Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2025
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-35730
STELLUS CAPITAL INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
Maryland
46-0937320
(State or other jurisdiction ofincorporation or organization)
(I.R.S. EmployerIdentification No.)
4400 Post Oak Parkway, Suite 2200, Houston, TX
77027
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (713) 292-5400
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share
SCM
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2025 was $371,895,297.
The number of shares of the issuer’s Common Stock, $0.001 par value per share, outstanding as of March 11, 2026 was 28,947,254.
Documents Incorporated by Reference
Portions of the registrant’s definitive Proxy Statement relating to the registrant’s 2026 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the registrant’s fiscal year, are incorporated by reference in Part III of this Annual Report on Form 10-K as indicated herein.
FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2025
TABLE OF CONTENTS
PART I.
ITEM 1.
BUSINESS
1
ITEM 1A.
RISK FACTORS
34
ITEM 1B.
UNRESOLVED STAFF COMMENTS
68
ITEM 1C.
CYBERSECURITY
ITEM 2.
PROPERTIES
69
ITEM 3.
LEGAL PROCEEDINGS
ITEM 4.
MINE SAFETY DISCLOSURES
PART II.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
70
ITEM 6.
[RESERVED]
74
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
75
ITEM 7A.
QUANTITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
96
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
98
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
181
ITEM 9A.
CONTROLS AND PROCEDURES
ITEM 9B.
OTHER INFORMATION
182
ITEM 9C.
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
183
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
184
ITEM 11.
EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
185
ITEM 16.
FORM 10-K SUMMARY
189
SIGNATURES
190
PART I
Item 1. Business
Except as otherwise indicated, the terms “we,” “us,” “our,” and the “Company” refer to Stellus Capital Investment Corporation; and “Stellus Capital Management,” the “Advisor” or the “Administrator” refer to our investment adviser and administrator, Stellus Capital Management, LLC.
General
We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). We were organized as a Maryland corporation on May 8, 2012, and formally commenced operations on November 7, 2012. We originate and invest primarily in private U.S. lower middle-market companies (typically those with $5 million to $50 million of EBITDA (earnings before interest, taxes, depreciation and amortization)) through first lien (including unitranche), second lien, and unsecured debt financing, often with corresponding equity co-investments. Unitranche structures may combine characteristics of first lien senior secured as well as second lien and/or subordinated loans, and our unitranche loans will expose us to the risks associated with second lien and subordinated loans to the extent we invest in the “last-out” tranche. Unsecured debt includes senior unsecured and subordinated loans.
Our investment activities are managed by our investment adviser, Stellus Capital Management, an investment advisory firm led by Robert T. Ladd and its other senior investment professionals. We source investments primarily through the extensive network of relationships that the principals of Stellus Capital Management have developed with financial sponsor firms, financial institutions, lower middle-market companies, management teams and other professional intermediaries. The companies in which we invest are typically highly leveraged, and in most cases, our investments in such companies will not be rated by national rating agencies. If such investments were rated, we believe that they would likely receive a rating that is often referred to as “junk.”
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 lower middle-market companies. We seek to achieve our investment objective by:
On May 9, 2022, we and certain of our affiliates received an exemptive order (the “Order”) from the Securities and Exchange Commission (“SEC”) that superseded the prior co-investment exemptive relief orders and permits us to co-invest with additional types of private funds, other BDCs, and registered investment companies managed by Stellus
Capital Management or an adviser that is controlled, controlling, or under common control with Stellus Capital Management, subject to the conditions included therein. Pursuant to the Order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors must make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching of us or our stockholders on the part of any person concerned, (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objectives and strategies, (3) the investment by our affiliates would not disadvantage us, and our participation would not be on a basis different from or less advantageous than that on which our affiliates are investing and (4) the proposed investment by us would not benefit the Advisor, the other affiliated funds that are participating in the investment, or any affiliated person of any of them (other than parties to the transaction), except to the extent permitted by the exemptive relief and applicable law, including the limitations set forth in Section 57(k) of the 1940 Act. We co-invest, subject to the conditions in the Order, with an affiliated private BDC and other private credit funds managed by Stellus Capital Management that have an investment strategy that is similar or identical to our investment strategy, and we may co-invest with other BDCs, registered investment companies and other private credit funds managed by Stellus Capital Management or an adviser that is controlled, controlling, or under common control with Stellus Capital Management in the future. We believe that such co-investments may afford us additional investment opportunities and an ability to achieve greater diversification.
As a BDC, we are required to comply with certain regulatory requirements. For instance, as a BDC, we may not acquire any assets other than “qualifying assets” as specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets. Qualifying assets include investments in “eligible portfolio companies” (as defined in the 1940 Act). Under the relevant SEC rules, the term “eligible portfolio company” includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and certain public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal place of business in the United States.
We have elected, qualified, and intend to qualify annually to be treated for tax purposes as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). To maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. As of December 31, 2025, we were in compliance with the RIC requirements. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any income we distribute to our stockholders.
Under the provisions of the 1940 Act, we are permitted, as a BDC that has satisfied certain requirements, to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 150% of our gross assets, less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. As of December 31, 2025, our asset coverage ratio was 203%. The amount of leverage that we employ at any time depends on our assessment of the market and other factors at the time of any proposed borrowing.
Our principal executive office is currently located at 4400 Post Oak Parkway, Suite 2200, Houston, TX 77027, and our telephone number is (713) 292-5400. We maintain a website on the Internet at www.stelluscapital.com (under the “Public Investors” section). Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K and you should not consider information contained on our website to be part of this Annual Report on Form 10-K.
SBIC Licenses
Two of our wholly owned subsidiaries, Stellus Capital SBIC, LP and Stellus Capital SBIC II, LP (together, the “SBIC subsidiaries” and individually, the “SBIC I subsidiary” and “SBIC II subsidiary,” respectively), hold licenses to operate as small business investment companies (“SBICs”). Current U.S. Small Business Administration (“SBA”) regulations allow a single SBIC to obtain leverage in the form of debentures guaranteed by the SBA up to a maximum of $175.0 million, subject to required capitalization of the SBIC subsidiary, SBA approval, and other requirements. The maximum leverage available to a “family” of two or more SBIC funds under common control is $350.0 million, subject to SBA approval. SBA-guaranteed debentures have fixed interest rates that equal the prevailing rate for 10-year U.S.
2
Treasury Notes plus a market spread and have a maturity of ten years, with interest payable semi-annually. The principal amount of the debentures is not required to be paid before maturity but may be pre-paid at any time with no prepayment penalty. We believe that the SBA-guaranteed debentures are an attractive source of debt capital.
We have obtained exemptive relief from the SEC to permit us to exclude the SBA-guaranteed debentures of the SBIC subsidiaries from the definition of senior securities in the asset coverage requirement applicable to us under the 1940 Act. The exemptive relief provides us with increased flexibility under the asset coverage requirement by permitting us to borrow up to $325.0 million more than we would otherwise be able to absent the receipt of this exemptive relief.
Summary Risk Factors
Investing in our securities involves a high degree of risk. You should carefully consider the information in “Item 1A. Risk Factors”, including, but not limited to, the following risks:
3
Portfolio Composition
Our investments generally range in size from $5 million to $30 million, and we may also selectively invest in larger positions. We generally expect that the size of our positions will increase in proportion to the size of our capital base. Pending such investments, we may reduce our outstanding indebtedness or invest in cash, cash equivalents, U.S. government securities and other high-quality debt investments with a maturity of one year or less. In the future, we may adjust opportunistically the percentage of our assets held in various types of loans, our principal loan sources and the industries to which we have greatest exposure based on market conditions, the credit cycle, available financing and our desired risk/return profile.
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The following table provides a summary of our portfolio investments as of December 31, 2025:
As of
December 31, 2025
($ in millions)
Total number of portfolio company investments
115
Fair value(a)
$
1,007.6
Cost
1,026.1
% of portfolio at fair value – first lien debt(b)
90.2
%
% of portfolio at fair value – second lien debt
1.2
% of portfolio at fair value – unsecured debt
—
% of portfolio at fair value – equity
8.6
Weighted-average annual yield(c)
8.7
Stellus Capital Management
Stellus Capital Management manages our investment activities and is responsible for analyzing investment opportunities, conducting research and performing due diligence on potential investments, negotiating and structuring our investments, originating prospective investments and monitoring our investments and portfolio companies on an ongoing basis.
The senior investment professionals of Stellus Capital Management have an average of over 37 years of investing, corporate finance, restructuring, consulting and accounting experience and have worked together at several companies. The Stellus Capital Management senior investment professionals have a wide range of experience in lower middle-market investing, including originating, structuring and managing loans and debt securities through market cycles. The Stellus Capital Management senior investment professionals continue to provide investment sub-advisory services to D. E. Shaw & Co., L.P. and its associated investment funds (the “D.E. Shaw group”).
In addition to serving as our investment adviser and the sub-advisor to the D. E. Shaw group as noted above, Stellus Capital Management currently manages private credit funds, some of which have an investment strategy that is similar or identical to our investment strategy. We received the Order from the SEC, which permits us to co-invest with investment funds managed by Stellus Capital Management or an adviser that is controlled, controlling, or under common control with Stellus Capital Management where doing so is consistent with our investment strategy as well as applicable law (including the terms and conditions of the Order). We believe that such co-investments may afford us additional investment opportunities and an ability to achieve greater diversification. We will not co-invest with any D.E. Shaw group funds.
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Stellus Capital Management also serves as our Administrator, pursuant to an administration agreement, and is responsible for furnishing us with office facilities and equipment and providing us with clerical, bookkeeping, recordkeeping and other administrative services at such facilities. Stellus Capital Management is headquartered in Houston, Texas, and also maintains offices in the Washington, D.C. area and Charlotte, North Carolina.
Market Opportunity
We originate and invest primarily in private lower middle-market companies through first lien (including unitranche), second lien and unsecured debt financing, often with corresponding equity co-investments. We believe the environment for investing in lower middle-market companies is attractive for several reasons, including:
Robust Demand for Debt Capital
We believe that private equity firms have significant committed but uncalled capital, a large portion of which is still available for investment in the United States. We expect the large amount of uninvested capital commitments will drive buyout activity over the next several years, which should, in turn, create lending opportunities for us.
Attractive Environment to Lend To Lower Middle-Market Companies
The current state of the U.S. economy provides an attractive environment to lend to lower middle-market companies. The U.S. services, healthcare, technology and consumer products sectors continue to show strong growth and profitability, allowing lower middle-market companies to continue to service their debt and prudently borrow to support growth initiatives and mergers and acquisitions activity. This dynamism, coupled with ample capital from private equity firms to support lower middle-market companies, is creating a large population of creditworthy companies looking for debt capital.
Attractive Deal Pricing and Structures
We believe that the pricing of lower middle-market debt investments is higher, and the terms of such investments are more conservative, compared to larger liquid, public debt financings, due to the more limited universe of lenders as well as the highly negotiated nature of these financings. These transactions tend to offer stronger covenant packages, higher interest rates, lower leverage levels and better call protection compared to larger financings. In addition, lower middle-market loans typically offer other investor protections such as default penalties, lien protection, change of control provisions and information rights for lenders.
Specialized Lending Requirements
Lending to lower middle-market companies requires in-depth diligence, credit expertise, restructuring experience and active portfolio management. We believe that several factors render many U.S. financial institutions ill-suited to lend to lower middle-market companies. For example, based on the experience of Stellus Capital Management’s senior investment professionals, lending to lower middle-market companies in the United States (a) is generally more labor intensive than lending to larger companies due to the smaller size of each investment and the fragmented nature of the information available with respect to such companies, (b) requires specialized due diligence and underwriting capabilities, and (c) may also require more extensive ongoing monitoring by the lender. We believe that, through Stellus Capital Management, we have the experience and expertise to meet these specialized lending requirements.
Competitive Strengths
We believe that the following competitive strengths will allow us to achieve positive returns for our investors:
Experienced Investment Team
Through our investment adviser, Stellus Capital Management, we have access to the experience and expertise of the Stellus Capital Management senior investment professionals, including its senior investment professionals who have an
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average of over 37 years of investing, corporate finance, restructuring, consulting and accounting experience and have worked together at several companies. The Stellus Capital Management investment professionals have a wide range of experience in lower middle-market investing, including originating, structuring and managing loans and debt securities through market cycles. We believe the members of Stellus Capital Management’s senior investment professionals are proven and experienced, with extensive capabilities in leveraged credit investing, having participated in these markets for the predominant portion of their careers. We believe that these characteristics enhance the quantity and quality of investment opportunities available to us.
Established, Rigorous Investment and Monitoring Process
The Stellus Capital Management investment professionals have developed an extensive review and credit analysis process. Each investment that is reviewed by Stellus Capital Management is brought through a structured, multi-stage approval process. In addition, Stellus Capital Management takes an active approach in monitoring all investments, including reviews of financial performance on at least a quarterly basis and regular discussions with management. We believe Stellus Capital Management’s investment and monitoring process and the depth and experience of its investment professionals allow it to conduct the type of due diligence and monitoring that enables it to identify and evaluate risks and opportunities.
Demonstrated Ability to Structure Investments Creatively
Stellus Capital Management has the expertise and ability to structure investments across all levels of a company’s capital structure. Furthermore, we believe that current market conditions will allow us to structure attractively priced debt investments and may allow us to incorporate other return-enhancing mechanisms such as commitment fees, OID, early redemption premiums, PIK interest and various forms of equity securities.
Resources of Stellus Capital Management Platform
We have access to the resources and capabilities of Stellus Capital Management, which has 17 investment professionals, including Robert T. Ladd, Dean D’Angelo, and Joshua T. Davis, who are supported by seven managing directors, four vice presidents and three analysts. These individuals have developed long-term relationships with lower middle-market companies, management teams, financial sponsors, lending institutions and deal intermediaries by providing flexible financing throughout the capital structure. We believe that these relationships provide us with a competitive advantage in identifying investment opportunities in our target market. We also expect to benefit from Stellus Capital Management’s due diligence, credit analysis, origination and transaction execution experience and capabilities, including the support provided with respect to those functions by W. Todd Huskinson, who serves as our Chief Financial Officer and Chief Compliance Officer, and his staff of sixteen finance and operations professionals.
Investment Strategy
The Stellus Capital Management senior investment professionals employ an opportunistic and flexible investing approach, combined with strong risk management processes, which we believe yields a highly diversified portfolio across companies, geographies, industries, and investment types. We seek direct origination opportunities of first lien (including unitranche), second lien, and unsecured debt financing, often with corresponding equity co-investments, in lower middle-market companies. We believe that businesses in this size range often have limited access to public financial markets, and will benefit from Stellus Capital Management’s reliable lending approach. Many financing providers have chosen to focus on large corporate clients and managing capital markets transactions rather than lending to lower middle-market businesses. Further, many financial institutions and traditional lenders are faced with constrained balance sheets and are requiring existing borrowers to reduce leverage.
With an average of over 37 years of investing, corporate finance, restructuring, consulting and accounting experience, the senior investment professionals of Stellus Capital Management have demonstrated investment expertise throughout the balance sheet and in a variety of situations, including financial sponsor buyouts, growth capital, debt refinancing, balance sheet recapitalizations, rescue financings, distressed opportunities, and acquisition financings. Our investment philosophy emphasizes capital preservation through superior credit selection and risk mitigation. We expect
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our portfolio to provide downside protection through conservative cash flow and asset coverage requirements, priority in the capital structure and information requirements. We also anticipate benefiting from equity participation through equity co-investments. This flexible approach enables us to respond to market conditions and offer customized lending solutions.
Stellus Capital Management invests across a wide range of industries with deep expertise in select verticals including, but not limited to, business services, retail, general industrial, government services, healthcare, software and specialty finance. Our typical transactions include providing financing for leveraged buyouts, acquisitions, recapitalizations and growth opportunities. We seek to maintain a diversified portfolio of investments as a method to manage risk and capitalize on specific sector trends. In addition, we co-invest with private credit funds and a private BDC managed by Stellus Capital Management or its affiliates that have a similar, overlapping or identical investment strategy as us where doing so is consistent with conditions of the Order, and we may co-invest with other BDCs, registered investment companies, and private credit funds managed by Stellus Capital Management or an adviser that is controlled, controlling, or under common control with Stellus Capital Management in the future.
Our objective is to act as the lead or largest investor in transactions, generally investing between $5 million and $30 million per transaction. We expect the average investment holding period to be between two and four years, depending upon portfolio company objectives and conditions in the capital markets.
We focus on lower middle-market companies with between $5 million and $50 million of EBITDA in a variety of industry sectors with positive long-term dynamics and dependable cash flows. We seek businesses with management teams with demonstrated track records and economic incentives in strong franchises and sustainable competitive advantages with dependable and predictable cash flows.
We employ leverage prudently and within the limitations of the applicable laws and regulations for BDCs. Any decision on our part to use leverage will depend upon our assessment of the attractiveness of available investment opportunities in relation to the costs and perceived risks of such leverage.
Transaction Sourcing
As access to investment opportunities is highly relationship-driven, the senior investment team and other investment professionals of Stellus Capital Management spend considerable time developing and maintaining contacts with key deal sources, including private equity firms, investment banks and senior lenders. The senior investment team and other investment professionals of Stellus Capital Management have been actively investing in the lower middle-market for more than a decade and have focused on extensive calling and marketing efforts via speaking engagements, sponsorships, industry events and referrals to broaden their relationship network. Existing relationships are constantly cultivated through transactional work and other personal contacts.
In addition to financial sponsors, Stellus Capital Management has developed a network of other deal sources, including:
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We believe that Stellus Capital Management’s broad network of deal origination contacts will provide us with a continuous source of investment opportunities.
These origination relationships provide access not only to potential investment opportunities but also to market intelligence on trends across the credit markets. Since inception, Stellus Capital Management has completed financing transactions with more than 195 equity sponsors and completed multiple financing transactions with more than 35 of those equity sponsors.
We believe that over the past decade, the senior investment team and other investment professionals of Stellus Capital Management have built a reputation as a thoughtful and disciplined provider of capital to lower middle-market companies and a preferred financing source for private equity sponsors and management teams. We believe these factors give Stellus Capital Management a competitive advantage in sourcing investment opportunities, which are put to use for our benefit.
