 28, 2013		$0.34

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. If a stockholder holds shares of the Company’s common stock in the name of a broker or financial intermediary, the stockholder should contact such broker or financial intermediary regarding their election to receive distributions in cash in lieu of shares of the Company’s common stock. 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. Of the total distributions of $8,189,000 made to shareholders in 2013 through June 30, 2013, $7,749,111 was made in cash and the remainder in shares.

NOTE 4 — PORTFOLIO INVESTMENTS AND FAIR VALUE

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

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STELLUS CAPITAL INVESTMENT CORPORATION
  
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

NOTE 4 — PORTFOLIO INVESTMENTS AND FAIR VALUE  – (continued)

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 June 30, 2013, the Company had investments in 25 portfolio companies. The total cost and fair value of the investments were $260,614,004 and $262,185,828, respectively. The composition of our investments as of June 30, 2013 is as follows:

		Cost				Fair Value
Senior Secured – First Lien		$	80,541,308			$	80,733,973
Senior Secured – Second Lien			78,574,423				80,163,210
Unsecured Debt			99,783,987				99,574,359
Equity			1,714,286				1,714,286
Total Investments		$	260,614,004			$	262,185,828

At December 31, 2012, the Company had investments in 15 portfolio companies. The total cost and fair value of the investments were $195,455,671 and $195,451,256, respectively. The composition of our investments as of December 31, 2012 is as follows:

		Cost				Fair Value
Senior Secured – First Lien		$	44,014,214			$	44,014,214
Senior Secured – Second Lien			38,597,293				38,597,622
Unsecured Debt			111,129,878				111,125,134
Equity			1,714,286				1,714,286
Total Investments		$	195,455,671			$	195,451,256

The Company’s investment portfolio may contain loans which have a component that is unfunded and requires the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2013 and December 31, 2012, the Company had two and one such investments with aggregate unfunded commitments of $14,500,000 and $2,000,000, respectively. The Company maintains sufficient liquidity to fund such unfunded loan commitments should the need arise.

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STELLUS CAPITAL INVESTMENT CORPORATION
  
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

NOTE 4 — PORTFOLIO INVESTMENTS AND FAIR VALUE  – (continued)

The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of June 30, 2013 are as follows:

		Quoted Prices in Active Markets for Identical Securities (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total
Senior Secured – First Lien		$	—			$	—			$	80,733,973			$	80,733,973
Senior Secured – Second Lien			—				26,786,951				53,376,259				80,163,210
Unsecured Debt			—				—				99,574,359				99,574,359
Equity			—				—				1,714,286				1,714,286
Total Investments		$	—			$	26,786,951			$	235,398,877			$	262,185,828

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, 2012 are as follows:

		Quoted Prices in Active Markets for Identical Securities (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total
Senior Secured – First Lien		$	—			$	—			$	44,014,214			$	44,014,214
Senior Secured – Second Lien			—				12,120,000				26,477,622				38,597,622
Unsecured Debt			—				—				111,125,134				111,125,134
Equity			—				—				1,714,286				1,714,286
Total Investments		$	—			$	12,120,000			$	183,331,256			$	195,451,256

The aggregate value changes of Level 3 portfolio investments during the six months ended June 30, 2013 are as follows:

		Senior Secured Loans – First Lien				Senior Secured Loans – Second Lien				Unsecured Debt				Equity				Total
Fair value at beginning of period		$	44,014,214			$	26,477,622			$	111,125,134			$	1,714,286			$	183,331,256
Purchases of investments			50,311,802				38,722,500				12,692,587				—				101,726,889
Sales and Redemptions			(13,895,750	)			(450,000	)			(25,000,000	)			—				(39,345,750	)
Realized gains			6,492				6,552				903,322								916,366
Change in unrealized appreciation (depreciation)
included in earnings			192,665				1,172,564				(204,884	)			—				1,160,345
Accretion of discount			104,550				23,592				58,200				—				186,342
Transfer from Level 2			—				—				—				—				—
Transfer to Level 2			—				(12,576,571	)			—				—				(12,576,571	)
Fair value at end of period		$	92,956,338			$	53,376,259			$	87,351,994			$	1,714,286			$	235,398,877
Change in unrealized appreciation (depreciation) on Level 3 investments still held as of June 30, 2013		$	192,665			$	1,172,564			$	(204,884	)		$	—			$	1,160,345

During the six months ended June 30, 2013, there were no transfers from Level 2 to Level 3.