Investment Structuring
Stellus Capital Management believes that each investment has unique characteristics that must be considered, understood and analyzed. Stellus Capital Management structures investment terms based on the business, the credit profile, the outlook for the industry in which a potential portfolio company operates, the competitive landscape, the products or services which the company sells and the management team and ownership of the company, among other factors. Stellus Capital Management relies upon the analysis conducted and information gathered through the investment process to evaluate the appropriate structure for our investments.
We invest primarily in the debt securities of lower middle-market companies. Our investments typically carry a high level of cash pay interest and may incorporate other return-enhancing mechanisms such as commitment fees, OID, early redemption premiums, PIK interest and some form of equity participation, including preferred stock, common stock, warrants and other forms of equity participation. We expect that a typical debt investment in which we invest will have a term at origination of between five and seven years. We expect to hold most of our investments to maturity or repayment, but we may sell some of our investments earlier if a liquidity event occurs, such as a sale or recapitalization, or upon the worsening of the credit quality of the portfolio company.
Stellus Capital Management negotiates covenants in connection with debt investments that provide protection for us but allow appropriate flexibility for the portfolio company. Such covenants may include affirmative and negative covenants, default penalties, lien protection and change of control provisions. Stellus Capital Management requires comprehensive information rights including access to management, financial statements and budgets and, in some cases, membership on the portfolio company’s board of directors or board observation rights. Additionally, Stellus Capital Management generally requires financial covenants and terms that restrict an issuer’s use of leverage and limit asset sales and capital expenditures.
Secured Debt
Secured debt, including first lien (including unitranche) and second lien financing, has liens on the assets of the borrower that serve as collateral in support of the repayment of such loans.
First Lien Debt First lien debt is structured with first-priority liens on the assets of the borrower that serve as collateral in support of the repayment of such loans. First lien loans may provide for moderate loan amortization in the early years of the loan, with the majority of the amortization deferred until loan maturity.
Unitranche Debt Unitranche debt typically is structured as first lien loans that combine both senior and junior debt, with lenders agreeing separately to an order of priority among them. To the extent that we invest in the “last out” tranche of a unitranche facility, our unitranche investments will have certain risk characteristics of second lien debt. Unitranche debt typically provides for moderate loan amortization in the initial years of the debt, with the majority of the principal payment deferred until loan maturity. Since unitranche debt generally allows the borrower to make a large lump sum payment of principal at the end of the loan term, there is a risk of loss if the borrower is unable to pay the
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lump sum or refinance the amount owed at maturity. In some cases, we will be the sole lender, or we, together with our affiliates, will be the sole lender, of unitranche debt, which can provide us with more influence interacting with a borrower in terms of monitoring and, if necessary, remediation in the event of underperformance.
Second Lien Debt Second lien debt is structured as junior, secured loans with second priority liens on an issuer’s assets. These loans typically provide for moderate loan amortization in the initial years of the loan, with the majority of the amortization deferred until loan maturity.
Unsecured Debt
Unsecured debt, including senior unsecured and subordinated loans, is not secured by any collateral and is effectively subordinated to the borrower’s secured indebtedness (to the extent of the collateral securing such indebtedness), including pursuant to one or more intercreditor agreements that we enter into with holders of a borrower’s senior debt.
Senior Unsecured Loans Senior unsecured loans are structured as loans that rank senior in right of payment to any of the borrower’s unsecured indebtedness that is contractually subordinated to such loans. These loans generally provide for fixed interest rates and amortize evenly over the term of the loan. Senior unsecured loans are generally less volatile than subordinated loans due to their priority over subordinated loans.
Subordinated Loans Subordinated loans are structured as unsecured, subordinated loans that provide for relatively high, fixed interest rates that provide us with significant current interest income. These loans typically have interest-only payments (often representing a combination of cash pay and PIK interest) in the early years, with amortization of principal deferred to maturity. Subordinated loans generally allow the borrower to make a large lump sum payment of principal at the end of the loan term, and there is a risk of loss if the borrower is unable to pay the lump sum or refinance the amount owed at maturity. Subordinated loans are generally more volatile than secured loans and senior unsecured loans and may involve a greater risk of loss of principal as compared to other types of loans. Subordinated loans often include a PIK feature, which effectively operates as negative amortization of loan principal, thereby increasing credit risk exposure over the life of the loan.
Equity Securities
In connection with some of our debt investments, we may also invest in preferred or common stock or receive nominally priced warrants or options to buy an equity interest in the portfolio company. As a result, as a portfolio company appreciates in value, we may achieve additional investment return from this equity interest. We may structure such equity investments and warrants to include provisions protecting our rights as a minority-interest holder, as well as a “put,” or right to sell such securities back to the issuer, upon the occurrence of specified events. In many cases, we may also seek to obtain registration rights in connection with these equity interests, which may include demand and “piggyback” registration rights.
Investment Process
Through the resources of Stellus Capital Management, we have access to significant research resources, experienced investment professionals, internal information systems and a credit analysis framework and investment process. Stellus Capital Management has designed a highly involved and interactive investment management process, which is the core of its culture and the basis for what we believe is a strong track record of investment returns. The investment process seeks to select only those investments that the Advisor believes have the most attractive risk/reward characteristics. The process involves several levels of review and is coordinated in an effort to identify risks in potential investments. Stellus Capital Management applies its expertise to screen our investment opportunities as described below. This rigorous process, combined with its broad origination capabilities, has allowed the Stellus Capital Management team to be prudent in selecting opportunities in which to make an investment.
All potential investment opportunities undergo an initial informal review by Stellus Capital Management’s investment professionals. Each potential investment opportunity that an investment professional determines merits
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consideration is presented and evaluated at a weekly meeting during which Stellus Capital Management’s senior investment professionals discuss the merits and risks of the potential investment opportunity as well as the due diligence process and the pricing and structure. If Stellus Capital Management’s senior investment professionals believe an investment opportunity merits further review, the investment opportunity is assigned a deal team and the deal team prepares and presents to the investment committee for initial review a prescreen memorandum that generally describes the potential transaction and includes a description of the risks, due diligence process and proposed structure and pricing for the proposed investment opportunity.
Prior to making an investment, Stellus Capital Management conducts rigorous diligence on each investment opportunity. In connection with its due diligence on a potential investment opportunity, Stellus Capital Management utilizes its internal diligence resources, which include its internally developed credit analytical framework, subscriptions to third party research resources, discussions with industry experts, internal information sharing systems and the analytical expertise of its investment professionals. Stellus Capital Management typically reviews the company’s historical financials, industry drivers and outlook, competitive threats, customer concentration, asset coverage, projected financials and credit metrics, management background checks and, if applicable, the track record and funding capabilities of the private equity sponsor.
Upon review of the prescreen memorandum, if the investment committee determines to proceed with the review of an investment opportunity, the deal team continues its diligence and deal structuring plans and prepares a credit approval memorandum for review by the investment committee. The credit approval memorandum updates the prescreen memorandum with more deal-specific detail, including an update to the diligence process and any changes in the structure and pricing of the proposed investment.
Investment Committee
Each new investment opportunity must be unanimously approved by Stellus Capital Management’s investment committee. Follow-on investments in existing portfolio companies also require the investment committee’s unanimous approval. Stellus Capital Management’s Chief Investment Officer, Robert T. Ladd, reviews any amendments before finalizing and closing negotiations with the prospective portfolio company. The purpose of Stellus Capital Management’s investment committee is to evaluate and approve all of our investments, subject at all times to the oversight of our Board. The investment committee process is intended to bring the diverse experience and perspectives of the committee’s members to the analysis and consideration of each investment. The investment committee consists of Robert T. Ladd, Dean D’Angelo, Joshua T. Davis and W. Todd Huskinson. The investment committee serves to provide investment consistency and adherence to our core investment philosophy and policies. The investment committee also determines appropriate investment sizing and suggests ongoing monitoring requirements.
In addition to reviewing investments, investment committee meetings serve as a forum to discuss credit views and outlooks. Potential transactions and deal flow are reviewed on a regular basis. Members of the investment team are encouraged to share information and views on credits with the investment committee early in their analysis. We believe this process improves the quality of the analysis and assists the deal team members to work more efficiently.
Each member of the investment committee performs a similar role for other accounts managed by Stellus Capital Management. In certain instances, including in connection with co-investments under the Order, approval by our Board may also be required prior to the making of an investment.
Monitoring Investments
In most cases, we do not have board influence over our portfolio companies. In some instances, Stellus Capital Management’s senior investment professionals may obtain board representation or observation rights in conjunction with our investments. Stellus Capital Management takes an active approach in monitoring all investments, including reviews of financial performance on at least a quarterly basis and regular discussions with management. The monitoring process begins with structuring terms and conditions, which require the timely delivery and access to critical financial and business information on portfolio companies.
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Specifically, Stellus Capital Management’s monitoring system consists of the following activities:
Regular Investment Committee Updates Key portfolio company developments are discussed each week as part of the standard investment committee meeting agenda.
Written Reports The deal teams provide periodic written updates as appropriate for key events that impact portfolio company performance or valuation. In addition, deal teams provide written updates following each portfolio company board meeting.
Quarterly Full Portfolio Review Stellus Capital Management’s investment committee performs a comprehensive review of every portfolio company with the deal teams. This process includes a written performance and valuation update and credit-specific discussion on each of our portfolio companies. Portfolio investments that are not publicly traded or for which market quotations are not readily available are valued at fair value as determined in good faith by our Board based on the input of Stellus Capital Management’s investment professionals and our Board’s audit committee. In addition, pursuant to our valuation policy, the valuation of each portfolio investment for which a market quotation is not readily available is reviewed by our independent third-party valuation firm at least twice annually.
As part of the monitoring process, Stellus Capital Management also tracks developments in the broader marketplace. Stellus Capital Management’s investment professionals have a wealth of information on the competitive landscape, industry trends, relative valuation metrics, and analyses that assist in the execution of our investment strategy. In addition, Stellus Capital Management’s extensive communications with brokers and dealers allows its investment professionals to monitor market and industry trends that could affect portfolio investments. Stellus Capital Management may provide ongoing strategic, financial and operational guidance to some portfolio companies either directly or by recommending its investment professionals or other experienced representatives to participate on the portfolio company’s board of directors. Stellus Capital Management maintains an extensive network of strategic and operational advisers to call upon for industry expertise or to supplement existing management teams.
Asset Quality
In addition to various risk management and monitoring tools, Stellus Capital Management uses an investment ranking system to characterize and monitor the credit profile and expected level of returns on each investment in our portfolio. This investment ranking system uses a five-level numeric scale. The following is a description of the conditions associated with each investment category:
Investment Category 1 is used for investments that are performing above expectations, and whose risks remain favorable compared to the expected risk at the time of the original investment.
Investment Category 2 is used for investments that are performing within expectations and whose risks remain neutral compared to the expected risk at the time of the original investment. All new loans are initially rated 2.
Investment Category 3 is used for investments that are performing below expectations and that require closer monitoring, but no loss of return or principal is expected. Portfolio companies with a rating of 3 may be out of compliance with financial covenants.
Investment Category 4 is used for investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are often in work out. Investments with a rating of 4 are those for which some loss of contractual return but no loss of principal is expected.
Investment Category 5 is used for investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are almost always in work out. Investments with a rating of 5 are those for which some loss of return and principal is expected.
In the event that Stellus Capital Management determines that an investment is underperforming, or circumstances suggest that the risk associated with a particular investment has significantly increased, Stellus Capital Management will
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increase its monitoring intensity and prepare regular updates for the investment committee, summarizing current operating results and material impending events and suggesting recommended actions. While the investment ranking system identifies the relative risk for each investment, the ranking alone does not dictate the scope and/or frequency of any monitoring that is performed. The frequency of Stellus Capital Management’s monitoring of an investment is determined by a number of factors, including, but not limited to, the trends in the financial performance of the portfolio company, the investment structure and the type of collateral securing the investment.
Determination of Net Asset Value and Portfolio Valuation Process
The net asset value per share of our outstanding shares of common stock is determined quarterly by dividing the value of total assets minus liabilities by the total number of shares outstanding.
Rule 2a-5 under the 1940 Act (“Rule 2a-5”) establishes requirements for determining fair value in good faith for purposes of the 1940 Act. Rule 2a-5 permits boards to designate certain parties to perform fair value determinations, subject to board oversight and certain other conditions. Rule 2a-5 also defines when market quotations are “readily available” for purposes of the 1940 Act and the threshold for determining whether a fund must determine the fair value of a security. Rule 31a-4 under the 1940 Act (“Rule 31a-4”) regulates recordkeeping associated with fair value determinations. While our Board has not elected to designate a valuation designee, we have adopted valuation policies and procedures that comply with the applicable requirements of Rule 2a-5 and Rule 31a-4.
As a BDC, we will generally invest in illiquid loans and securities, including debt and equity securities of private lower middle-market companies. Section 2(a)(41) of the 1940 Act requires that a BDC value its assets as follows: (i) the third party price for securities for which a market quotation is readily available; and (ii) for all other securities and assets, fair value, as determined in good faith by a BDC’s board (or valuation designee, as applicable).
In calculating the value of our total assets, investment transactions will be recorded on the trade date. Realized gains or losses will be computed using the specific identification method.
Under procedures approved by our Board, we intend to value investments for which market quotations are readily available at such market quotations. We will obtain these market values from an independent pricing service or at the midpoint of 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 quotations are not readily available will be valued at fair value as determined in good faith by our Board. Such determinations of fair value may involve subjective judgments and estimates. We also engage independent valuation providers to review the valuation of each portfolio investment that does not have a readily available market quotation at least twice annually.
Debt and equity investments purchased within approximately 90 days of the valuation date will be valued at cost, plus accreted discount or minus amortized premium, which approximates fair value. With respect to unquoted securities, our Board will value each investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies that are public and other factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Board will use the pricing indicated by the external event to corroborate and/or assist in determining the valuation. Because we expect that there will not be a readily available market quotation for many of the investments in our portfolio, we expect to value most of our portfolio investments at fair value as determined in good faith by the Board using a documented valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different from the valuations currently assigned.
We have adopted Financial Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 requires us to assume that the portfolio investment is assumed to
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be sold in the principal market to market participants, or in the absence of a principal market, the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. In accordance with ASC 820, the market in which we can exit portfolio investments with the greatest volume and level of activity is considered our principal market.
With respect to investments for which market quotations are not readily available, our Board undertakes a multi-step valuation process each quarter, as described below:
In following these approaches, the types of factors that are taken into account in determining the fair value of our investments include, as relevant, but are not limited to:
Realization of Investments
The potential exit scenarios of a portfolio company play an important role in evaluating investment decisions. Our debt orientation provides for increased potential exit opportunities, including (a) the sale of investments in the private
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markets, (b) the refinancing of investments, often due to maturity or recapitalizations, and (c) other liquidity events, including the sale or merger of the portfolio company. Since we seek to maintain a debt orientation in our investments, we expect to receive interest income over the course of the investment period, resulting in a return on invested capital well in advance of final exit.
Derivatives
We may utilize hedging techniques such as interest rate swaps to mitigate potential interest rate risk on our indebtedness. Such interest rate swaps would principally be used to protect us against higher costs on our indebtedness resulting from increases in both short-term and long-term interest rates. We also may use various hedging and other risk management strategies to seek to manage various risks, including changes in currency exchange rates and market interest rates. Such hedging strategies would be utilized to seek to protect the value of our portfolio investments, for example, against possible adverse changes in the market value of securities held in our portfolio.
Rule 18f-4 under the 1940 Act (“Rule 18f-4”) requires BDCs that use derivatives to, among other things, comply with a value-at-risk leverage limit, adopt a derivatives risk management program, and implement certain testing and board reporting procedures. Rule 18f-4 exempts BDCs that qualify as “limited derivatives users” from the aforementioned requirements, provided that these BDCs adopt written policies and procedures that are reasonably designed to manage the BDC’s derivatives risks and comply with certain recordkeeping requirements. We currently qualify as a “limited derivatives user” and expect to continue to do so. We have adopted a derivatives policy in compliance with Rule 18f-4 and comply with the recordkeeping requirements.
Managerial Assistance
As a BDC, we offer, and must provide upon request, managerial assistance to our portfolio companies. This assistance could involve monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. Stellus Capital Management or an affiliate of Stellus Capital Management provides such managerial assistance on our behalf to portfolio companies that request this assistance. We may receive fees for these services and will reimburse Stellus Capital Management or an affiliate of Stellus Capital Management, as applicable, for its allocated costs in providing such assistance, subject to the review by our Board, including our independent directors.
Competition
Our primary competitors in providing financing to lower middle-market companies include public and private funds, other BDCs, commercial and investment banks, commercial financing companies and, to the extent they provide an alternative form of financing, private equity and hedge funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, we believe some competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or to the distribution and other requirements we must satisfy to maintain our qualification as a RIC.
We use the expertise of the investment professionals of Stellus Capital Management to which we have access to assess investment risks and determine appropriate pricing for our investments in portfolio companies. In addition, we believe that the relationships of the investment professionals of Stellus Capital Management enable us to learn about, and compete effectively for, financing opportunities with attractive lower middle-market companies in the industries in which we invest.
Employees
We do not have any direct employees, and our day-to-day investment operations are managed by Stellus Capital Management. We have a Chief Executive Officer and President and a Chief Financial Officer, Chief Compliance
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Officer, Treasurer and Secretary. To the extent necessary, we may hire additional personnel going forward. Our officers are employees of Stellus Capital Management and our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and his staff is paid by us pursuant to the Administration Agreement that we have entered into with Stellus Capital Management (the “Administration Agreement”).
Management Agreements
Stellus Capital Management serves as our investment adviser and is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). In addition, Stellus Capital Management serves as our administrator.
Investment Advisory Agreement
Subject to the overall supervision of our Board and in accordance with the 1940 Act, Stellus Capital Management manages our day-to-day operations and provides investment advisory services to us. Under the terms of the Investment Advisory Agreement (the “Investment Advisory Agreement”), Stellus Capital Management:
Pursuant to the Investment Advisory Agreement, we have agreed to pay Stellus Capital Management a fee for investment advisory and management services consisting of two components — a base management fee and an incentive fee. The cost of both the base management fee and the incentive fee is ultimately borne by our stockholders.
Management Fee
The base management fee is calculated at an annual rate of 1.75% of our gross assets, including assets purchased with borrowed funds or other forms of leverage (including preferred stock, public and private debt issuances, derivative instruments, repurchase agreements and other similar instruments or arrangements) and excluding cash and cash equivalents. For services rendered under the Investment Advisory Agreement, the base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of our gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarters. Base management fees for any partial month or quarter are appropriately prorated.
Incentive Fee
The incentive fee, which provides Stellus Capital Management with a share of the income that it generates for us, has two components, ordinary income and capital gains, calculated as follows:
The ordinary income component is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the immediately preceding calendar quarter, subject to a total return requirement and deferral of non-cash amounts, and is 20.0% of the amount, if any, by which our pre-incentive fee net investment income, expressed
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as a rate of return on the value of our net assets attributable to our common stock, for the immediately preceding calendar quarter, exceeds a 2.0% (which is 8.0% annualized) hurdle rate and a “catch-up” provision, for the benefit of Stellus Capital Management, measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, Stellus Capital Management receives no incentive fee on our ordinary income until our pre-incentive fee net investment income equals the hurdle rate of 2.0%, but then receives, as a “catch-up,” 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5%.
The effect of the “catch-up” provision is that, subject to the total return provision discussed below, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, Stellus Capital Management receives 20.0% of our pre-incentive fee net investment income as if a hurdle rate did not apply. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial assistance and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement, and any interest expense and any distributions paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash. 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 will be 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 quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding quarters. In other words, any ordinary income incentive fee that is payable in a calendar quarter will be limited to the lesser of (i) 20.0% of the amount by which our pre-incentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, subject to the “catch-up” provision, and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations for the then-current and 11 preceding calendar 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 our pre-incentive fee net investment income, realized gains and losses and unrealized appreciation and depreciation for the then-current and 11 preceding calendar quarters. In addition, the portion of such incentive fee that is attributable to deferred interest (such as PIK interest or OID) will be paid to Stellus Capital Management, without any interest thereon, only if and to the extent we actually receive such interest in cash, and any accrual thereof will be reversed if and to the extent such interest is reversed in connection with any write-off or similar treatment of the investment giving rise to any deferred interest accrual. Any reversal of such amounts would reduce net income for the quarter by the net amount of the reversal (after taking into account the reversal of incentive fees payable) and would result in a reduction and possible elimination of the incentive fees for such quarter. There is no accumulation of amounts on the hurdle rate from quarter to quarter, and accordingly there is no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle, and there is no delay of payment if prior quarters are below the quarterly hurdle. Stellus Capital Management has agreed to permanently waive any interest accrued on the portion of the incentive fee attributable to deferred interest (such as PIK interest or OID).
Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that we may pay an incentive fee in a quarter where we incur a loss, subject to the total return requirement. For example, if we receive pre-incentive fee net investment income in excess of the quarterly minimum hurdle rate, we will pay the applicable incentive fee even if we have incurred a loss in that quarter due to realized and unrealized capital losses. Our net investment income used to calculate this component of the incentive fee is also included in the amount of our gross assets used to calculate the 1.75% base management fee. These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter.
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The following is a graphical representation of the calculation of the income-related portion of the incentive fee:
Quarterly Incentive Fee Based on Net Investment Income
Pre-Incentive Fee Net Investment Income
(expressed as a percentage of the value of net assets)
Percentage of Pre-incentive Fee Net Investment Income
Allocated to Income-Related Portion of Incentive Fee
The capital gains component of the incentive fee is determined 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 is equal to 20.0% of our cumulative aggregate realized capital gains from inception through the end of that calendar year, computed net of our aggregate cumulative realized capital losses and our aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gains incentive fees. If such amount is negative, then no capital gains incentive fee will be payable for such year. Additionally, if the Investment Advisory Agreement is terminated as of a date that is not a calendar year end, the termination date will be treated as though it were a calendar year end for purposes of calculating and paying the capital gains incentive fee.
Examples of Quarterly Incentive Fee Calculation
Example 1: Income Related Portion of Incentive Fee Before Total Return Requirement Calculation:
Alternative 1
Assumptions
Investment income (including interest, dividends, fees, etc.) = 1.25%Hurdle rate(1) = 2.0%Management fee(2) = 0.4375%Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.2%Pre-incentive fee net investment income(investment income — (management fee + other expenses)) = 0.6125%
Pre-incentive fee net investment income does not exceed hurdle rate, therefore there is no income-related incentive fee.
Alternative 2
Investment income (including interest, dividends, fees, etc.) = 2.9%Hurdle rate(1) = 2.0%Management fee(2) = 0.4375% Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.2%
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Pre-incentive fee net investment income(investment income — (management fee + other expenses)) = 2.2625%
Incentive fee
= 100% × Pre-incentive fee net investment income (subject to “catch-up”)(3)= 100% × (2.2625% — 2.0%)= 0.2625%
Pre-incentive fee net investment income exceeds the hurdle rate, but does not fully satisfy the “catch-up” provision, therefore the income related portion of the incentive fee is 0.2625%.
Alternative 3
Investment income (including interest, dividends, fees, etc.) = 3.5%Hurdle rate(1) = 2.0%Management fee(2) = 0.4375%Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.2%Pre-incentive fee net investment income(investment income — (management fee + other expenses)) = 2.8625%Incentive fee = 100% × Pre-incentive fee net investment income (subject to “catch-up”)(3)Incentive fee = 100% × “catch-up” + (20.0% × (pre-incentive fee net investment income — 2.5%))
“Catch-up”
= 2.5% — 2.0%= 0.5%
= (100% × 0.5%) + (20.0% × (2.8625% — 2.5%))= 0.5% + (20.0% × 0.3625%)= 0.5% + 0.0725%= 0.5725%
Pre-incentive fee net investment income exceeds the hurdle rate, and fully satisfies the “catch-up” provision, therefore the income related portion of the incentive fee is 0.5725%.
Example 2: Income Portion of Incentive Fee with Total Return Requirement Calculation:
Alternative 1:
Investment income (including interest, dividends, fees, etc.) = 3.5%Hurdle rate(1) = 2.0%Management fee(2) = 0.4375%Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.2%Pre-incentive fee net investment income(investment income — (management fee + other expenses) = 2.8625%Cumulative incentive compensation accrued and/or paid for preceding 11 calendar quarters = $9,000,000
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20.0% of cumulative net increase in net assets resulting from operations over current and preceding 11 calendar quarters = $8,000,000
Although our pre-incentive fee net investment income exceeds the hurdle rate of 2.0% (as shown in Alternative 3 of Example 1 above), no incentive fee is payable because 20.0% of the cumulative net increase in net assets resulting from operations over the then-current and 11 preceding calendar quarters did not exceed the cumulative income and capital gains incentive fees accrued and/or paid for the preceding 11 calendar quarters.
Alternative 2:
Investment income (including interest, dividends, fees, etc.) = 3.5%Hurdle rate(1) = 2.0%Management fee(2) = 0.4375%Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.2%Pre-incentive fee net investment income(investment income — (management fee + other expenses) = 2.8625%Cumulative incentive compensation accrued and/or paid for preceding 11 calendar quarters = $9,000,00020.0% of cumulative net increase in net assets resulting from operations over current and preceding11 calendar quarters = $10,000,000
Because our pre-incentive fee net investment income exceeds the hurdle rate of 2.0% and because 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 income and capital gains incentive fees accrued and/or paid for the preceding 11 calendar quarters, an incentive fee would be payable, as shown in Alternative 3 of Example 1 above.
Example 3: Capital Gains Portion of Incentive Fee(*):
Year 1: $2.0 million investment made in Company A (“Investment A”), and $3.0 million investment made in Company B (“Investment B”)
Year 2: Investment A sold for $5.0 million and fair market value (“FMV”) of Investment B determined to be $3.5 million
Year 3: FMV of Investment B determined to be $2.0 million
Year 4: Investment B sold for $3.25 million
The capital gains portion of the incentive fee would be:
Year 1: None
Year 2: Capital gains incentive fee of $0.6 million — ($3.0 million realized capital gains on sale of Investment A multiplied by 20.0%)
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Year 3: None — $0.4 million (20.0% multiplied by ($3.0 million cumulative capital gains less $1.0 million cumulative capital depreciation)) less $0.6 million (previous capital gains fee paid in Year 2)
Year 4: Capital gains incentive fee of $50,000 — $0.65 million ($3.25 million cumulative realized capital gains multiplied by 20.0%) less $0.6 million (capital gains incentive fee taken in Year 2)
Year 1: $2.0 million investment made in Company A (“Investment A”), $5.25 million investment made in Company B (“Investment B”) and $4.5 million investment made in Company C (“Investment C”)
Year 2: Investment A sold for $4.5 million, FMV of Investment B determined to be $4.75 million and FMV of Investment C determined to be $4.5 million
Year 3: FMV of Investment B determined to be $5.0 million and Investment C sold for $5.5 million
Year 4: FMV of Investment B determined to be $6.0 million
Year 5: Investment B sold for $4.0 million
The capital gains incentive fee, if any, would be:
Year 2: $0.4 million capital gains incentive fee — 20.0% multiplied by $2.0 million ($2.5 million realized capital gains on Investment A less $0.5 million unrealized capital depreciation on Investment B)
Year 3: $0.25 million capital gains incentive fee(1) — $0.65 million (20.0% multiplied by $3.25 million ($3.5 million cumulative realized capital gains less $0.25 million unrealized capital depreciation)) less $0.4 million capital gains incentive fee received in Year 2
Year 4: $0.05 million capital gains incentive fee — $0.7 million ($3.50 million cumulative realized capital gains multiplied by 20.0%) less $0.65 million cumulative capital gains incentive fee paid in Year 2 and Year 3
Year 5: None — $0.45 million (20.0% multiplied by $2.25 million (cumulative realized capital gains of $3.5 million less realized capital losses of $1.25 million)) less $0.7 million cumulative capital gains incentive fee paid in Year 2, Year 3 and Year 4(2)
*
The hypothetical amounts of returns shown are based on a percentage of our total net assets and assume no leverage. There is no guarantee that positive returns will be realized and actual returns may vary from those shown in this example.
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Payment of Our Expenses
All investment professionals of Stellus Capital Management, when and to the extent engaged in providing investment advisory and management services, and the compensation and routine overhead expenses of personnel allocable to these services to us, are provided and paid for by Stellus Capital Management and not by us. We bear all other out-of-pocket costs and expenses of our operations and transactions, including, without limitation, those relating to:
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Duration and Termination
Unless terminated earlier as described below, the Investment Advisory Agreement will continue in effect from year to year if approved annually by our Board or by the affirmative vote of the holders of a majority of our outstanding voting securities, and, in either case, if also approved by a majority of the independent directors. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Subsequent Events.” The Investment Advisory Agreement automatically terminates in the event of its assignment, as defined in the 1940 Act, by Stellus Capital Management and may be terminated by either party without penalty upon 60 days’ written notice to the other. The holders of a majority of our outstanding voting securities may also terminate the Investment Advisory Agreement without penalty upon 60 days’ written notice. See “Item 1A. Risk Factors — Risks Related to our Operations” in this Annual Report on Form 10-K. We are dependent upon key personnel of Stellus Capital Management for our future success. If Stellus Capital Management were to lose any of its key personnel, our ability to achieve our investment objective could be significantly harmed.
Indemnification
The Investment Advisory Agreement provides that Stellus Capital Management 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 us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of Stellus Capital Management’s services under the Investment Advisory Agreement or otherwise as our investment adviser. Our obligation to provide indemnification under the Investment Advisory Agreement, however, is limited by the 1940 Act and Investment Company Act Release No. 11330, which, among other things, prohibit us from indemnifying any director, officer or other individual from any liability resulting directly from the willful misconduct, bad faith, gross negligence in the performance of duties or reckless disregard of applicable obligations and duties of the directors, officers or other individuals and require us to set forth reasonable and fair means for determining whether indemnification shall be made.
Board Approval of the Investment Advisory Agreement
Our Board, including a majority of our independent directors, approved the Investment Advisory Agreement at its first meeting, held on September 24, 2012, and approved the annual continuation of the Investment Advisory Agreement most recently on January 7, 2026 by virtual means in reliance on relief provided by the SEC in response to the COVID-19 pandemic. As a condition of the SEC’s in-person meeting relief, our Board will be required to ratify the re-approval of the Investment Advisory Agreement at its next in-person meeting. In its consideration of the Investment Advisory Agreement, the Board focused on information it had received relating to, among other things: (a) the nature, quality and extent of the advisory and other services to be provided to us by our investment adviser; (b) comparative data with respect to advisory fees or similar expenses paid by other BDCs with similar investment objectives; (c) our projected operating expenses and expense ratio compared to BDCs with similar investment objectives; (d) any existing and potential sources of indirect income to our investment adviser from its relationships with us and the profitability of those relationships; (e) information about the services to be performed and the personnel performing such services under the Investment Advisory Agreement; (f) the organizational capability and financial condition of our investment adviser; and (g) various other factors.
In voting to approve the Investment Advisory Agreement, our Board, including all of the directors who are not “interested persons” of the Company, made the following conclusions:
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Based on the information reviewed and the discussions, the Board, including a majority of the independent directors, concluded that the investment management fee rates and terms are reasonable in relation to the services to be provided and approved the Investment Advisory Agreement as being in the best interests of our stockholders.
Administration Agreement
Under the Administration Agreement, Stellus Capital Management furnishes us with office facilities and equipment and provides us with clerical, bookkeeping, recordkeeping and other administrative services at such facilities. Stellus Capital Management also performs, or oversees the performance of, our required administrative services, which include being responsible for the financial and other records that we are required to maintain and preparing reports to our stockholders and reports and other materials filed with the SEC. In addition, Stellus Capital Management assists us in determining and publishing our net asset value, oversees the preparation and filing of our tax returns and the printing and dissemination of reports and other materials to our stockholders, and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. Under the Administration Agreement, Stellus Capital Management also provides managerial assistance on our behalf to those portfolio companies that have accepted our offer to provide such assistance.
Payments under the Administration Agreement are equal to an amount based upon our allocable portion (subject to the review of our Board) of Stellus Capital Management’s overhead in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and his staff. In addition, if requested to provide significant managerial assistance to our portfolio companies, Stellus Capital Management will be paid an additional amount based on the services provided, which shall not exceed the amount we receive from such portfolio companies for providing this assistance. The Administration Agreement had an initial term of two years and may be renewed with the approval of our Board on an annual basis. The Board most recently approved the annual continuation of the Administration Agreement on January 7, 2026. The Administration Agreement may be terminated by either party without penalty upon 60 days’ written notice to the other party. To the extent that Stellus Capital Management outsources any of its functions under the Administration Agreement, we will pay the fees associated with such functions on a direct basis without any incremental profit to Stellus Capital Management. Stockholder approval is not required to amend the Administration Agreement.
The Administration Agreement provides that Stellus Capital Management, its affiliates and their respective officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of Stellus Capital Management’s services under the Administration Agreement or otherwise as our administrator. Our obligation to provide indemnification under the Administration Agreement, however, is limited by the 1940 Act and Investment Company Act Release No. 11330, which, among other things, prohibit us from indemnifying any director, officer or other individual from any liability resulting directly from the willful misconduct, bad faith, gross negligence in the performance of duties or reckless disregard of applicable obligations and duties of the directors, officers or other individuals and require us to set forth reasonable and fair means for determining whether indemnification shall be made.
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 Stellus Capital Management or an affiliate thereof remains our investment advise.
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Exchange Act Reports
We maintain a website at www.stelluscapital.com (under the “Public Investors” section). The information on our website is not incorporated by reference in this Annual Report on Form 10-K.
We make available on or through our website certain reports and amendments to those reports that we file with or furnish to the SEC in accordance with the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC.
Regulation as a Business Development Company
We are a BDC under the 1940 Act that has elected to be treated as a RIC under the Code. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates (including any investment advisers), principal underwriters and affiliates of those affiliates or underwriters and requires that a majority of the directors be persons other than “interested persons,” as that term is defined in Section 2(a)(19) of the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved by the holders of a majority of our outstanding voting securities.
We may invest up to 100% of our assets in securities acquired directly from issuers in privately negotiated transactions. With respect to such securities, we may, for the purpose of public resale, be deemed an “underwriter,” as that term is defined in the Securities Act of 1933, as amended (the “Securities Act”). Our intention is to not write (sell) or buy put or call options to manage risks associated with the publicly traded securities of our portfolio companies, except that we may enter into hedging transactions to manage the risks associated with interest rate fluctuations. However, we may purchase or otherwise receive warrants to purchase the common stock of our portfolio companies in connection with acquisition financing or other investments. Similarly, in connection with an acquisition, we may acquire rights to require the issuers of acquired securities or their affiliates to repurchase them under certain circumstances. We also do not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Under these limits, we generally cannot acquire more than 3% of the voting stock of any registered investment company, invest more than 5% of the value of our total assets in the securities of one investment company or invest more than 10% of the value of our total assets in the securities of more than one investment company. With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments might subject our stockholders to additional expenses. None of these are policies fundamental and any of them may be changed without stockholder approval upon 60 days’ prior written notice to stockholders.
Qualifying Assets
Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as “qualifying assets,” unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The principal categories of qualifying assets relevant to our business are the following:
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The regulations defining qualifying assets may change over time. We may adjust our investment focus as needed to comply with and/or take advantage of any regulatory, legislative, administrative or judicial actions in this area.
Managerial Assistance to Portfolio Companies
In order to count portfolio securities as qualifying assets for the purpose of the 70% test, a BDC must either control the issuer of the securities or must offer to make available to the issuer of the securities significant managerial assistance. However, when the BDC purchases securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available managerial assistance means any arrangement whereby the BDC, through its directors, officers, employees or agents, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company. With respect to an SBIC, making available managerial assistance means the making of loans to a portfolio company. Stellus Capital Management will provide such managerial assistance on our behalf to portfolio companies that request this assistance.
Temporary Investments
Pending investment in other types of qualifying assets, as described above, our investments may consist of cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt investments that mature in one year or less from the date of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets or temporary investments. Typically, we will invest in U.S. Treasury bills or in repurchase agreements, so long as the agreements are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price that is
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greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would not meet the diversification tests in order to maintain our qualification as a RIC for U.S. federal income tax purposes. Accordingly, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. Stellus Capital Management will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.