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STELLUS CAPITAL INVESTMENT CORPORATION
  
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

NOTE 4 — PORTFOLIO INVESTMENTS AND FAIR VALUE  – (continued)

During the six months ended June 30, 2013, there were two transfers from Level 3 to Level 2 due to quoted prices available for the financial instruments.

The aggregate values of Level 3 portfolio investments changed during the period from Inception through December 31, 2012 are as follows:

		Senior Secured Loans – First Lien				Senior Secured Loans – Second Lien				Unsecured Debt				Equity				Total
Fair value at beginning of period		$	—			$	—			$	—			$	—			$	—
Purchases of investments			97,066,024				16,477,500				124,507,797				1,714,286				239,765,607
Sales and Redemptions			(53,057,372	)			—				(13,400,740	)			—				(66,458,112	)
Change in unrealized appreciation (depreciation) included in earnings			—				—				(4,744	)			—				(4,744	)
Accretion of discount			5,562				122				22,821				—				28,505
Transfer from Level 2			—				10,000,000				—				—				10,000,000
Transfer to Level 2			—				—				—				—				—
Fair value at end of period		$	44,014,214			$	26,477,622			$	111,125,134			$	1,714,286			$	183,331,256
Change in unrealized appreciation (depreciation) on Level 3 investments still held as of December 31, 2012		$	—			$	—			$	(4,744	)		$	—			$	(4,744	)

The following is a summary of geographical concentration of our investment portfolio as of June 30, 2013:

		Cost				Fair Value				% of Total Investments
Colorado		$	36,222,535			$	36,416,980				13.90	%
Canada			27,851,919				28,085,330				10.71	%
Texas			26,552,462				26,676,407				10.17	%
New York			25,222,365				25,222,365				9.62	%
Minnesota			20,117,198				20,209,298				7.71	%
Kentucky			16,995,155				16,995,155				6.48	%
Florida			16,808,553				16,808,553				6.41	%
South Carolina			15,000,000				15,231,000				5.81	%
Massachusetts			10,000,000				10,081,300				3.84	%
Utah			9,858,883				9,999,750				3.81	%
Pennsylvania			9,649,788				9,789,000				3.73	%
New Jersey			9,268,855				9,268,855				3.54	%
Indiana			9,060,881				9,060,881				3.46	%
Puerto Rico			8,704,440				8,731,624				3.33	%
Missouri			7,921,322				8,100,000				3.09	%
Illinois			7,387,759				7,387,759				2.82	%
Virginia			2,513,091				2,576,571				0.98	%
Georgia			1,478,798				1,545,000				0.59	%
		$	260,614,004			$	262,185,828				100.00	%

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STELLUS CAPITAL INVESTMENT CORPORATION
  
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

NOTE 4 — PORTFOLIO INVESTMENTS AND FAIR VALUE  – (continued)

The following is a summary of geographical concentration of our investment portfolio as of December 31, 2012:

		Cost				Fair Value				% of Total Investments
Pennsylvania		$	33,708,952			$	33,704,209				17.24	%
Canada			20,778,456				20,778,456				10.63	%
Colorado			19,532,633				19,532,633				9.99	%
Kentucky			17,095,646				17,095,646				8.75	%
Florida			16,639,880				16,639,880				8.51	%
South Carolina			15,000,000				15,000,000				7.67	%
New York			13,000,000				13,000,000				6.65	%
Texas			12,119,671				12,120,000				6.20	%
Massachusetts			10,000,000				10,000,000				5.12	%
Utah			9,902,063				9,902,062				5.07	%
New Jersey			9,879,189				9,879,189				5.05	%
Indiana			8,969,955				8,969,955				4.59	%
Connecticut			7,351,604				7,351,604				3.76	%
Georgia			1,477,622				1,477,622				0.77	%
		$	195,455,671			$	195,451,256				100.00	%