Warrants and Options
Under the 1940 Act, a BDC is subject to restrictions on the amount of warrants, options, restricted stock or rights to purchase shares of capital stock that it may have outstanding at any time. Under the 1940 Act, we may generally only offer warrants provided that (i) the warrants expire by their terms within ten years, (ii) the exercise or conversion price is not less than the current market value at the date of issuance, (iii) our stockholders authorize the proposal to issue such warrants, and our Board approves such issuance on the basis that the issuance is in the best interests of us and our stockholders and (iv) if the warrants are accompanied by other securities, the warrants are not separately transferable unless no class of such warrants and the securities accompanying them have been publicly distributed. The 1940 Act also provides that the amount of our voting securities that would result from the exercise of all outstanding warrants, as well as options and rights, at the time of issuance may not exceed 25% of our outstanding voting securities. In particular, the amount of capital stock that would result from the conversion or exercise of all outstanding warrants, options or rights to purchase capital stock cannot exceed 25% of the BDC’s total outstanding shares of capital stock.
Senior Securities
We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 150% immediately after each such issuance. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see “Item 1A. Risk Factors — Risks Relating to our Business and Structure — Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage” in this Annual Report on Form 10-K.
Common Stock
We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock at a price below the then-current net asset value of the common stock if our Board determines that such sale is in our and our stockholders’ best interests, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our Board, closely approximates the market value of such securities (less any distributing commission or discount). We would need approval from our stockholders to issue shares below the then-current net asset value per share any time after the expiration of the current approval. We may also make rights offerings to our stockholders at prices per share less than the net asset value per share, subject to applicable requirements of the 1940 Act.
Codes of Ethics
We and Stellus Capital Management have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act and Rule 206(4)-7 under the Advisers Act, respectively, that establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to each such code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with such code’s requirements. In addition, each code of ethics is available on the EDGAR database on the SEC’s website at www.sec.gov. You may also obtain copies of each code of ethics, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov.
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Proxy Voting Policies and Procedures
We have delegated our proxy voting responsibility to Stellus Capital Management. The proxy voting policies and procedures of Stellus Capital Management are set out below. The guidelines will be reviewed periodically by Stellus Capital Management and our independent directors and, accordingly, are subject to change.
Introduction. As an investment adviser registered under the Advisers Act, Stellus Capital Management has a fiduciary duty to act solely in our best interests. As part of this duty, Stellus Capital Management recognizes that it must vote our securities in a timely manner free of conflicts of interest and in our best interests. Stellus Capital Management’s policies and procedures for voting proxies for its investment advisory clients are intended to comply with Section 206 of, and Rule 206(4)-6 under, the Advisers Act.
Proxy Policies. Stellus Capital Management votes proxies relating to our portfolio securities in what it perceives to be the best interest of our stockholders. Stellus Capital Management reviews on a case-by-case basis each proposal submitted to a stockholder vote to determine its effect on the portfolio securities we hold. In most cases, Stellus Capital Management will vote in favor of proposals that Stellus Capital Management believes are likely to increase the value of the portfolio securities we hold. Although Stellus Capital Management will generally vote against proposals that may have a negative effect on our portfolio securities, Stellus Capital Management may vote for such a proposal if there exist compelling long-term reasons to do so.
To ensure that Stellus Capital Management’s vote is not the product of a conflict of interest, Stellus Capital Management requires that anyone involved in the decision-making process disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote. Where conflicts of interest may be present, Stellus Capital Management will disclose such conflicts to us, including our independent directors, and may request guidance from us on how to vote such proxies.
Proxy Voting Records. You may obtain information about how Stellus Capital Management voted proxies by making a written request for proxy voting information to: Stellus Capital Investment Corporation, Attention: Investor Relations, 4400 Post Oak Parkway, Suite 2200, Houston, TX 77027, or by calling us collect at (713) 292-5414. The SEC also maintains a website at www.sec.gov that contains this information.
Privacy Principles
We are committed to maintaining the privacy of our stockholders and to safeguarding their non-public personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.
Generally, we do not receive any non-public personal information relating to our stockholders, although certain non-public personal information of our stockholders may become available to us. We do not disclose any non-public personal information about our stockholders or former stockholders to anyone, except as required by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent or third-party administrator).
We restrict access to non-public personal information about our stockholders to employees of Stellus Capital Management and its affiliates with a legitimate business need for the information. We maintain physical, electronic and procedural safeguards that are designed to protect the non-public personal information of our stockholders.
Other
We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.
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We and Stellus Capital Management are each required to adopt and implement written policies and procedures reasonably designed to prevent violation of relevant federal securities laws, review these policies and procedures annually for their adequacy and the effectiveness of their implementation, and designate a Chief Compliance Officer to be responsible for administering the policies and procedures.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) imposes a wide variety of regulatory requirements on publicly held companies and their insiders. Many of these requirements affect us. For example:
Taxation as a RIC
As a BDC, we have elected to be treated and intend to qualify annually to be treated as a RIC under subchapter M of the Code; however, no assurance can be given that we will be able to maintain our RIC tax treatment. As a RIC, we generally will not be subject to U.S. federal income tax on any net ordinary income or capital gains that we timely distribute to our stockholders as dividends.
To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, we generally must timely distribute to our stockholders, for each taxable year, at least 90% of our “investment company taxable income,” which is our net ordinary income plus the excess of our realized net short-term capital gains over our realized net long-term capital losses (the “Annual Distribution Requirement”).
For any taxable year in which we qualify as a RIC and satisfy the Annual Distribution Requirement, we will not be subject to U.S. federal income tax on the portion of our income we timely distribute (or are deemed to distribute) to stockholders. We will be subject to U.S. federal income tax imposed at corporate rates on any income or capital gains not distributed (or deemed distributed) to our stockholders.
In addition, we will be subject to a nondeductible 4% U.S. federal excise tax on certain undistributed income unless we distribute in a timely manner each calendar year an amount at least equal to the sum of (a) 98% of our net ordinary income for each calendar year, (b) 98.2% of the amount by which our capital gain exceeds our capital loss (adjusted for certain ordinary losses) for the one-year period ending October 31 in that calendar year, and (c) certain undistributed amounts from previous years on which we paid no U.S. federal income tax (the “Excise Tax Distribution Requirement”). In order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things:
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We may invest in partnerships, including qualified publicly traded partnerships, which may result in our being subject to state, local or foreign income, franchise or withholding tax liabilities.
For U.S. federal income tax purposes, we may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having OID (such as debt instruments with PIK interest or, in certain cases, with increasing interest rates or issued with warrants), we must include in income each year a portion of the OID that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. Because any OID accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash amount. If we are not able to obtain sufficient cash from other sources to satisfy the Annual Distribution Requirement, we may fail to maintain our tax treatment as a RIC and become subject to U.S. federal income tax on all of our taxable income without the benefit of the dividends-paid deduction.
Although we do not presently expect to do so, we are authorized to borrow funds and to sell assets in order to satisfy (i) the Annual Distribution Requirement and to otherwise eliminate our liability for U.S. federal income and excise taxes and/or (ii) the Diversification Tests. However, under the 1940 Act, we are not permitted in certain circumstances to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. See “Item 1. Business — Regulation as a Business Development Company — Senior Securities” in this Annual Report on Form 10-K. Moreover, our ability to dispose of assets to meet the Annual Distribution Requirement, the Excise Tax Distribution Requirement or the Diversification Tests may be limited by (a) the illiquid nature of our portfolio and/or (b) other requirements relating to our qualifications as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Annual Distribution Requirement, the Excise Tax Distribution Requirement or the Diversification Tests, we may make such dispositions at times that, from an investment standpoint, are not advantageous.
In addition, we have formed and operate two SBIC subsidiaries, and are partially dependent on the SBIC subsidiaries for cash distributions to enable us to meet the Annual Distribution Requirement. The SBIC subsidiaries may be limited by the Small Business Investment Act of 1958, as amended (the “Small Business Investment Act”), and SBA regulations governing SBICs, from making certain distributions to us that may be necessary to maintain our tax treatment as a RIC. We may have to request a waiver of the SBA’s restrictions for the SBIC subsidiaries to make certain distributions to maintain our RIC tax treatment. We cannot assure you that the SBA will grant such waiver. If the SBIC subsidiaries are unable to obtain a waiver, compliance with the SBA regulations may cause us to fail to maintain our tax treatment as a RIC, which would result in us becoming subject to U.S. federal income tax.
Certain of our investment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things, (a) treat dividends that would otherwise constitute qualified dividend income as non-qualified
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dividend income, (b) treat dividends that would otherwise be eligible for the corporate dividends received deduction as ineligible for such treatment, (c) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (d) convert lower-taxed long term capital gain into higher-taxed short-term capital gain or ordinary income, (e) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited), (f) cause us to recognize income or gain without a corresponding receipt of cash, (g) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (h) adversely alter the characterization of certain complex financial transactions and (i) produce income that will not be qualifying income for purposes of the 90% Income Test. We intend to monitor our transactions and may make certain tax elections to mitigate the effect of these provisions and prevent our disqualification as a RIC.
A RIC is limited in its ability to deduct expenses in excess of its “investment company taxable income” (which is, generally, ordinary income plus the excess of net short-term capital gains over net long-term capital losses). If our expenses in a given year exceed investment company taxable income, we would experience a net operating loss for that year. However, a RIC is not permitted to carry forward net operating losses to subsequent years. In addition, expenses can be used only to offset investment company taxable income, not net capital gain. A RIC may not use any net capital losses (that is, realized capital losses in excess of realized capital gains) to offset the RIC’s investment company taxable income, but may carry forward such losses indefinitely and use them to offset capital gains. Due to these limits on the deductibility of expenses, over the course of one or more taxable years we may have, for U.S. federal income tax purposes, aggregate taxable income that we are required to distribute and that is taxable to our shareholders, even if such income is greater than the aggregate net income we actually earned during those years. Such required distributions may be made from our cash assets or by liquidation of investments, if necessary. We may realize gains or losses from such liquidations. In the event we realize net capital gains from such transactions, a shareholder may receive a larger capital gain distribution than we would have received in the absence of such transactions.
Gain or loss realized by us from warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated as capital gain or loss. Such capital gain or loss generally will be long term or short term, depending on how long we held a particular warrant. Some of the income and fees that we may recognize will not satisfy the 90% Income Test. In order to ensure that such income and fees do not disqualify us as a RIC for a failure to satisfy the 90% Income Test, we may hold assets that generate such income and provide services that generate such fees indirectly through one or more entities treated as corporations for U.S. federal income tax purposes. Such corporations will be required to pay U.S. federal income tax at corporate rates on their earnings, which ultimately will reduce our return on such income and fees.
A “publicly offered regulated investment company” is a RIC whose shares are either (i) continuously offered pursuant to a public offering within the meaning of Section 4 of the Securities Act, (ii) regularly traded on an established securities market or (iii) held by at least 500 persons at all times during the taxable year. We currently expect to qualify as a publicly offered RIC, but there can be no assurance that we will in fact so qualify for any of our taxable years. If we are not treated as a publicly offered RIC for any calendar year, each U.S. stockholder that is an individual, trust or estate will be treated as having received a dividend from us in the amount of such U.S. stockholder’s allocable share of the base management fee and incentive fees paid to our investment adviser and certain of our other expenses for the calendar year, and these fees and expenses will be treated as miscellaneous itemized deductions of such U.S. stockholder. Miscellaneous itemized deductions generally are not deductible by a U.S. stockholder that is an individual, trust or estate.
If we are unable to qualify for tax treatment as a RIC, and certain relief provisions are unable to be satisfied, we would be subject to U.S. federal income tax imposed at corporate rates (and also will be subject to any applicable state and local taxes), on all of our taxable income (including our net capital gains) regardless of whether we make any distributions to our stockholders. In any taxable year that we do not qualify as a RIC, distributions would not be required, but if such distributions are paid, including distributions of net long-term capital gain, they would be taxable to our stockholders as ordinary dividend income to the extent of our current and accumulated earnings and profits. Subject to certain holding period requirements and other limitations under the Code, corporate stockholders would be eligible to claim a dividends received deduction with respect to such dividend and non-corporate stockholders would generally be able to treat such dividend income as “qualified dividend income,” which is subject to reduced rates of U.S. federal income tax. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return
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of capital to the extent of the stockholder’s adjusted tax basis, and any remaining distributions would be treated as a capital gain. If we fail to qualify as a RIC for a period greater than two taxable years, to requalify as a RIC in a subsequent year we may be subject to U.S. federal income tax imposed at corporate rates on any net built-in gains with respect to certain of our assets (i.e. the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if we had been liquidated) that we elect to recognize on requalification or when recognized over the next five years.
NYSE Corporate Governance Regulations
The New York Stock Exchange (“NYSE”) has adopted corporate governance regulations that listed companies must comply with. We are in compliance with such corporate governance listing standards applicable to BDCs.
Regulation as a Small Business Investment Company
Our wholly owned SBIC subsidiaries’ SBIC licenses allow them to incur leverage by issuing SBA-guaranteed debentures, subject to SBA regulations. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and 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 at the time of issuance at a market-driven spread over U.S. Treasury Notes with ten-year maturities.
SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses. Under current SBA regulations, eligible small businesses (together with their affiliates) include businesses that have a tangible net worth not exceeding $24.0 million and have average annual net income after U.S federal income taxes not exceeding $8.0 million (average net income to be computed without benefit of any carryover loss) for the two most recent fiscal years. In addition, an SBIC must devote 25% of its investment activity to “smaller enterprises,” as defined by the SBA. A smaller enterprise is a business (together with its affiliates) that has a net worth not exceeding $6.0 million and has average annual net income after U.S. federal income taxes not exceeding $2.0 million (average net income to be computed without benefit of any carryover loss) for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility of a small business or a smaller enterprise, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales of the business and its affiliates.
The SBA generally prohibits an SBIC from providing financing to small businesses with certain characteristics, such as relenders or businesses with the majority of their employees located outside the United States, and business engaged in certain prohibited industries, such as project finance, real estate, farmland, financial intermediaries or certain “passive” (i.e. non-operating) businesses. Without prior SBA approval, an SBIC may not provide financing or a commitment to a small business in an amount equal to more than approximately 10.0% of the SBIC’s private capital in any one company and its affiliates.
SBA regulations currently limit the amount that an SBIC subsidiary may borrow to a maximum of $175.0 million with at least $87.5 million in regulatory capital (as defined in the SBA regulations), subject to SBA approval. The maximum leverage available to a “family” of two or more SBIC funds under common control is $350.0 million, subject to SBA approval. As of December 31, 2025, our SBIC I subsidiary had $75.0 million in regulatory capital and $124.0 million in SBA-guaranteed debentures outstanding. As of December 31, 2025, our SBIC II subsidiary had $87.5 million in regulatory capital and $175.0 million in SBA-guaranteed debentures outstanding. As of December 31, 2025, the estimated fair value of the SBA-guaranteed debentures as prepared for disclosure purposes was $290.4 million.
We have received exemptive relief from the SEC to permit us to exclude the SBA-guaranteed debentures of our SBIC subsidiaries from the definition of senior securities in the asset coverage requirement applicable to us under the 1940 Act. This allows us increased flexibility under the asset coverage requirement by permitting us to borrow up to $325.0 million more (subject to SBA approval) than we would otherwise be able to absent the receipt of this exemptive relief.
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Our SBIC subsidiaries are subject to regulation and oversight by the SBA, including, among other requirements, maintaining certain minimum financial ratios and other covenants, routine examination by the SBA, and the performance of a financial audit by an independent auditor. Additionally, the SBA restricts the ability of an SBIC to provide financing to an “associate,” as defined in the SBA regulations, without prior written approval from the SBA. SBA regulations also prohibit, without prior SBA approval, a “change of control” or “change in ownership” of an SBIC (as such terms are defined in the SBA regulations) and require that SBICs invest idle funds in accordance with SBA regulations. Our SBIC subsidiaries also may be limited in their ability to make distributions to us if they do not have sufficient capital, in accordance with SBA regulations.
Receipt of an SBIC license does not assure that our SBIC subsidiaries will receive SBA-guaranteed debenture funding, which is dependent upon our SBIC subsidiaries continuing to be in compliance with SBA regulations and policies. The SBA, as a creditor, will have a superior claim to our SBIC subsidiaries’ assets over our stockholders in the event we liquidate one or both of our SBIC subsidiaries or the SBA exercises its remedies under the SBA-guaranteed debentures issued by our SBIC subsidiaries upon an event of default.
Item 1A. Risk Factors
Investing in our securities involves a number of significant risks. Before you invest in our securities, you should be aware of various risks, including those described below. You should carefully consider these risk factors, together with all of the other information included in this Annual Report on Form 10-K, before you decide whether to make an investment in our securities. The risks set out below are the principal risks with respect to an investment in our securities generally and with respect to a BDC with investment objectives, investment policies, capital structures or trading markets similar to ours. However, they may not be the only risks we face. Additional risks and uncertainties not presently known to us or not presently deemed material by us may also impair our operations and performance. If any of the following events occur, our business, financial condition, results of operations and cash flows could be materially and adversely affected. In such case, our net asset value and the trading price of our securities could decline, and you may lose all or part of your investment.
Risks Relating to our Business and Structure
The capital markets may experience periods of disruption and instability. Such market conditions may materially and adversely affect debt and equity capital markets, which may have a negative impact on our business and operations.
From time to time, capital markets may experience periods of disruption and instability, including during portions of the past several fiscal years. There can be no assurance these market conditions will not continue or worsen in the future, including as a result of inflation and fluctuating interest rates, the wars in Ukraine and Russia and the Middle East, and health epidemics and pandemics.
Equity capital may be difficult to raise during such periods of adverse or volatile market conditions because, subject to some limited exceptions, as a BDC, we are generally not able to issue additional shares of our common stock at a price less than net asset value without first obtaining approval for such issuance from our stockholders and our independent directors.
Volatility and dislocation in the capital markets can also create a challenging environment in which to raise or access debt capital. The reappearance of market conditions similar to those experienced during portions of the past several fiscal years and from 2008 through 2009 for any substantial length of time could make it difficult to extend the maturity of or refinance our existing indebtedness or obtain new indebtedness with similar terms, and any failure to do so could have a material adverse effect on our business. The debt capital that will be available to us in the future, if at all, may be at a higher cost and on less favorable terms and conditions than what we have historically experienced, including being in an elevated interest rate environment. If we are unable to raise or refinance debt, then our equity investors may not benefit from the potential for increased returns on equity resulting from leverage and we may be limited in our ability to make new commitments or to fund existing commitments to our portfolio companies.
Significant changes or volatility in the capital markets may also have a negative effect on the valuations of our investments. While most of our investments are not publicly traded, applicable accounting standards require us to assume as part of our valuation process that our investments are sold in a principal market to market participants (even if we plan on holding an investment through its maturity).
Significant changes in the capital markets may adversely affect the pace of our investment activity and economic activity generally. The illiquidity of our investments may make it difficult for us to sell such investments to access capital if required, and as a result, we could realize significantly less than the value at which we have recorded our investments if we were required to sell them for liquidity purposes. An inability to raise or access capital, and any required sale of all or a portion of our investments as a result, could have a material adverse effect on our business, financial condition or results of operations.
Any public health emergency, including any outbreak of existing or new pandemics or epidemic diseases, or the threat thereof, and the resulting financial and economic market uncertainty, could have a significant adverse impact on us and the fair value of our investments and our portfolio companies.
The extent of the impact of any public health emergency on our and our portfolio companies’ operational and financial performance will depend on many factors, including the duration and scope of such public health emergency, the actions taken by governmental authorities to contain its financial and economic impact, the extent of any related travel advisories and restrictions implemented, the impact of such public health emergency on overall supply and demand, goods and services, investor liquidity, consumer confidence and levels of economic activity and the extent of its disruption to important global, regional and local supply chains and economic markets, all of which are highly uncertain and cannot be predicted. In addition, our and our portfolio companies’ operations may be significantly impacted, or even temporarily or permanently halted, as a result of government quarantine measures, voluntary and precautionary restrictions on travel or meetings and other factors related to a public health emergency, including its potential adverse impact on the health of any of our or our portfolio companies’ personnel. This could create widespread business continuity issues for us and our portfolio companies. These factors may also cause the valuation of our investments to differ materially from the values that we may ultimately realize. Our valuations, and particularly valuations of private investments and private companies, are inherently uncertain, may fluctuate over short periods of time and are often based on estimates, comparisons and qualitative evaluations of private information.
Any public health emergency, pandemic or any outbreak of other existing or new epidemic diseases, or the threat thereof, and the resulting financial and economic market uncertainty could have a significant adverse impact on us and the fair value of our investments and our portfolio companies.
We are exposed to risks associated with changes in interest rates.
General interest rate fluctuations may have a negative impact on our investments and our investment returns and, accordingly, may have a material adverse effect on our investment objective and our net investment income.
Because we borrow money to make investments and may in the future issue additional senior securities, including preferred stock and debt securities, our net investment income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we can offer no assurance that fluctuations in interest rates would not have a material adverse effect on our net investment income in the event we use debt to finance our investments. From time to time, we may also enter into certain hedging transactions to mitigate our exposure to changes in interest rates. In the past, we have entered into certain hedging transactions to mitigate our exposure to adverse fluctuations in interest rates, and we may do so again in the future. However, we cannot assure you that such transactions will be successful in mitigating our exposure to interest rate risk. There can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.
Rising interest rates may increase the cost of debt for our underlying portfolio companies, which could adversely impact their financial performance and ability to meet ongoing obligations to us. Also, an increase in interest rates available to investors could make an investment in our common stock less attractive if we are not able to pay dividends at a level that provides a similar return, which could reduce the value of our common stock.
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Fluctuations in interest rates could have a material adverse effect on our business and that of our portfolio companies.
Fluctuations in interest rates could have a dampening effect on overall economic activity, the financial condition of our portfolio companies and the financial condition of the end customers who ultimately create demand for the capital we supply, all of which could negatively affect our business, financial condition or results of operations. The Federal Reserve decreased the federal funds rate three times in 2025. Lower interest rates may increase prepayment risk for our portfolio company investments with higher interest rates. Although the Federal Reserve kept the federal funds rate flat in January 2026, the Federal Reserve has signaled there is potential for federal funds rate cuts later in 2026. Uncertainty surrounding future Federal Reserve actions may have a material effect on our business making it particularly difficult for us to obtain financing at attractive rates, impacting our ability to execute on our growth strategies or future acquisitions.
Inflation has adversely affected and may continue to adversely affect the business, results of operations and financial condition of our portfolio companies.
Certain of our portfolio companies are in industries that have been impacted by inflation. Ongoing inflationary pressures have increased the costs of labor, energy and raw materials and have adversely affected consumer spending, economic growth and our portfolio companies’ operations. If such portfolio companies are unable to pass any increases in their costs of operations along to their customers, it could adversely affect their operating results and impact their ability to pay interest and principal on our loans, particularly if interest rates rise in response to inflation. In addition, any projected future decreases in our portfolio companies’ operating results due to inflation could adversely impact the fair value of those investments. Any decreases in the fair value of our investments could result in future realized or unrealized losses and therefore reduce our net assets resulting from operations.
We are subject to risks related to corporate social responsibility.
Our business faces increasing public scrutiny related to environmental, social and governance (“ESG”) activities. We risk damage to our brand and reputation if we fail to act responsibly in a number of areas, such as environmental stewardship, corporate governance and transparency and considering ESG factors in our investment processes. Adverse incidents with respect to ESG activities could impact the value of our brand and relationships with investors, all of which could adversely affect our business and results of operations. Further, there can be no assurance that investors will determine that any of our ESG initiatives or commitments are sufficiently robust. Additionally, new regulatory initiatives related to ESG could adversely affect us and our portfolio companies.
At the same time, there are various approaches to responsible investing activities and divergent views on the consideration of ESG topics. These differing views increase the risk that any action or lack thereof with respect to our Adviser’s consideration of responsible investing or ESG-related practices will be perceived negatively. “Anti-ESG” sentiment has gained momentum across the U.S., with a growing number of states having enacted or proposed “anti-ESG” policies, legislation or issued related legal opinions. Such scrutiny of ESG-related practices could expose the us and our portfolio companies to the risk of investigations or challenges by federal authorities, result in reputational harm and discourage certain investors from investing in us.
We are dependent upon key personnel of Stellus Capital Management for our future success. If Stellus Capital Management were to lose any of its key personnel, our ability to achieve our investment objective could be significantly harmed.
We depend on the diligence, skill and network of business contacts of the senior investment professionals of Stellus Capital Management to achieve our investment objective. Stellus Capital Management’s team of investment professionals evaluates, negotiates, structures, closes and monitors our investments in accordance with the terms of our Investment Advisory Agreement. We can offer no assurance, however, that Stellus Capital Management’s investment professionals will continue to provide investment advice to us.
Stellus Capital Management’s investment committee, which provides oversight over our investment activities, is provided to us by Stellus Capital Management under the Investment Advisory Agreement. Stellus Capital Management’s
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investment committee consists of four members, including Messrs. Ladd, and D’Angelo, each a member of our Board and a senior investment professional of Stellus Capital Management, Mr. Huskinson, Chief Financial Officer and Chief Compliance Officer for us and Stellus Capital Management, and Mr. Davis, a senior investment professional of Stellus Capital Management. The loss of one or more of the members of Stellus Capital Management’s investment committee may limit our ability to achieve our investment objective and operate our business. This could have a material adverse effect on our financial condition, results of operations and cash flows.
Our business model depends to a significant extent upon strong referral relationships. Any inability of Stellus Capital Management to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business.
We depend upon the investment professionals of Stellus Capital Management to maintain their relationships with private equity sponsors, placement agents, investment banks, management groups and other financial institutions, and we rely to a significant extent upon these relationships to provide us with potential investment opportunities. If the investment professionals of Stellus Capital Management fail to maintain such relationships, or to develop new relationships with other sources of investment opportunities, we will not be able to grow our investment portfolio. In addition, individuals with whom the investment professionals of Stellus Capital Management have relationships are not obligated to provide us with investment opportunities, and we can offer no assurance that these relationships will generate investment opportunities for us in the future.
Our financial condition, results of operations and cash flows will depend on our ability to manage our business effectively.
Our ability to achieve our investment objective will depend on our ability to manage our business and to grow our investments and earnings. This will depend, in turn, on Stellus Capital Management’s ability to identify, invest in and monitor portfolio companies that meet our investment criteria. The achievement of our investment objective on a cost-effective basis will depend upon Stellus Capital Management’s execution of our investment process, its ability to provide competent, attentive and efficient services to us and, to a lesser extent, our access to financing on acceptable terms. Stellus Capital Management’s senior investment professionals will have substantial responsibilities in connection with the management of other investment funds, accounts and investment vehicles. The personnel of Stellus Capital Management may be called upon to provide managerial assistance to our portfolio companies. These activities may distract them from sourcing new investment opportunities for us or slow our rate of investment. Any failure to manage our business and our future growth effectively could have a material adverse effect on our business, financial condition, results of operations and cash flows.
There are significant potential conflicts of interest that could negatively affect our investment returns.
The members of Stellus Capital Management’s investment committee serve, or may serve, as officers, directors, members, or principals of entities that operate in the same or a related line of business as we do, or of investment funds, accounts, or investment vehicles managed by Stellus Capital Management. Similarly, Stellus Capital Management and its affiliates may have other clients with similar, different or competing investment objectives. In serving in these multiple capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in the best interests of us or our stockholders. For example, Stellus Capital Management and its affiliates currently manage several private credit funds and another BDC that have investment strategies that are similar to, overlapping with and/or identical to our investment strategy, and with which we co-invest. Stellus Capital Management also provides sub-advisory services to the D. E. Shaw group with respect to a private investment fund and a strategy of a private multi-strategy investment fund to which the D. E. Shaw group serves as investment adviser that have an investment strategy similar to our investment strategy.
The senior investment professionals and other investment team members of Stellus Capital Management may, from time to time, possess material non-public information, limiting our investment discretion.
The senior investment professionals and other investment team members of Stellus Capital Management, including members of Stellus Capital Management’s investment committee, may serve as directors of, or in a similar capacity
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with, portfolio companies in which we invest, the securities of which are purchased or sold on our behalf. In the event that material non-public information is obtained with respect to such companies, or we become subject to trading restrictions under the internal trading policies of those companies or as a result of applicable law or regulations, we could be prohibited for a period of time from purchasing or selling the securities of such companies, and this prohibition may have an adverse effect on us.
Our management and incentive fees may induce Stellus Capital Management to incur additional leverage.
Generally, the management and incentive fees payable by us to Stellus Capital Management may create an incentive for Stellus Capital Management to use any additional available leverage. For example, the fact that the base management fee that we pay to Stellus Capital Management is payable based upon our gross assets (which includes any borrowings for investment purposes) may encourage Stellus Capital Management to use leverage to make additional investments. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during cyclical economic downturns. Under certain circumstances, the use of additional leverage may increase the likelihood of our default on our borrowings, which would disfavor holders of our common stock.
In addition, because the incentive fee on net investment income is calculated as a percentage of our net assets subject to a hurdle, having additional leverage available may encourage Stellus Capital Management to use leverage to increase the leveraged return on our investment portfolio. To the extent additional leverage is available at favorable rates, Stellus Capital Management could use leverage to increase the size of our investment portfolio to generate additional income, which may make it easier to meet the incentive fee hurdle. As a result, the incentives for Stellus Capital Management to cause us to use additional leverage may be greater, which could result in our investing in more speculative securities than would otherwise be the case, resulting in higher investment losses, particularly during economic downturns.
Our incentive fee may induce Stellus Capital Management to make speculative investments.
We pay Stellus Capital Management an incentive fee based, in part, upon net capital gains realized on our investments. Unlike that portion of the incentive fee based on income, there is no hurdle rate applicable to the portion of the incentive fee based on net capital gains. Additionally, under the incentive fee structure, Stellus Capital Management may benefit when capital gains are recognized and, because Stellus Capital Management will determine when to sell a holding, Stellus Capital Management will control the timing of the recognition of such capital gains. As a result, Stellus Capital Management may have a tendency to invest more capital in investments that are likely to result in capital gains as compared to income-producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.
We may be obligated to pay Stellus Capital Management incentive compensation even if we incur a loss and may pay more than 20.0% of our net capital gains because we cannot recover payments made in previous years.
Stellus Capital Management is entitled to incentive compensation for each fiscal quarter in an amount equal to a percentage of the excess of our investment income for that quarter (before deducting incentive compensation) above a threshold return for that quarter and subject to a total return requirement. The general effect of this total return requirement is to prevent payment of the foregoing incentive compensation 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 calendar quarters. Consequently, we may pay an incentive fee if we incurred losses more than three years prior to the current calendar quarter even if such losses have not yet been recovered in full. Thus, we may be required to pay Stellus Capital Management incentive compensation for a fiscal quarter even if there is a decline in the value of our portfolio or we incur a net loss for that quarter. If we pay an incentive fee of 20.0% of our realized capital gains (net of all realized capital losses and unrealized capital depreciation on a cumulative basis) and thereafter experience additional realized capital losses or unrealized capital depreciation, we will not be able to recover any portion of the incentive fee previously paid.
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We operate in a highly competitive market for investment opportunities, which could reduce returns and result in losses.
A number of entities compete with us to make the types of investments that we make. We compete with public and private funds, commercial and investment banks, commercial financing companies and, to the extent they provide an alternative form of financing, private equity and hedge funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, we believe some of our competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or the source-of-income, asset diversification and distribution requirements we must satisfy to maintain our RIC qualification. The competitive pressures we face may have a material adverse effect on our business, financial condition, results of operations and cash flows. As a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we may not be able to identify and make investments that are consistent with our investment objective.
With respect to the investments we make, we do not seek to compete based primarily on the interest rates we offer, and we believe that some of our competitors may make loans with interest rates that are lower than the rates we offer. With respect to all investments, we may lose some investment opportunities if we do not match our competitors’ pricing, terms and structure. However, if we match our competitors’ pricing, terms and structure, we may experience decreased net interest income, lower yields and increased risk of credit loss. We may also compete for investment opportunities with investment funds, accounts and investment vehicles managed by Stellus Capital Management. Although Stellus Capital Management will allocate opportunities in accordance with its policies and procedures, allocations to such investment funds, accounts and investment vehicles will reduce the amount and frequency of opportunities available to us and may not be in the best interests of us and our stockholders.
Our investments in the business services industry are subject to unique risks relating to technological developments, regulatory changes and changes in customer preferences.
Our investments in portfolio companies that operate in the business services industry represent 26.48% of our total portfolio as of December 31, 2025. Our investments in portfolio companies in the business services sector include those that provide services related to data and information, building, cleaning and maintenance services, and energy efficiency services. Portfolio companies in the business services sector are subject to many risks, including the negative impact of regulation, changing technology, a competitive marketplace and difficulty in obtaining financing. Portfolio companies in the business services industry must respond quickly to technological changes and understand the impact of these changes on customers’ preferences. Adverse economic, business, or regulatory developments affecting the business services sector could have a negative impact on the value of our investments in portfolio companies operating in this industry, and therefore could negatively impact our business and results of operations.
Our investments in companies in the high-tech industry are subject to unique risks relating to technological developments, regulatory changes and changes in customer preference.
As of December 31, 2025, our investments in portfolio companies operating in the high-tech sector represented 10.61% of our total portfolio. There are risks in investing in companies that operate in this market, including the impact of new or changing regulations and the burden and expense associated with efforts to comply therewith, changing consumer preferences, a highly competitive marketplace and difficulty in obtaining financing. Any of these factors could materially and adversely affect the operations of a portfolio company in this industry and, in turn, impair our ability to timely collect principal and interest payments owed to us.
We will be subject to U.S. federal income tax imposed at corporate rates if we are unable to maintain our tax treatment as a RIC under subchapter M of the Code.
To maintain our tax treatment as a RIC under subchapter M of the Code, we must meet certain source-of-income, asset diversification and distribution requirements. The Annual Distribution Requirement for a RIC generally is satisfied
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if we distribute at least 90% of our “investment company taxable income,” which is generally our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders on an annual basis. Because we incur debt, we are subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to maintain our tax treatment as a RIC. If we are unable to obtain cash from other sources, we may fail to maintain our tax treatment as a RIC and, thus, may be subject to U.S. federal income.
The source-of-income requirement will be satisfied if we obtain at least 90% of our annual income from dividends, interest, payments with respect to loans of certain securities, gains from the sale of stock or other securities or foreign currencies, net income from certain “qualified publicly traded partnerships,” or other income derived from the business of investing in stock or securities.
To maintain our tax treatment as a RIC, we must also meet certain asset diversification requirements at the end of each calendar quarter. Specifically, (1) at least 50% of the value of our assets must consist of cash, cash equivalents (including receivables), U.S. government securities, securities of other RICs, and other securities if such securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and (2) no more than 25% of the value of our assets can be invested in (i) the securities, other than U.S. government securities or securities of other RICs, of one issuer, (ii) the securities, other than the securities of other RICs, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses, or (iii) the securities of certain “qualified publicly traded partnerships” as defined by the Code. Failure to meet these tests may result in our having to dispose of certain investments quickly in order to prevent the loss of our tax treatment as a RIC. Because most of our investments are in private or thinly-traded public companies, any such dispositions may be made at disadvantageous prices and may result in substantial losses.
No certainty can be provided, that we will satisfy the asset diversification requirements or the other requirements necessary to maintain our tax treatment as a RIC. If we fail to maintain our tax treatment as a RIC for any reason and become subject to U.S. federal income tax, the resulting taxes could substantially reduce our net assets, the amount of income available for distributions to our stockholders and the amount of funds available for new investments.
Legislative or regulatory tax changes could have an adverse impact on us and our stockholders.
Legislative or other actions relating to taxes could have a negative effect on us. Matters pertaining to U.S. federal income taxation are constantly under review by persons involved in the legislative process, and by the Internal Revenue Service, and the U.S. Treasury Department. New legislation and any U.S. Treasury regulations, administrative interpretations or court decisions interpreting such legislation could have adverse consequences, including affecting our ability to qualify as a RIC or otherwise impacting the U.S. federal income tax consequences applicable to us and our investors. For example, on July 4, 2025, the United States enacted “An Act to Provide for Reconciliation Pursuant to Title II of H. Con. Res. 14,” also known as the “One Big Beautiful Bill,” which includes significant amendments to the Code. Investors are urged to consult with their tax advisor regarding tax legislative, regulatory, or administrative developments and proposals and their potential effect on an investment in our securities.
We may have difficulty paying our required distributions if we recognize income before, or without, receiving cash representing such income.
For U.S. federal income tax purposes, we include in income certain amounts that we have not yet received in cash, such as the accrual of OID. This may arise if we receive warrants in connection with the making of a loan and in other circumstances, or through contracted PIK interest, which represents contractual interest added to the loan balance and due at the end of the loan term. Such OID, which could be significant relative to our overall investment activities, and increases in loan balances as a result of contracted PIK arrangements are included in income before we receive any corresponding cash payments. We also may be required to include in income certain other amounts that we will not receive in cash.