The following is a summary of industry concentration of our investment portfolio as of June 30, 2013:

		Cost				Fair Value				% of Total Investments
Services: Business		$	36,671,392			$	36,904,803				14.08	%
Healthcare & Pharmaceuticals			35,566,612				35,340,402				13.48	%
High Tech Industries			28,376,839				28,376,839				10.82	%
Media: Broadcasting & Subscription			22,921,322				23,331,000				8.90	%
Telecommunications			22,252,754				22,414,401				8.55	%
Energy: Oil & Gas			19,621,144				19,643,577				7.49	%
Retail			19,127,738				19,268,605				7.35	%
Beverage, Food, & Tobacco			16,669,216				17,212,500				6.57	%
Finance			12,222,365				12,222,365				4.66	%
Automotive			12,203,449				12,203,449				4.65	%
Software			11,478,798				11,626,300				4.43	%
Consumer Goods: Non-Durable			9,649,788				9,789,000				3.73	%
Transportation: Cargo			9,060,881				9,060,881				3.46	%
Metals & Mining			4,791,706				4,791,706				1.83	%
		$	260,614,004			$	262,185,828				100.00	%

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STELLUS CAPITAL INVESTMENT CORPORATION
  
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

NOTE 4 — PORTFOLIO INVESTMENTS AND FAIR VALUE  – (continued)

The following is a summary of industry concentration of our investment portfolio as of December 31, 2012:

		Cost				Fair Value				% of Total Investments
Consumer Goods: Non-Durable		$	33,708,952			$	33,704,209				17.24	%
Services: Business			31,117,502				31,117,501				15.93	%
High Tech Industries			30,778,456				30,778,456				15.75	%
Health & Pharmaceuticals			26,884,237				26,884,237				13.75	%
Retail			19,781,252				19,781,252				10.12	%
Media: Broadcasting & Subscription			15,000,000				15,000,000				7.67	%
Automotive			12,345,646				12,345,646				6.32	%
Telecommunications			12,119,671				12,120,000				6.20	%
Transportation: Cargo			8,969,955				8,969,955				4.59	%
Metals & Mining			4,750,000				4,750,000				2.43	%
		$	195,455,671			$	195,451,256				100.00	%

The following provides quantitative information about Level 3 fair value measurements as of June 30, 2013:

Description:

Fair Value

Valuation Technique

Unobservable Inputs

Range (Average)(1)(3)

First lien debt

$

80,733,973

Income/Market approach(2)

HY credit spreads, Risk free rates, credit quality(3)

-.34% to .39% (.09%)

Second lien debt

$

53,376,259

Income/Market approach(2)

HY credit spreads, Risk free rates, credit quality(3)

-.24% to -.82% (.01%)

Unsecured debt

$

99,574,359

Income/Market approach(2)

HY credit spreads, Risk free rates, credit quality(3)

-.02% to 3.48% (.67%)

Equity investments

$

1,714,286

Market approach(4)

Underwriting multiple/EBITDA Multiple

5x to 12x

Total Long Term Level 3 Investments

$

235,398,877

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STELLUS CAPITAL INVESTMENT CORPORATION
  
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

NOTE 4 — PORTFOLIO INVESTMENTS AND FAIR VALUE  – (continued)

The following provides quantitative information about Level 3 fair value measurements as of December 31, 2012:

Description:

Fair Value

Valuation Technique

Unobservable Inputs

Range (Average)(1)(3)

First lien debt

$

44,014,214

Income/Market approach(2)

HY credit spreads, Risk free rates, credit quality(3)

-.22% to.11% (-.12%)

Second lien debt

$

26,477,622

Income/Market approach(2)

HY credit spreads, Risk free rates, credit quality(3)

-.49% to -.18% (-.30%)

Unsecured debt

$

111,125,134

Income/Market approach(2)

HY credit spreads, Risk free rates, credit quality(3)

-.31% to.03% (-.20%)

Equity investments

$

1,714,286

Market approach(4)

Underwriting multiple/EBITDA Multiple

5x to 12x

Total Long Term Level 3 Investments

$

183,331,256

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STELLUS CAPITAL INVESTMENT CORPORATION
  
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

NOTE 5 — EQUITY OFFERINGS AND RELATED EXPENSES

The Company issued 30,996 shares of common stock during the six months ended June 30, 2013 in connection with the stockholder distribution reinvestment.

NOTE 6 — NET INCREASE (DECREASE) IN NET ASSETS PER COMMON SHARE

The following information sets forth the computation of net increase (decrease) in net assets resulting from operations per common share for the three months and six months ended June 30, 2013.

		Three months ended June 30, 2013				Six months ended June 30, 2013
Net increase in net assets resulting from operations		$	4,477,595			$	10,009,713
Average common shares			12,050,618				12,043,117
Basic and diluted earnings per common share		$	0.37			$	0.83

NOTE 7 — COMMITMENTS AND CONTINGENCIES

The Company is currently not subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our business, financial condition or results of operations.

NOTE 8 — FINANCIAL HIGHLIGHTS

		Six months ended June 30, 2013 (Unaudited)				Three months ended June 30, 2013 (Unaudited)
Per Share Data:(1)
Net asset value at beginning of period		$	14.45			$	14.56
Net investment income			0.64				0.33
Change in unrealized appreciation (depreciation)			0.11				0.04
Realized gain			0.08				0.01
Total from investment operations			0.83				0.38
Stockholder distributions			(0.68	)			(0.34	)
Net asset value at end of period		$	14.60			$	14.60
Per share market value at end of period		$	15.05			$	15.05
Total return based on market value(2)			3.95	%			(4.28	)%
Weighted average shares outstanding at end of period			12,043,117				12,050,618
Ratio/Supplemental Data:
Net assets at end of period		$	176,106,557			$	176,106,557
Average net assets(3)		$	174,715,502			$	175,520,716
Annualized ratio of net operating expenses to net assets(3)			7.02	%			7.67	%
Annualized ratio of net investment income to net assets(3)			8.77	%			9.05	%
Portfolio Turnover(4)			21	%			9	%

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STELLUS CAPITAL INVESTMENT CORPORATION
  
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

NOTE 9 — CREDIT FACILITY

On November 7, 2012, the Company entered into a revolving credit facility (the “Credit Facility”) with various lenders. SunTrust Bank is one of the lenders and serves as administrative agent under the Credit Facility. As of June 30, 2013, the Credit Facility provided for borrowings in an aggregate amount up to $115,000,000 on a committed basis and an accordion for an additional $35,000,000 for a total facility size of $150,000,000. The exercise of the accordion will require sufficient borrowing base and additional commitments from the existing lender group and/or new lenders.

The Company’s obligations to the lenders are secured by a first priority security interest in its portfolio of securities and cash, but excluding short term investments. The Credit Facility contains certain affirmative and negative covenants, including but not limited to: (i) maintaining a minimum liquidity test of at least 85% of adjusted borrowing base, (ii) maintaining an asset coverage ratio of at least 2.0 to 1.0, and (iii) maintaining a minimum shareholder’s equity. As of June 30, 2013, the Company was in compliance with these covenants.

Borrowings under the Credit Facility bear interest, subject to the Company’s election, on a per annum basis equal to (i) LIBOR plus 3.00% with no LIBOR floor or (ii) 2.00% plus an alternate base rate based on the highest of the Prime Rate, Federal Funds Rate plus 0.5% or one month LIBOR plus 1.0%. The Company pays unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility. Interest is payable quarterly in arrears. Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on November 12, 2016.