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Since in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the Annual Distribution Requirement to maintain our tax treatment as a RIC. In such a case, we may have to sell some of our investments at times we would not consider advantageous or raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are not able to obtain such cash from other sources, we may fail to maintain our tax treatment as a RIC and thus be subject to U.S. federal income tax.
We may in the future choose to pay dividends in our own common stock, in which case you may be required to pay tax in excess of the cash you receive.
We currently expect to be treated as a publicly offered RIC, although there can be no assurance that we will in fact so qualify for any of our taxable years, and we may distribute taxable dividends that are payable in part in our common stock. In accordance with certain applicable Treasury regulations and published guidance issued by the Internal Revenue Service, a publicly offered RIC may treat a distribution of its own stock as fulfilling the Annual Distribution Requirement if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, the cash available for distribution must be allocated among the stockholders electing to receive cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than the lesser of (a) the portion of the distribution such stockholder has elected to receive in cash or (b) an amount equal to his or her entire distribution times the percentage limitation on cash available for distribution. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. Taxable stockholders receiving such dividends will be required to include the amount of the dividends as ordinary income (or as long-term capital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.
PIK interest payments we receive will increase our assets under management and, as a result, will increase the amount of base management fees and incentive fees payable by us to Stellus Capital Management.
Certain of our debt investments may contain provisions providing for the payment of PIK interest. Because PIK interest results in an increase in the size of the loan balance of the underlying loan, the receipt by us of PIK interest will have the effect of increasing our assets under management. As a result, because the base management fee that we pay to Stellus Capital Management is based on the value of our gross assets, the receipt by us of PIK interest will result in an increase in the amount of the base management fee payable by us. In addition, any such increase in a loan balance due to the receipt of PIK interest will cause such loan to accrue interest on the higher loan balance, which will result in an increase in our pre-incentive fee net investment income and, as a result, an increase in incentive fees that are payable by us to Stellus Capital Management.
Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage.
We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as “senior securities,” up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, we are permitted as a BDC that has satisfied certain requirements to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 150% of our gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. If the value of
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our assets declines, we may be unable to satisfy this test. If that happens, we would not be able to borrow additional funds until we were able to comply with the 150% asset coverage ratio applicable to us under the 1940 Act. Also, any amounts that we use to service our indebtedness would not be available for distributions to our common stockholders. If we issue senior securities, we will be exposed to typical risks associated with leverage, including an increased risk of loss.
We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below then-current net asset value per share of our common stock if our Board determines that such sale is in our best interests, and if our stockholders approve such sale. A proposal approved by our stockholders at our 2025 annual stockholders meeting authorizes us to sell shares equal to up to 25% of our outstanding common stock below the then-current net asset value per share of our common stock in one or more offerings. This approval will expire on the earlier of our 2026 annual stockholder meeting or June 17, 2026, the one-year anniversary of our 2025 annual stockholders meeting. The proposal approved by our stockholders did not specify a maximum discount below net asset value at which we are able to issue our common stock, although the number of shares sold in each offering may not exceed 25% of our outstanding common stock immediately prior to such sale. We would need similar future approval from our stockholders to issue shares below the then current net asset value per share any time after the expiration of the current approval. In addition, we intend to distribute between 90% and 100% of our taxable income to our stockholders in order to satisfy the requirements applicable to RICs under subchapter M of the Code. Consequently, we may not have the funds or the ability to fund new investments, to make additional investments in our portfolio companies, to fund our unfunded commitments to portfolio companies or to repay borrowings. In addition, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value. In addition, we cannot issue shares of our common stock below net asset value unless our Board determines that it would be in our and our stockholders’ best interests to do so. Sales of common stock at prices below net asset value per share dilute the interests of existing stockholders, have the effect of reducing our net asset value per share and may reduce our market price per share. In addition, continuous sales of common stock below net asset value may have a negative impact on total returns and could have a negative impact on the market price of our shares of common stock. If we raise additional funds by issuing common stock, then the percentage ownership of our stockholders at that time will decrease, and you may experience dilution.
Because we finance our investments with borrowed money, the potential for gain or loss on amounts invested in us is magnified and may increase the risk of investing in us.
The use of leverage magnifies the potential for gain or loss on amounts invested. The use of leverage is generally considered a speculative investment technique and increases the risks associated with investing in our securities. If we continue to use leverage to partially finance our investments through banks, insurance companies and other lenders, you will experience increased risks of investing in our common stock. Lenders of these funds have fixed dollar claims on our assets that are superior to the claims of our common stockholders, and we would expect such lenders to seek recovery against our assets in the event of a default. We, through our SBIC subsidiaries, intend to issue debt securities guaranteed by the SBA and sold in the capital markets. Upon any such issuance of debt securities and as a result of its guarantee of the debt securities, if any, the SBA would also have fixed dollar claims on the assets of our SBIC subsidiaries that are superior to the claims of our common stockholders.
If we are unable to meet the financial obligations under our 7.250% Notes due 2030 (the “2030 Notes Payable”), as issued on April 1, 2025 and September 25, 2025, or the Credit Facility, the SBA, as a creditor, has a superior claim to the assets of our SBIC subsidiaries over our stockholders in the event we liquidate or the SBA exercises its remedies under such debentures as the result of a default by us. In addition, under the terms of the Credit Facility and any borrowing facility or other debt instrument we may enter into, we are likely to be required to use the net proceeds of any investments that we sell to repay a portion of the amount borrowed under such facility or instrument before applying such net proceeds to any other uses. If the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged, thereby magnifying losses or eliminating our stake in a leveraged investment. Similarly, any decrease in our revenue or income will cause our net income to decline more sharply than it would have had we not borrowed. Such a decline would also negatively affect our ability to make distributions with respect to our common stock. Our ability to service any debt depends largely on our financial
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performance and is subject to prevailing economic conditions and competitive pressures. Moreover, as the base management fee payable to Stellus Capital Management is payable based on the value of our gross assets, including those assets acquired through the use of leverage, Stellus Capital Management will have a financial incentive to incur leverage, which may not be consistent with our stockholders’ interests. In addition, our common stockholders bear the burden of any increase in our expenses as a result of our use of leverage, including interest expenses and any increase in the base management fee payable to Stellus Capital Management.
As a BDC that has satisfied certain requirements under the 1940 Act, we generally are required to meet a coverage ratio of total assets to total borrowings and other senior securities, which include all of our borrowings and any preferred stock that we may issue in the future, of at least 150%. If this ratio declines below 150%, we will not be able to incur additional debt until we are able to comply with the 150% asset coverage ratio applicable to us under the 1940 Act. This could have a material adverse effect on our operations, and we may not be able to make distributions. The amount of leverage that we employ will depend on Stellus Capital Management’s and our Board’s assessment of market and other factors at the time of any proposed borrowing. We cannot assure you that we will be able to obtain credit at all or on terms acceptable to us.
We have received exemptive relief from the SEC to permit us to exclude the SBA-guaranteed debentures of our SBIC subsidiaries from the definition of senior securities in the asset coverage requirement applicable to us under the 1940 Act. This relief allows us increased flexibility under the asset coverage requirement by allowing us to borrow up to $325.0 million more through our SBIC subsidiaries than we would otherwise be able to borrow absent the receipt of this exemptive relief.
In addition, our debt facilities may impose financial and operating covenants that restrict our business activities, including limitations that hinder our ability to finance additional loans and investments or to make the distributions required to maintain our qualification as a RIC under the Code.
The following table illustrates the effect of leverage on returns from an investment in our shares assuming various annual returns on our portfolio, net of expenses. The calculations in the table below are hypothetical, and actual returns may be higher or lower than those appearing in the table below.
Assumed Return on Portfolio (Net of Expenses)
(10)%
(5)%
0%
5%
10%
Corresponding Return to Common Stockholders(1)
(37.8)
(23.8)
(9.8)
4.2
18.3
Substantially all of our assets are subject to security interests under the Credit Facility or claims of the SBA with respect to SBA-guaranteed debentures we issue and, if we default on our obligations thereunder, we may suffer adverse consequences, including foreclosure on our assets.
As of December 31, 2025, substantially all of our assets were pledged as collateral under the Credit Facility or are subject to a superior claim over the holders of our common stock by the SBA pursuant to the SBA-guaranteed debentures. If we default on our obligations under the Credit Facility or the SBA-guaranteed debentures, the lenders and/or the SBA may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests or their superior claim. In such event, we may be forced to sell our investments to raise funds to repay our outstanding borrowings in order to avoid foreclosure, and these forced sales may be at times and at prices we would not consider advantageous. Moreover, such deleveraging of our company could significantly impair our ability to effectively operate our business in the manner in which we have historically operated. As a result, we could be forced to curtail or cease new investment activities and lower or eliminate the dividends that we have historically paid to our stockholders.
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In addition, if the lenders exercise their right to sell the assets pledged under the Credit Facility, such sales may be completed at distressed sale prices, thereby diminishing or potentially eliminating the amount of cash available to us after repayment of the amounts outstanding under the Credit Facility.
Provisions in the Credit Facility or any other future borrowing facility may limit our discretion in operating our business.
The Credit Facility is, and any future borrowing facility may be, backed by all or a portion of our loans and securities on which the lenders will or, in the case of a future facility, may have a security interest. We may pledge up to 100% of our assets and may grant a security interest in all of our assets under the terms of any debt instrument we enter into with lenders. We expect that any security interests we grant will be set forth in a guarantee and security agreement and evidenced by the filing of financing statements by the agent for the lenders. In addition, we expect that the custodian for our securities serving as collateral for such loan would include in its electronic systems notices indicating the existence of such security interests and, following notice of occurrence of an event of default, if any, and during its continuance, will only accept transfer instructions with respect to any such securities from the lender or its designee. If we were to default under the terms of any debt instrument, the agent for the applicable lenders would be able to assume control of the timing of disposition of any or all of our assets securing such debt, which would have a material adverse effect on our business, financial condition, results of operations and cash flows.
In addition, any security interests as well as negative covenants under the Credit Facility or any other borrowing facility may limit our ability to incur additional liens or debt and may make it difficult for us to restructure or refinance indebtedness at or prior to maturity or obtain additional debt or equity financing. For example, under the terms of the Credit Facility, we have generally agreed to not incur any additional secured indebtedness, other than certain indebtedness that we may incur, in accordance with the Credit Facility, to allow us to purchase investments in U.S. Treasury Bills. In addition, we have agreed not to incur any additional indebtedness that has a maturity date prior to the maturity date of the Credit Facility. Further, if our borrowing base under the Credit Facility or any other borrowing facility were to decrease, we would be required to secure additional assets in an amount equal to any borrowing base deficiency. In the event that all of our assets are secured at the time of such a borrowing base deficiency, we could be required to repay advances under the Credit Facility or any other borrowing facility or make deposits to a collection account, either of which could have a material adverse impact on our ability to fund future investments and to make stockholder distributions.
In addition, under the Credit Facility or any other borrowing facility, we may be subject to limitations as to how borrowed funds may be used, which may include restrictions on geographic and industry concentrations, loan size, payment frequency and status, average life, collateral interests and investment ratings, as well as regulatory restrictions on leverage which may affect the amount of funding that may be obtained. There may also be certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, a violation of which could limit further advances and, in some cases, result in an event of default. Furthermore, we expect that the terms of the Credit Facility will contain a covenant requiring us to maintain compliance with RIC provisions at all times, subject to certain remedial provisions. Thus, a failure to maintain compliance with RIC provisions could result in an event of default under the Credit Facility. An event of default under the Credit Facility or any other borrowing facility could result in an accelerated maturity date for all amounts outstanding thereunder, which could have a material adverse effect on our business and financial condition. This could reduce our revenues and, by delaying any cash payment allowed to us under the Credit Facility or any other borrowing facility until the lenders have been paid in full, reduce our liquidity and cash flow and impair our ability to grow our business and maintain our qualification as a RIC.
Because we use debt to finance our investments and have issued, and may in the future issue, senior securities including preferred stock and debt securities, if market interest rates were to increase, our cost of capital could increase, which could reduce our net investment income.
Because we borrow money to make investments and have issued, and may in the future issue additional senior securities including preferred stock and debt securities, our net investment income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invests those funds. As a result, we can
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offer no assurance that a significant change in market interest rates would not have a material adverse effect on our net investment income in the event we use debt to finance our investments. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates to the extent permitted by the 1940 Act.
Adverse developments in the credit markets may impair our ability to enter into any other future borrowing facility.
In past economic downturns and during other times of extreme market volatility, many commercial banks and other financial institutions stopped lending or significantly curtailed their lending activity. In addition, in an effort to stem losses and reduce their exposure to segments of the economy deemed to be high risk, some financial institutions limited routine refinancing and loan modification transactions and even reviewed the terms of existing facilities to identify bases for accelerating the maturity of existing lending facilities. If these conditions recur, it may be difficult for us to obtain desired financing to finance the growth of our investments on acceptable economic terms, or at all.
If we are unable to consummate credit facilities on commercially reasonable terms, our liquidity may be reduced significantly. If we are unable to repay amounts outstanding under any facility we may enter into and are declared in default or are unable to renew or refinance any such facility, it would limit our ability to initiate significant originations or to operate our business in the normal course. These situations may arise due to circumstances that we may be unable to control, such as inaccessibility of the credit markets, a severe decline in the value of the U.S. dollar, a further economic downturn or an operational problem that affects third parties or us, and could materially damage our business. Moreover, we are unable to predict when economic and market conditions may become more favorable. Even if such conditions improve broadly and significantly over the long term, adverse conditions in particular sectors of the financial markets could adversely impact our business.
Most of our portfolio investments are recorded at fair value as determined in good faith by our Board and, as a result, there may be uncertainty as to the value of our portfolio investments.
Most of our portfolio investments will take the form of securities that are not publicly traded. The fair value of loans, securities and other investments that are not publicly traded may not be readily determinable, and we value these investments at fair value as determined in good faith by our Board, including to reflect significant events affecting the value of our investments. Most, if not all, of our investments (other than cash and cash equivalents) are classified as Level 3 under ASC 820. This means that our portfolio valuations are based on unobservable inputs and our own assumptions about how market participants would price the asset or liability in question. Inputs into the determination of fair value of our portfolio investments require significant management judgment or estimation. Even if observable market data is available, such information may be the result of consensus pricing information or broker quotes, which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimers materially reduces the reliability of such information. We have retained the services of independent service providers to review the valuation of these loans and securities. The types of factors that Board may take into account in determining the fair value of our investments generally include, as appropriate, comparison to publicly traded securities including such factors as yield, maturity and measures of credit quality, the enterprise value of a portfolio company, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these loans and securities existed. Our net asset value could be adversely affected if our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such loans and securities.
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We may expose ourselves to risks if we engage in hedging transactions.
We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Use of these hedging instruments may expose us to counter-party credit risk. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the portfolio positions should increase. Moreover, it may not be possible to hedge against an exchange rate or interest rate fluctuation that is generally anticipated at an acceptable price.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our consolidated financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.
We incur significant costs as a result of being a publicly traded company.
As a publicly traded company, we incur legal, accounting, investor relations and other expenses, including costs associated with corporate governance requirements, such as those under the Sarbanes-Oxley Act, other rules implemented by the SEC and the listing standards of the NYSE. These costs may be significant, and thus may reduce the amount of funds we have available to deploy as investments, reducing our efficiency and potentially hampering our business, financial condition, and results of operations.
We are obligated to maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or our internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our securities.
Complying with Section 404 of the Sarbanes-Oxley Act requires a rigorous compliance program as well as adequate time and resources. We may not be able to complete our internal control evaluation, testing and any required remediation in a timely fashion. Additionally, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on the price of our securities.
We are required to disclose changes made in our internal control and procedures on a quarterly basis and our management is required to assess the effectiveness of these controls annually. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.
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We and our portfolio companies may be subjected to potential adverse effects of new or modified laws or regulations.
We and our portfolio companies are subject to regulation at the local, state, federal and, in some cases, foreign levels. These laws and regulations, as well as their interpretation, are likely to change from time to time, and new laws and regulations may be enacted. Accordingly, any change in these laws or regulations, changes in their interpretation, or newly enacted laws or regulations, or any failure by us or our portfolio companies to comply with these laws or regulations, could require changes to certain of the our or our portfolio companies’ business practices, negatively impact our or our portfolio companies’ operations, cash flows or financial condition, impose additional costs on us or our portfolio companies or otherwise adversely affect our business or the business of our portfolio companies. In addition to the legal, tax and regulatory changes that are expected to occur, there may be unanticipated changes. The legal, tax and regulatory environment for BDCs, investment advisers and the instruments that they utilize (including derivative instruments) is continuously evolving.
A single political party currently controls both the executive and legislative branches of government, which increases the likelihood that legislation may be adopted that could significantly affect the regulation of U.S. financial markets. Regulatory changes could result in greater competition from banks and other lenders with which we compete for lending and other investment opportunities. The United States may also potentially withdraw from or renegotiate various trade agreements and take other actions that would change current trade policies of the United States. In addition, in June 2024, the U.S. Supreme Court reversed its longstanding approach under the Chevron doctrine, which provided for judicial deference to regulatory agencies. As a result of this decision, there may be increased challenges to existing agency regulations and it is unclear how lower courts will apply the decision in the context of other regulatory schemes without more specific guidance from the U.S. Supreme Court. For example, the decision could significantly impact consumer protection, advertising, privacy, artificial intelligence, anti-corruption and anti-money laundering practices and other regulatory regimes with which we are required to comply. Any such regulatory developments could result in uncertainty about and changes in the ways such regulations apply to us and our portfolio companies, and may require additional resources to ensure our continued compliance. We cannot predict which, if any, of these actions will be taken or, if taken, their effect on the financial stability of the United States. Such actions could have a significant adverse effect on our business, financial condition and results of operations.
Over the last several years, there also has been an increase in regulatory attention to the extension of credit outside of the traditional banking sector, raising the possibility that some portion of the non-bank financial sector will be subject to new regulation. While it cannot be known at this time whether any regulation will be implemented or what form it will take, increased regulation of non-bank credit extension could negatively impact the our operations, cash flows or financial condition, impose additional costs on us, intensify the regulatory supervision of us or otherwise adversely affect our business, financial condition and results of operations.
Any failure to comply with SBA regulations could have an adverse effect on our SBIC subsidiaries’ operations.
On June 20, 2014 and August 14, 2019, our wholly owned subsidiaries, SBIC I subsidiary and SBIC II subsidiary, respectively, received licenses from the SBA to operate as SBICs. The SBA places certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs from providing funds for certain purposes or to businesses in a few prohibited industries. Compliance with SBIC requirements may cause our SBIC subsidiaries to forgo attractive investment opportunities that are not permitted under SBA regulations.
Further, SBA regulations require that an SBIC be examined by the SBA to determine its compliance with the relevant SBA regulations at least every two years. The SBA prohibits, without prior SBA approval, a “change of control” of an SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10% or more of a class of capital stock of an SBIC. If either of our SBIC subsidiaries fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit its use of debentures, declare outstanding debentures immediately due and payable, and/or limit it from making new investments. In addition, the SBA can revoke or suspend a license for willful or repeated violation of, or willful or repeated failure to observe, any provision of the Small Business Investment Act, or any rule or regulation
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promulgated thereunder. These actions by the SBA would, in turn, negatively affect us because our SBIC subsidiaries are our wholly owned subsidiaries.
Risks Related to Our Operations
Because we intend to distribute substantially all of our income to our stockholders to obtain and maintain our status as a RIC, we will continue to need additional capital to finance our growth. If additional funds are unavailable or not available on favorable terms, our ability to grow may be impaired.
We will need additional capital to fund new investments and grow our portfolio of investments. We intend to access the capital markets periodically to issue debt or equity securities or borrow from financial institutions in order to obtain such additional capital. Unfavorable economic conditions could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. A reduction in the availability of new capital could limit our ability to grow. In addition, we are required to distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders to maintain our qualification as a RIC. As a result, these earnings will not be available to fund new investments. An inability on our part to access the capital markets successfully could limit our ability to grow our business and execute our business strategy fully and could decrease our earnings, if any, which would have an adverse effect on the value of our shares of common stock.
Our wholly owned SBIC subsidiaries may be unable to make distributions to us that will enable us to maintain RIC tax treatment, which could result in the imposition of U.S. federal income tax.
In order for us to qualify as a RIC and to minimize the imposition of U.S. federal income tax, we are required to distribute substantially all of our net ordinary income and net capital gain income, including income from certain of our subsidiaries that are classified as partnerships or disregarded entities for U.S. federal income tax purposes, which includes the income from our SBIC subsidiaries. We are partially dependent on our SBIC subsidiaries for cash distributions to enable us to meet the RIC distribution requirements. Our SBIC subsidiaries may be limited by the Small Business Investment Act and SBA regulations governing SBICs, from making certain distributions to us that may be necessary to maintain our tax treatment as a RIC. We may have to request a waiver of the SBA’s restrictions for our SBIC subsidiaries to make certain distributions to maintain our RIC tax treatment. We cannot assure you that the SBA will grant such waiver and if our SBIC subsidiaries are unable to obtain a waiver, compliance with the SBA regulations may result in loss of RIC tax treatment and a consequent imposition of U.S. federal income on our income.
Our ability to enter into certain transactions with our affiliates is restricted, which may limit the scope of investments available to us.
We are prohibited under the 1940 Act from participating in certain transactions with our affiliates without the prior approval of our independent directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities will be our affiliate for purposes of the 1940 Act, and we are generally prohibited from buying or selling any security from or to such affiliate without the prior approval of our independent directors. The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, which could include concurrent investments in the same portfolio company, without prior approval of our independent directors and, in some cases, the SEC. We are prohibited from buying or selling any security from or to any person that controls us or who owns more than 25% of our voting securities or certain of that person’s affiliates, or entering into prohibited joint transactions with such persons, absent the prior approval of the SEC. As a result of these restrictions, we may be prohibited from buying or selling any security (other than any security of which we are the issuer) from or to any portfolio company of a private fund managed by Stellus Capital Management or its affiliates without the prior approval of the SEC, which may limit the scope of investment opportunities that would otherwise be available to us.
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The involvement of our interested directors in the valuation process may create conflicts of interest.
We make many of our portfolio investments in the form of loans and securities that are not publicly traded and for which no market quotation is readily available. As a result, our Board determines the fair value of these loans and securities in good faith as described elsewhere in this Annual Report on Form 10-K. In connection with that determination, investment professionals from Stellus Capital Management provide our Board with valuations based upon the most recent portfolio company financial statements available and projected financial results of each portfolio company. While the valuation for each portfolio investment is reviewed by an independent valuation firm at least twice annually, the ultimate determination of fair value is made by our Board, including our interested directors, and not by such third-party valuation firm. In addition, Messrs. Ladd and D’Angelo, each an interested member of our Board, have a direct pecuniary interest in Stellus Capital Management. The participation of Stellus Capital Management’s investment professionals in our valuation process, and the pecuniary interest in Stellus Capital Management by certain members of our Board, could result in a conflict of interest as Stellus Capital Management’s management fee is based, in part, on the value of our gross assets, and incentive fees are based, in part, on realized gains and realized and unrealized losses.
There are potential conflicts related to other arrangements we have with Stellus Capital Management.
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.” In addition, we have entered into an Administration Agreement with Stellus Capital Management, pursuant to which we are required to pay to Stellus Capital Management our allocable portion of overhead and other expenses incurred by Stellus Capital Management in performing its obligations under such Administration Agreement, such as rent and our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and his staff. This will create conflicts of interest that our Board will monitor. For example, under the terms of the license agreement, we will be unable to preclude Stellus Capital Management from licensing or transferring the ownership of the “Stellus Capital” name to third parties, some of whom may compete against us. Consequently, we will be unable to prevent any damage to goodwill that may occur as a result of the activities of Stellus Capital Management or others. Furthermore, in the event the license agreement is terminated, we will be required to change our name and cease using “Stellus Capital” as part of our name. Any of these events could disrupt our recognition in the marketplace, damage any goodwill we may have generated and otherwise harm our business.
The Investment Advisory Agreement and the Administration Agreement with Stellus Capital Management were not negotiated on an arm’s-length basis and may not be as favorable to us as if they had been negotiated with an unaffiliated third party.
The Investment Advisory Agreement and the Administration Agreement were negotiated between related parties. Consequently, their terms, including fees payable to Stellus Capital Management, may not be as favorable to us as if they had been negotiated with an unaffiliated third party. In addition, we may choose not to enforce, or to enforce less vigorously, our rights and remedies under these agreements because of our desire to maintain our ongoing relationship with Stellus Capital Management and its affiliates. Any such decision, however, would breach our fiduciary obligations to our stockholders.
The time and resources that Stellus Capital Management devote to us may be diverted, and we may face additional competition due to the fact that Stellus Capital Management and its affiliates are not prohibited from raising money for, or managing, another entity that makes the same types of investments that we target.
Stellus Capital Management and some of its affiliates, including our officers and our interested directors, are not prohibited from raising money for, or managing, another investment entity that makes the same types of investments as those we target. For example, Stellus Capital Management and/or its affiliates currently manage a private BDC and other private credit funds that have investment strategies that are similar, overlapping or identical to our investment strategy and with which we co-invest. In addition, pursuant to sub-advisory arrangements, Stellus Capital Management provides non-discretionary advisory services to the D. E. Shaw group related to a private investment fund and a strategy of a private multi-strategy investment fund to which the D. E. Shaw group
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serves as investment adviser. As a result, the time and resources they could devote to us may be diverted. In addition, we may compete with any such investment entity for the same investors and investment opportunities.
Our incentive fee arrangements with Stellus Capital Management may vary from those of other investment funds, account or investment vehicles managed by Stellus Capital Management, which may create an incentive for Stellus Capital Management to devote time and resources to a higher fee-paying fund.
If Stellus Capital Management is paid a higher performance-based fee from any of its other funds, it may have an incentive to devote more research and development or other activities, and/or recommend the allocation of investment opportunities, to such higher fee-paying fund. For example, to the extent Stellus Capital Management’s incentive compensation is not subject to a hurdle or total return requirement with respect to another fund, it may have an incentive to devote time and resources to such other fund. Any such diversion of Stellus Capital Management's time and resources could negatively impact our business, financial condition, or results.
Stellus Capital Management’s liability is limited under the Investment Advisory Agreement and we have agreed to indemnify Stellus Capital Management against certain liabilities, which may lead Stellus Capital Management to act in a riskier manner on our behalf than it would when acting for its own account.
Under the Investment Advisory Agreement, Stellus Capital Management has not assumed any responsibility to us other than to render the services called for under that agreement. It will not be responsible for any action of our Board in following or declining to follow Stellus Capital Management’s advice or recommendations. Under the Investment Advisory Agreement, Stellus Capital Management, its officers, members and personnel, and any person controlling or controlled by Stellus Capital Management will not be liable to us, any subsidiary of ours, our directors, our stockholders or any subsidiary’s stockholders or partners for acts or omissions performed in accordance with and pursuant to the Investment Advisory Agreement, except those resulting from acts constituting gross negligence, willful misfeasance, bad faith or reckless disregard of the duties that Stellus Capital Management owes to us under the Investment Advisory Agreement. In addition, as part of the Investment Advisory Agreement, we have agreed to indemnify Stellus Capital Management and each of its officers, directors, members, managers and employees from and against any claims or liabilities, including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our business and operations or any action taken or omitted on our behalf pursuant to authority granted by the Investment Advisory Agreement, except where attributable to gross negligence, willful misfeasance, bad faith or reckless disregard of such person’s duties under the Investment Advisory Agreement. These protections may lead Stellus Capital Management to act in a riskier manner when acting on our behalf than it would when acting for its own account.
Stellus Capital Management can resign as our investment adviser or administrator upon 60 days’ notice and we may not be able to find a suitable replacement within that time, or at all, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.
Stellus Capital Management has the right under the Investment Advisory Agreement to resign as our investment adviser at any time upon 60 days’ written notice, whether we have found a replacement or not. Similarly, Stellus Capital Management has the right under the Administration Agreement to resign at any time upon 60 days’ written notice, whether we have found a replacement or not. If Stellus Capital Management was to resign, we may not be able to find a new investment adviser or administrator or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions to our stockholders are likely to be adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management and investment or administrative activities, as applicable, is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by Stellus Capital Management. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect our business, financial condition, results of operations and cash flows.
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If we fail to comply with the regulatory requirements applicable to BDCs, our business could be affected and our operating flexibility could be significantly reduced.
We have elected to be regulated as a BDC under the 1940 Act. The 1940 Act imposes numerous constraints on the operations of BDCs. For example, BDCs are required to invest at least 70% of their total assets in specified types of securities, primarily in private companies or thinly traded U.S. public companies, cash, cash equivalents, U.S. government securities and other high quality debt investments that mature in one year or less. Failure to comply with the requirements imposed on BDCs by the 1940 Act could cause the SEC to bring an enforcement action against us and/or expose us to claims of private litigants. In addition, upon approval of a majority of our stockholders, we may elect to withdraw their respective election as a BDC. If we decide to withdraw our election, we may be required to register as an investment company under the 1940 Act and be subject to the substantially greater regulation under the 1940 Act as a closed-end investment company. Compliance with those regulations would significantly decrease our operating flexibility and could significantly increase our cost of doing business.
If we do not invest a sufficient portion of our assets in qualifying assets, we could violate the 1940 Act provisions applicable to BDCs or be precluded from investing according to our current business strategy.
As a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets.
We believe that most of the investments that we acquire in the future will constitute qualifying assets. However, we may be precluded from investing in what we believe to be attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could violate the 1940 Act provisions applicable to BDCs. As a result of such violation, specific rules under the 1940 Act could prevent us, for example, from making follow-on investments in existing portfolio companies (which could result in the dilution of our position).
If we do not maintain our election to be regulated as a BDC, we would be subject to regulation as a registered closed-end investment company under the 1940 Act. As a registered closed-end investment company, we would be subject to substantially more regulatory restrictions under the 1940 Act which would significantly decrease our operating flexibility.
We may experience fluctuations in our annual and quarterly operating results.
We could experience fluctuations in our annual and quarterly operating results due to a number of factors, including the interest rate payable on the loans and debt securities we acquire, the default rate on such loans and securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. In light of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
Our Board may change our investment objective, operating policies and strategies without prior notice or stockholder approval.
Our Board has the authority, except as otherwise provided in the 1940 Act, to modify or waive certain of our operating policies and strategies without prior notice and without stockholder approval. However, absent stockholder approval, we may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results and the market price of our common stock. Nevertheless, any such changes could adversely affect our business and impair our ability to make distributions to our stockholders.
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Our Board is authorized to reclassify any unissued shares of common stock into one or more classes of preferred stock, which could convey special rights and privileges to its owners.
Under Maryland General Corporation Law and our charter, our Board is authorized to classify and reclassify any authorized but unissued shares of stock into one or more classes of stock, including preferred stock. Prior to issuance of shares of each class or series, the Board will be required by Maryland law and our charter to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to stockholder distributions, qualifications and terms or conditions of redemption for each class or series. Thus, the Board could authorize the issuance of shares of preferred stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or that otherwise might be in their best interest. The cost of any such reclassification would be borne by our common stockholders. Certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock. For example, the 1940 Act provides that holders of preferred stock are entitled to vote separately from holders of common stock to elect two preferred stock directors. The issuance of preferred stock convertible into shares of common stock may also reduce the net income and net asset value per share of our common stock upon conversion, provided, that we will only be permitted to issue such convertible preferred stock to the extent we comply with the requirements of Section 61 of the 1940 Act, including obtaining common stockholder approval. These effects, among others, could have an adverse effect on your investment in our common stock.
Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock.
The Maryland General Corporation Law and our charter and bylaws contain provisions that may discourage, delay or make more difficult a change in control of Stellus Capital Investment Corporation or the removal of our directors. We are subject to the Maryland Business Combination Act, subject to any applicable preempting requirements of the 1940 Act. Our Board has adopted a resolution exempting from the Business Combination Act any business combination between us and any other person, subject to prior approval of such business combination by our Board, including approval by a majority of our independent directors. If the resolution exempting business combinations is repealed or our Board does not approve a business combination, the Business Combination Act may discourage third parties from trying to acquire control of us and increase the difficulty of consummating such an offer. Our bylaws exempt from the Maryland Control Share Acquisition Act acquisitions of our stock by any person. If we amend our bylaws to repeal the exemption from the Control Share Acquisition Act, the Control Share Acquisition Act also may make it more difficult for a third party to obtain control of us and increase the difficulty of consummating such a transaction.
We have also adopted measures that may make it difficult for a third party to obtain control of us, including provisions of our charter classifying our Board in three classes serving staggered three-year terms, and authorizing our Board to classify or reclassify shares of our stock in one or more classes or series, to cause the issuance of additional shares of our stock, to amend our charter without stockholder approval and to increase or decrease the number of shares of stock that we have authority to issue. These provisions, as well as other provisions of our charter and bylaws, may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interests of our stockholders.
We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to make distributions to our stockholders.
Our business is highly dependent on the communications and information systems of Stellus Capital Management. In addition, certain of these systems are provided to Stellus Capital Management by third party service providers. Any failure or interruption of such systems, including as a result of the termination of an agreement with any such third-party service provider, could cause delays or other problems in our activities. This, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to make distributions to our stockholders.
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The failure of cybersecurity systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning, could impair our ability to conduct business effectively.
Cybersecurity has become a priority for regulators in the U.S. and around the world. Cybersecurity incidents and cyber-attacks have been occurring globally at a more frequent and severe level, and will likely continue to increase in frequency in the future. Cyber-attacks and other security threats could originate from a wide variety of sources, including cyber criminals, nation state hackers, hacktivists and other outside parties. Additionally, cyber-attacks and other security threats have become increasingly complex as a result of new technologies, such as artificial intelligence, which are able to identify and target new vulnerabilities in information technology systems.
The occurrence of a disaster, such as a cyber-attack against us or against a third-party that has access to our data or networks, a natural catastrophe, an industrial accident, failure of our disaster recovery systems, or consequential employee error, could have an adverse effect on our ability to communicate or conduct business, negatively impacting our operations and financial condition. This adverse effect can become particularly acute if those events affect our electronic data processing, transmission, storage, and retrieval systems, or impact the availability, integrity, or confidentiality of our data.
We depend heavily upon computer systems to perform necessary business functions. Despite our implementation of a variety of security measures, our computer systems, networks, and data, like those of other companies, could be subject to cyber-attacks and unauthorized access, use, alteration, or destruction, such as from physical and electronic break-ins or unauthorized tampering, malware and computer virus attacks, or system failures and disruptions. If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary, and other information processed, stored in, and transmitted through our computer systems and networks. Such an attack could cause interruptions or malfunctions in our operations, which could result in financial losses, litigation, regulatory penalties, client dissatisfaction or loss, reputational damage, and increased costs associated with mitigation of damages and remediation.
Third parties with which we do business may also be sources of cybersecurity or other technological risks. We outsource certain functions and these relationships allow for the storage and processing of our information, as well as customer, counterparty, employee and borrower information. Cybersecurity failures or breaches by Stellus Capital Management and other service providers (including, but not limited to, accountants, custodians, transfer agents and administrators), and the issuers of securities in which we invest, also have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, interference with our ability to calculate its net asset value, impediments to trading, the inability of our stockholders to transact business, violations of applicable privacy and other laws, regulatory fines, penalties, reputation damages, reimbursement of other compensation costs, or additional compliance costs. We cannot guarantee that third parties and infrastructure in our networks or our partners’ networks have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems or the third-party information technology systems that support our services. Our ability to monitor these third parties’ information security practices is limited, and they may not have adequate information security measures in place. While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure or destruction of data, or other cybersecurity incidents, with increased costs and other consequences, including those described above. In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future.
Privacy and information security laws and regulation changes, and compliance with those changes, may result in cost increases due to system changes and the development of new administrative processes. In addition, we may be required to expend significant additional resources to modify our protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks. We currently do not maintain insurance coverage relating to cybersecurity risks, and we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are not fully insured.
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We, Stellus Capital Management and our portfolio companies are subject to risks associated with “phishing” and other cyber-attacks.