As of June 30, 2013 and December 31, 2012, $91,000,000 and $38,000,000 was outstanding under the Credit Facility, respectively. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value. The Company incurred costs of $2,015,415 in connection with obtaining the Credit Facility, which the Company has recorded as prepaid loan structure fees on its statement of assets and liabilities and is amortizing these fees over the life of the Credit Facility. As of June 30, 2013 and December 31, 2012, $1,716,629 and $1,947,820 of such prepaid loan structure fees had yet to be amortized, respectively.

For the three months ended June 30, 2013 the effective interest rate under the Credit Facility was approximately 3.4% (approximately 4.0% including commitment fees on the unused portion of the Credit Facility). Interest is paid quarterly in arrears. The Company recorded interest and fee expense of $718,219 for the three months ended June 30, 2013, of which $512,790 was interest expense, $125,532 was amortization of loan fees paid on the Credit Facility, $67,430 related to commitment fees on the unused portion of the Credit Facility, and $12,467 related to loan administration fees.

For the six months ended June 30, 2013 the effective interest rate under the Credit Facility was approximately 3.3% (approximately 4.0% including commitment fees on the unused portion of the Credit Facility). Interest is paid quarterly in arrears. The Company recorded interest and fee expense of $1,284,759 for the six months ended June 30, 2013, of which $849,668 was interest expense, $249,685 was amortization of loan fees paid on the Credit Facility, $160,611 related to commitment fees on the unused portion of the Credit Facility, and $24,795 related to loan administration fees. The Company paid $548,126 and $870,980 in interest expense and unused commitment fees for the three and six months ended June 30, 2013, respectively. The average borrowings under the Credit Facility for the three and six months ended June 30, 2013 were $61,648,352 and $51,110,497, respectively.

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STELLUS CAPITAL INVESTMENT CORPORATION
  
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

NOTE 10 — SUBSEQUENT EVENTS

Investment Portfolio

On July 17, 2013, we made a $14,800,000 investment in the second lien loan of Help Systems.

On August 1, 2013, we received full repayment on our second lien term loan of Baja Broadband at par resulting in total proceeds of $15,000,000.

These two transactions bring the investment portfolio to approximately $261,820,000 and the average investment per company to $10,500,000.

Credit Facility

On July 30, 2013, the Company partially exercised the accordion feature under its Credit Facility and received additional commitments from the existing bank group in the amount of $20,000,000 which increased the total commitments to $135,000,000 under the facility.

The outstanding balance under the Credit Facility as of August 2, 2013 was $87,000,000 due to the additional borrowings and repayments subsequent to June 30, 2013.

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Forward-Looking Statements

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:

Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words.

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or SEC rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this quarterly report on Form 10-Q.

Overview

We were organized as a Maryland corporation on May 18, 2012 and formally commenced operations on November 7, 2012. Our investment objective is to maximize the total return to our stockholders in the form of current income and capital appreciation through debt and related equity investments in middle-market companies.

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We are an externally managed, non-diversified, closed-end investment company that has elected to be regulated as a BDC under the 1940 Act. As a BDC, we are required to comply with certain regulatory requirements.

As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized in the United States.

In order to expedite the ramp-up of our investment activities and further our ability to meet our investment objectives, we acquired our initial portfolio on November 7, 2012. The total consideration paid was $194.4 million, consisting of $165.2 million in cash and $29.2 million in shares of our common stock based on the price of $15.00 per share, or $194.4 million in total for 11 companies (excluding accrued interest of approximately $2.3 million) from a private investment fund to which the D. E. Shaw group serves as investment adviser and Stellus Capital Management, LLC serves as a non-discretionary sub-adviser.

We financed the cash portion of the acquisition of our initial portfolio by (i) borrowing $152.5 million under a $156 million credit facility led by SunTrust Bank (the “Bridge Facility”) and (ii) using the $12.7 million of proceeds we received in connection with the sale of shares of our common stock in a private placement transaction to certain purchasers, including persons and entities associated with Stellus Capital Management, LLC, at a purchase price of $15.00 per share.

On November 13, 2012, we completed our initial public offering (“IPO”) and sold 9,200,000 shares (including 1,200,000 shares through the underwriters’ exercise of their overallotment option) of our common stock through a group of underwriters at an initial public offering price of $15.00 per share. We received $132.2 million of total net proceeds in connection with the IPO. We used the net proceeds from our IPO and borrowings under the Credit Facility (as described below) to pay down all amounts outstanding under the Bridge Facility and terminated the Bridge Facility in conjunction with such repayment.

On November 13, 2012, we entered into a senior secured revolving credit facility (the “Credit Facility”), which provides for borrowings in an aggregate amount up to $115 million on a committed basis and an accordion for an additional $35 million for a total facility size of $150 million. The exercise of the accordion will require sufficient borrowing base and additional commitments from the existing lender group and/or new lenders. Borrowings under the Credit Facility bear interest, subject to the Company’s election, on a per annum basis equal to (i) LIBOR plus 3.00% with no LIBOR floor or (ii) 2.00% plus an alternate base rate based on the highest of the Prime Rate, Federal Funds Rate plus 0.5% or one month LIBOR plus 1.0%. The Company pays unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility. Interest is payable quarterly in arrears. Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on November 12, 2016. As of June 30, 2013, we had $91 million in borrowings outstanding under the Credit Facility.

The Company incurred costs of $2.0 million in connection with obtaining the Credit Facility, which the Company has recorded as prepaid loan structure fees on its statement of assets and liabilities and is amortizing these fees over the life of the Credit Facility. As of June 30, 2013, $1.7 million of such prepaid loan structure fees have yet to be amortized.

We intend to elect to be treated for tax purposes as a RIC under Subchapter M of the Code. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. As a RIC, we generally will not have to pay corporate-level taxes on any income we distribute to our stockholders.

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Portfolio Composition and Investment Activity

Portfolio Composition

We originate and invest primarily in privately-held middle-market companies (typically those with $5.0 million to $50.0 million of EBITDA) through first lien, second lien, unitranche and mezzanine debt financing, often times with a corresponding equity investment.

As of June 30, 2013, we had $262.2 million (at fair value) invested in 25 companies. As of June 30, 2013, our portfolio included approximately 30.8% of first lien debt, 30.6% of second lien debt, 38.0% of mezzanine debt and 0.6% of equity investments at fair value.

As of December 31, 2012, we had $195.5 million (at fair value) invested in 15 companies. As of December 31, 2012, our portfolio included approximately 22.5% of first lien debt, 19.7% of second lien debt, 56.9% of mezzanine debt and 0.9% of equity investments at fair value.

The composition of our investments as of June 30, 2013 and December 31, 2012 was as follows:

		As of June 30, 2013								As of December 31, 2012
		Cost				Fair Value				Cost				Fair Value
Senior Secured – First Lien		$	80,541,308			$	80,733,973			$	44,014,214			$	44,014,214
Senior Secured – Second Lien			78,574,423				80,163,210				38,597,293				38,597,622
Unsecured Debt			99,783,987				99,574,359				111,129,878				111,125,134
Equity			1,714,286				1,714,286				1,714,286				1,714,286
Total Investments		$	260,614,004			$	262,185,828			$	195,455,671			$	195,451,256

The following is a summary of geographical concentration of our investment portfolio as of June 30, 2013:

		Cost				Fair Value				% of Total Investments
Colorado		$	36,222,535			$	36,416,980				13.90	%
Canada			27,851,919				28,085,330				10.71	%
Texas			26,552,462				26,676,407				10.17	%
New York			25,222,365				25,222,365				9.62	%
Minnesota			20,117,198				20,209,298				7.71	%
Kentucky			16,995,155				16,995,155				6.48	%
Florida			16,808,553				16,808,553				6.41	%
South Carolina			15,000,000				15,231,000				5.81	%
Massachusetts			10,000,000				10,081,300				3.84	%
Utah			9,858,883				9,999,750				3.81	%
Pennsylvania			9,649,788				9,789,000				3.73	%
New Jersey			9,268,855				9,268,855				3.54	%
Indiana			9,060,881				9,060,881				3.46	%
Puerto Rico			8,704,440				8,731,624				3.33	%
Missouri			7,921,322				8,100,000				3.09	%
Illinois			7,387,759				7,387,759				2.82	%
Virginia			2,513,091				2,576,571				0.98	%
Georgia			1,478,798				1,545,000				0.59	%
		$	260,614,004			$	262,185,828				100.00	%