Our business and the business of our portfolio companies relies upon secure information technology systems for data processing, storage and reporting. Despite careful security and controls design, implementation and updating, our and our portfolio companies’ information technology systems could become subject to cyber-attacks. Cyber-attacks include, but are not limited to, gaining unauthorized access to digital systems (e.g., through “hacking”, malicious software coding, social engineering or “phishing” attempts) for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service attacks on websites (i.e., efforts to make network services unavailable to intended users). Stellus Capital Management’s employees have been and expect to continue to be the target of fraudulent calls, emails and other forms of activities. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen information, misappropriation of assets, increased cybersecurity protection and insurance costs, litigation and damage to our business relationships, regulatory fines or penalties, or other adverse effects on our business, financial condition or results of operations. In addition, we may be required to expend significant additional resources to modify its protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks related to cyber-attacks.
Stellus Capital Management’s and other service providers’ increased use of mobile and cloud technologies could heighten the risk of a cyber-attack as well as other operational risks, as certain aspects of the security of such technologies may be complex, unpredictable or beyond their control. These service providers’ reliance on mobile or cloud technology or any failure by mobile technology and cloud service providers to adequately safeguard their systems and prevent cyber-attacks could disrupt their operations and result in misappropriation, corruption or loss of personal, confidential or proprietary information. In addition, there is a risk that encryption and other protective measures against cyber-attacks may be circumvented, particularly to the extent that new computing technologies increase the speed and computing power available.
We are subject to risks associated with artificial intelligence and machine learning technology.
Recent technological advances in artificial intelligence and machine learning technology may pose risks to us and our portfolio companies. We and our portfolio companies could be exposed to the risks of artificial intelligence and machine learning technology if third-party service providers or any counterparties, whether or not known to us, also use artificial intelligence and machine learning technology in their business activities. We and our portfolio companies may not be in a position to control the use of artificial intelligence and machine learning technology in third-party products or services.
Use of artificial intelligence and machine learning technology could include the input of confidential information in contravention of applicable policies, contractual or other obligations or restrictions, resulting in such confidential information becoming partly accessible by other third-party artificial intelligence and machine learning technology applications and users.
Independent of its context of use, artificial intelligence and machine learning technology is generally highly reliant on the collection and analysis of large amounts of data, and it is not possible or practicable to incorporate all relevant data into the model that artificial intelligence and machine learning technology utilizes to operate. Certain data in such models will inevitably contain a degree of inaccuracy and error, which may be material, and could otherwise be inadequate or flawed, which would be likely to degrade the effectiveness of artificial intelligence and machine learning technology. To the extent that we or our portfolio companies are exposed to the risks of artificial intelligence and machine learning technology use, any such inaccuracies or errors could have adverse impacts on our Company or our investments.
Artificial intelligence and machine learning technology and its applications, including in the private investment and financial sectors, continue to develop rapidly, and it is impossible to predict the future risks that may arise from such developments.
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Risks Related to Economic Conditions
Global economic, political and market conditions may adversely affect our business, financial condition and results of operations, including our revenue growth and profitability.
Our business, financial conditions and results of operations may be affected by conditions and trends in the global financial markets and the global economic and political climate relating to, among other things, fluctuations in interest rates, the availability and cost of credit, future increases in inflation, economic uncertainty, changes in laws (including laws and regulations relating to our taxation, taxation of our clients and applicable to alternative asset managers), trade policies, commodity prices, tariffs (including retaliatory tariffs), currency exchange rates and controls, political elections and administration transitions, and national and international political events (including contract terminations or funding pauses, government agency closures, prolonged government shutdowns, wars and other forms of conflict, terrorist acts, and security operations), work stoppages, labor shortages and labor disputes, supply chain disruptions and catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes and global health pandemics.
Changes in trade policies, including the imposition of new tariffs or increases in existing tariffs between the United States, Mexico, Canada, China or other countries, or reactionary measures in response thereto including retaliatory tariffs, legal challenges, or currency manipulation, could adversely affect the market conditions in which we operate. Although the Supreme Court recently invalidated the tariffs imposed under the International Emergency Economic Powers Act (“IEEPA”), certain tariff rates and obligations established through trade agreements that were negotiated during active IEEPA tariffs remain in effect, and the current administration has announced widely applicable tariffs pursuant to the Trade Act of 1974, effective February 24, 2026. The administration has indicated that it will continue seeking to implement tariffs through other statutory authorities as well. The scope of the Supreme Court’s decision may create market uncertainty as it relates to the availability of refunds for prior tariffs and the imposition of new tariffs to replace those imposed under IEEPA. These factors are outside of our control and may negatively impact the businesses in which we invest directly or indirectly and, in turn, could have a material adverse impact on our business, operating results and financial condition. We monitor developments and seek to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that we will be successful in doing so.
Global financial markets have experienced heightened volatility in recent periods, including as a result of economic and political events in or affecting the world’s major economies, such as the ongoing wars and conflicts between Russia and Ukraine, as well as continued political and social unrest in Venezuela, the Middle East and regions of North Africa. Concerns over economic recession, future increases in inflation, interest rate volatility, fluctuations in oil and gas prices resulting from global production and demand levels and geopolitical tension, have exacerbated market volatility. Market volatility has been further exacerbated by social unrest, changes regarding immigration and work permit policies and other political and security concerns both in the United States and across various international regions. Due to interrelationships within the global financial markets, if these issues do not abate or worsen or spread, our business may be adversely affected both within and outside of the directly affected regions.
During periods of difficult market conditions or slowdowns, which may be across one or more industries, sectors or geographies, the companies in which we invest may experience decreased revenues, financial losses, credit rating downgrades, difficulty in obtaining access to financing and increased funding costs. During such periods, those companies may also have difficulty in pursuing growth strategies, expanding their businesses and operations and be unable to meet their debt service obligations or other expenses as they become due, including obligations and expenses payable us. Negative financial results in our portfolio companies could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline. Additionally, the Federal Reserve announced its decision to keep the federal funds rate flat in January 2026, however, the Federal Reserve may further decrease, or may announce its intention to further decrease, the federal funds rate in 2026. These developments, along with the United States government’s credit and deficit concerns, global economic uncertainties and market volatility, could cause interest rates to be volatile, which may negatively impact our ability to access the debt markets and capital markets on favorable terms.
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Increased geopolitical unrest, terrorist attacks, or acts of war may impact the businesses in which we invests, and harm our business, operating results, and financial conditions.
Terrorist activity and the continued threat of terrorism and acts of civil or international hostility, both within the United States and abroad, as well as ongoing military and other actions and heightened security measures in response to these types of threats, may cause significant volatility and declines in the global markets, loss of life, property damage, disruptions to commerce and reduced economic activity, which may negatively impact the businesses in which we invests directly or indirectly and, in turn, could have a material adverse impact on the our business, operating results, and financial condition. Losses from terrorist attacks are generally uninsurable.
Risks Related to our Investments
Our business and our portfolio companies may be susceptible to economic slowdowns or recessions which would harm our operating results.
Many of the portfolio companies in which we have invested or expect to make investments are likely to be susceptible to economic slowdowns or recessions and may be unable to repay our loans during such periods. Therefore, the number of our non-performing assets is likely to increase, and the value of our portfolio is likely to decrease during such periods. Adverse economic conditions may decrease the value of collateral securing some of our loans and debt securities and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing our investments and harm our operating results.
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its assets, which could trigger cross-defaults under other agreements and jeopardize our portfolio company’s ability to meet its obligations under the loans and debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company. In addition, lenders in certain cases can be subject to lender liability claims for actions taken by them when they become too involved in the borrower’s business or exercise control over a borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of actions taken if we render significant managerial assistance to the borrower.
Furthermore, if one of our portfolio companies were to file for bankruptcy protection, a bankruptcy court might re-characterize our debt holding and subordinate all or a portion of our claim to claims of other creditors, even though we may have structured our investment as senior secured debt. The likelihood of such a re-characterization would depend on the facts and circumstances, including the extent to which we provided managerial assistance to that portfolio company.
Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing our investments and harm business, financial condition, operating results and prospects.
We may be subject to risks related to bank impairments or failures either directly or through our portfolio companies, which, in turn, could indirectly impact our performance and results of operations.
The impairment or failure of one or more banks with whom we or any of our portfolio companies transact may inhibit our ability or the ability of our portfolio companies to access depository accounts, including cash and cash equivalents, as well as investment accounts, which, in turn, may directly or indirectly impact our performance and results of operations. In the event of a bank impairment or failure we may be forced to delay or forgo investments, and affected portfolio companies may default on their debt obligations to us, either of which would impact our performance. In the event of such a failure of a banking institution where one or more of our portfolio companies holds depository accounts, access to such accounts could be restricted and FDIC protection may not be available for balances in excess of amounts insured by the FDIC. In such instances, we or our affected portfolio companies would not recover such excess, uninsured amounts, and they may not be able to cure any defaults. Additionally, unfavorable economic conditions also could
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increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing our investments and harm business, financial condition, operating results and prospects. We closely monitor activity in the banking sector as it relates to any of our borrowers and continually assess any potential direct or indirect impact to us as a result of the same.
Our investments in leveraged portfolio companies may be risky, and we could lose all or part of our investment.
Investment in leveraged companies involves a number of significant risks. Leveraged companies in which we invest may have limited financial resources and may be unable to meet their obligations under their loans and debt securities that we hold. Such developments may be accompanied by a deterioration in the value of any collateral securing the investment and/or equity co-investments we hold and a reduction in the likelihood of our realizing any guarantees that we may have obtained in connection with our investment. Smaller leveraged companies also may have less predictable operating results and may require substantial additional capital to support their operations, finance their expansion or maintain their competitive position.
We may hold the loans and debt securities of leveraged companies that may, due to the significant operating volatility typical of such companies, enter into bankruptcy proceedings.
Leveraged companies may experience bankruptcy or similar financial distress. The bankruptcy process has a number of significant inherent risks. Many events in a bankruptcy proceeding are the product of contested matters and adversary proceedings and are beyond the control of the creditors. A bankruptcy filing by a portfolio company may adversely and permanently affect that company. If the proceeding is converted to a liquidation, the value of the portfolio company may not equal the liquidation value that was believed to exist at the time of the investment. The duration of a bankruptcy proceeding is also difficult to predict, and a creditor’s return on investment can be adversely affected by delays until the plan of reorganization or liquidation ultimately becomes effective. The administrative costs in connection with a bankruptcy proceeding are frequently high and would be paid out of the debtor’s estate prior to any return to creditors. Because the standards for classification of claims under bankruptcy law are vague, our influence with respect to the class of securities or other obligations we own may be lost by increases in the number and amount of claims in the same class or by different classification and treatment. In the early stages of the bankruptcy process, it is often difficult to estimate the extent of, or even to identify, any contingent claims that might be made. In addition, certain claims that have priority by law (for example, claims for taxes) may be substantial.
Our investments in private and lower middle-market portfolio companies are risky, and we could lose all or part of our investment.
Investment in private and lower middle-market companies involves a number of significant risks. Generally, little public information exists about these companies, and we rely on the ability of Stellus Capital Management’s investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments. Lower middle-market companies may have limited financial resources and may be unable to meet their obligations under their loans and debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of our realizing any guarantees we may have obtained in connection with our investment. In addition, such companies typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. Additionally, lower middle-market companies are more likely to depend on the management talents and efforts of a small group of persons. Therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on one or more of the portfolio companies we invest in and, in turn, on us. Lower middle-market companies also may be parties to litigation and may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence. In addition, our executive officers, directors and Stellus Capital Management may, in the ordinary course of business, be named as defendants in litigation arising from our investments in portfolio companies, the commencement and duration of which could distract from their roles or service to us and negatively impact our business.
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The lack of liquidity in our investments may adversely affect our business.
Most of our assets are invested in illiquid loans and securities, and a substantial portion of our investments in leveraged companies are subject to legal and other restrictions on resale or are otherwise less liquid than more broadly traded public securities. The illiquidity of these investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. Also, as noted above, we may be limited or prohibited in our ability to sell or otherwise exit certain positions in our portfolio, as such a transaction could be considered a joint transaction prohibited by the 1940 Act.
Price declines and illiquidity in the corporate debt markets may adversely affect the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation.
As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at fair value as determined in good faith by our Board. As part of the valuation process, our Board may take into account the following types of factors, if relevant, in determining the fair value of our investments:
When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate the valuation. We record decreases in the market values or fair values of our investments as unrealized depreciation. Declines in prices and liquidity in the corporate debt markets may result in significant net unrealized depreciation in our portfolio. The effect of all of these factors on our portfolio may reduce our net asset value by increasing net unrealized depreciation in our portfolio. Depending on market conditions, we could incur substantial realized losses and may suffer additional unrealized losses in future periods, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are a non-diversified investment company within the meaning of the 1940 Act, and therefore, we are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer.
We are classified as a non-diversified investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer. Beyond the asset diversification requirements associated with our qualification as a RIC under the Code, we do not have fixed guidelines for diversification. To the extent that we assume large positions in the securities of a small
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number of issuers or our investments are concentrated in relatively few industries, our net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market’s assessment of the issuer. We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company.
Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio.
Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as “follow-on” investments, in seeking to:
We generally have discretion to make follow-on investments, subject to the availability of capital resources. Failure on our part to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our level of risk, because we prefer other opportunities or because we are inhibited by compliance with BDC requirements of the 1940 Act or the desire to maintain our qualification as a RIC. Our ability to make follow-on investments may also be limited by our compliance with the conditions under the Order we received from the SEC related to co-investments with investment funds managed by Stellus Capital Management (or an affiliate thereof) or Stellus Capital Management’s allocation policy.
Because we generally do not hold controlling equity interests in our portfolio companies, we may not be able to exercise control over our portfolio companies or to prevent decisions by management of our portfolio companies that could decrease the value of our investments.
We hold equity controlling equity positions in one of the portfolio companies included in our portfolio and, although we may do so in the future, we do not currently intend to hold additional controlling equity positions in our other portfolio companies. As a result, we are subject to the risk that a portfolio company may make business decisions with which we disagree, and that the management and/or stockholders of a portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity of the debt and equity investments that we hold in our portfolio companies, we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company and may therefore suffer a decrease in the value of our investments.
Defaults by our portfolio companies will harm our operating results.
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its assets. This could trigger cross-defaults under other agreements and jeopardize such portfolio company’s ability to meet its obligations under the loans or debt or equity securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting portfolio company.
Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and ability to make stockholder distributions and result in a decline in the market price of our shares.
We are subject to the risk that the debt investments we make in our portfolio companies may be repaid prior to maturity. We expect that our investments will generally allow for repayment at any time subject to certain penalties. When this occurs, we intend to generally reinvest these proceeds in temporary investments, pending their future
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investment in accordance with our investment strategy. These temporary investments will typically have substantially lower yields than the debt being prepaid, and we could experience significant delays in reinvesting these amounts. Any future investment may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elects to prepay amounts owed to us. Additionally, prepayments could negatively impact our ability to make, or the amount of, stockholder distributions with respect to our common stock, which could result in a decline in the market price of our shares.
The effect of global climate change may impact the operations of our portfolio companies.
Climate change creates physical and financial risk and some of our portfolio companies may be adversely affected by climate change. For example, the needs of customers of energy companies vary with weather conditions, primarily temperature and humidity. To the extent weather conditions are affected by climate change, energy use could increase or decrease depending on the duration and magnitude of any changes. Increases in the cost of energy could adversely affect the cost of operations of our portfolio companies if the use of energy products or services is material to their business. A decrease in energy use due to weather changes may affect some of our portfolio companies’ financial condition, through decreased revenues. Extreme weather conditions in general require more system backup, adding to costs, and can contribute to increased system stresses, including service interruptions.
Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.
We invest a portion of our capital in second lien and subordinated loans issued by our portfolio companies. The portfolio companies usually have, or may be permitted to incur, other debt that ranks equally with, or senior to, the loans in which we invest. By their terms, such debt instruments may provide that the holders are entitled to receive payment of interest or principal on or before the dates on which we are entitled to receive payments in respect of the loans in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying senior creditors, a portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with loans in which we invest, we would have to share any distributions on an equal and ratable basis with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.
Additionally, certain loans that we make to portfolio companies may be secured on a second priority basis by the same collateral securing senior secured debt of such companies. The first priority liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the portfolio company under the agreements governing the loans. The holders of obligations secured by first priority liens on the collateral will generally control the liquidation of, and be entitled to receive proceeds from, any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds were not sufficient to repay amounts outstanding under the loan obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the portfolio company’s remaining assets, if any.
We may also make unsecured loans to portfolio companies, meaning that such loans will not benefit from any interest in collateral of such companies. Liens on such portfolio companies’ collateral, if any, will secure the portfolio company’s obligations under its outstanding secured debt and may secure certain future debt that is permitted to be incurred by the portfolio company under its secured loan agreements. The holders of obligations secured by such liens will generally control the liquidation of, and be entitled to receive proceeds from, any realization of such collateral to repay their obligations in full before us. In addition, the value of such collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other
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factors. There can be no assurance that the proceeds, if any, from sales of such collateral would be sufficient to satisfy our unsecured loan obligations after payment in full of all secured loan obligations. If such proceeds were not sufficient to repay the outstanding secured loan obligations, then our unsecured claims would rank equally with the unpaid portion of such secured creditors’ claims against the portfolio company’s remaining assets, if any.
The rights we may have with respect to the collateral securing the loans we make to our portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of such senior debt. Under a typical intercreditor agreement, at any time that obligations that have the benefit of the first priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first priority liens:
We may not have the ability to control or direct such actions, even if our rights are adversely affected.
We may be exposed to special risks associated with bankruptcy cases.
From time to time, one or more of our portfolio companies may be involved in bankruptcy or other reorganization or liquidation proceedings. Many of the events within a bankruptcy case are adversarial and often beyond the control of the creditors. While creditors generally are afforded an opportunity to object to significant actions, we cannot assure you that a bankruptcy court would not approve actions that may be contrary to our interests. There also are instances where creditors can lose their ranking and priority if they are considered to have taken over management of a borrower.
To the extent that portfolio companies in which we have invested through a unitranche facility are involved in bankruptcy proceedings, the outcome of such proceedings may be uncertain. For example, it is unclear whether a bankruptcy court would enforce an agreement among lenders which sets the priority of payments among unitranche lenders. In such a case, the “first out” lenders in the unitranche facility may not receive the same degree of protection as they would if the agreement among lenders was enforced.
The reorganization of a company can involve substantial legal, professional and administrative costs to a lender and the borrower. Bankruptcy and reorganization proceedings are