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The following is a summary of geographical concentration of our investment portfolio as of December 31, 2012:

		Cost				Fair Value				% of Total Investments
Pennsylvania		$	33,708,952			$	33,704,209				17.24	%
Canada			20,778,456				20,778,456				10.63	%
Colorado			19,532,633				19,532,633				9.99	%
Kentucky			17,095,646				17,095,646				8.75	%
Florida			16,639,880				16,639,880				8.51	%
South Carolina			15,000,000				15,000,000				7.67	%
New York			13,000,000				13,000,000				6.65	%
Texas			12,119,671				12,120,000				6.20	%
Massachusetts			10,000,000				10,000,000				5.12	%
Utah			9,902,063				9,902,062				5.07	%
New Jersey			9,879,189				9,879,189				5.05	%
Indiana			8,969,955				8,969,955				4.59	%
Connecticut			7,351,604				7,351,604				3.76	%
Georgia			1,477,622				1,477,622				0.77	%
		$	195,455,671			$	195,451,256				100.00	%

The following is a summary of industry concentration of our investment portfolio as of June 30, 2013:

		Cost				Fair Value				% of Total Investments
Services: Business		$	36,671,392			$	36,904,803				14.08	%
Healthcare & Pharmaceuticals			35,566,612				35,340,402				13.48	%
High Tech Industries			28,376,839				28,376,839				10.82	%
Media: Broadcasting & Subscription			22,921,322				23,331,000				8.90	%
Telecommunications			22,252,754				22,414,401				8.55	%
Energy: Oil & Gas			19,621,144				19,643,577				7.49	%
Retail			19,127,738				19,268,605				7.35	%
Beverage, Food, & Tobacco			16,669,216				17,212,500				6.57	%
Finance			12,222,365				12,222,365				4.66	%
Automotive			12,203,449				12,203,449				4.65	%
Software			11,478,798				11,626,300				4.43	%
Consumer Goods: Non-Durable			9,649,788				9,789,000				3.73	%
Transportation: Cargo			9,060,881				9,060,881				3.46	%
Metals & Mining			4,791,706				4,791,706				1.83	%
		$	260,614,004			$	262,185,828				100.00	%

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The following is a summary of industry concentration of our investment portfolio as of December 31, 2012:

		Cost				Fair Value				% of Total Investments
Consumer Goods: Non-Durable		$	33,708,952			$	33,704,209				17.24	%
Services: Business			31,117,502				31,117,501				15.93	%
High Tech Industries			30,778,456				30,778,456				15.75	%
Health & Pharmaceuticals			26,884,237				26,884,237				13.75	%
Retail			19,781,252				19,781,252				10.12	%
Media: Broadcasting & Subscription			15,000,000				15,000,000				7.67	%
Automotive			12,345,646				12,345,646				6.32	%
Telecommunications			12,119,671				12,120,000				6.20	%
Transportation: Cargo			8,969,955				8,969,955				4.59	%
Metals & Mining			4,750,000				4,750,000				2.43	%
		$	195,455,671			$	195,451,256				100.00	%

At June 30, 2013, our average portfolio company investment at amortized cost and fair value was approximately $10.4 million and $10.5 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $21.0 million and $21.0 million, respectively. At December 31, 2012, our average portfolio company investment at amortized cost and fair value was approximately $13.0 million and $13.0 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $33.0 million and $33.0 million, respectively.

At June 30, 2013, 55% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 45% bore interest at fixed rates. At December 31, 2012, 40% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 60% bore interest at fixed rates.

The weighted average yield on all of our debt investments as of June 30, 2013 and December 31, 2012 was approximately 11.7% and 12.5%, respectively. The weighted average yield was computed using the effective interest rates for all of our debt investments, including accretion of original issue discount.

As of June 30, 2013 and December 31, 2012, we had cash of $1.0 million and $12.1 million, respectively, and United States Treasury securities of $10.0 million and $50.0 million, respectively. The United States Treasury securities were purchased and temporarily held in connection with complying with RIC diversification requirements under Subchapter M of the Code.

Investment Activity

On November 7, 2012, we acquired our initial portfolio for $165.2 million in cash and $29.2 million in shares of our common stock based on the price of $15.00 per share, or $194.4 million in total (excluding accrued interest of approximately $2.3 million) from a private investment fund to which the D. E. Shaw group serves as investment adviser and Stellus Capital Management, LLC serves as a non-discretionary sub-adviser. Our initial portfolio was comprised of a portion of the loans to middle-market companies that were originated over the previous three years by the Stellus Capital Management, LLC investment team during their time with the D. E. Shaw group and were selected for our initial portfolio because they are similar to the type of investments we originate. Our initial portfolio included middle-market loans that had an internal risk rating of 2 or better (i.e., investments that were performing at or above expectations and whose risks were neutral or favorable compared to the expected risk at the time of the original investment).

During the three months ended June 30, 2013, we made $80.8 million of investments in seven new portfolio companies and one to an existing portfolio company. During the six months ended June 30, 2013, we made $112 million of investments in 11 new portfolio companies and one to an existing portfolio company.

During the three months ended June 30, 2013, we received $23.8 million in proceeds principally from prepayments of our investments, including $1.3 million from amortization of certain other investments. During

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the six months ended June 30, 2013, we received $49 million in proceeds principally from prepayments of our investments, including $1.5 million from amortization of certain other investments.

Our level of investment activity can vary substantially from period to period depending on many factors, including the amount of debt and equity capital to middle market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.

Asset Quality

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

The following table shows the investment rankings of our investments at fair value:

		As of June 30, 2013												As of December 31, 2012
Investment Rating		Fair Value				% of Total Portfolio				Number of Portfolio Companies				Fair Value				% of Total Portfolio				Number of Portfolio Companies
1		$	19.1				7	%			2			$	—				—	%			—
2			230.1				88	%			22				195.5				100				15
3			13.0				5	%			1				—				—				—
4			—				—				—				—				—				—
5			—				—				—				—				—				—
		$	262.2								25			$	195.5				100	%			15

Loans and Debt Securities on Non-Accrual Status

We will not accrue interest on loans and debt securities if we have reason to doubt our ability to collect such interest. As of June 30, 2013 and December 31, 2012, we had no loans on non-accrual.

Results of Operations for the Three Months and Six Months Ended June 30, 2013

An important measure of our financial performance is net increase (decrease) in net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income (loss) is the difference between our income from interest, dividends, fees and other investment income and our operating expenses including interest on borrowed funds. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of

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

Revenues

We generate revenue in the form of interest income on debt investments and capital gains and distributions, if any, on investment securities that we may acquire in portfolio companies. Our debt investments typically have a term of five to seven years and bear interest at a fixed or floating rate. Interest on our debt securities is generally payable quarterly. Payments of principal on our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments may pay interest in-kind, or PIK. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect that the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases. In addition, we may generate revenue in the form of prepayment fees, commitment, loan origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees.

Investment income for the three months and six months ended June 30, 2013 totaled $7.3 million and $13.8 million, respectively, and was entirely composed of interest income.

Expenses

Our primary operating expenses include the payment of fees to Stellus Capital Management, LLC under the investment advisory agreement, our allocable portion of overhead expenses under the administration agreement and other operating costs described below. We bear all other out-of-pocket costs and expenses of our operations and transactions, which may include: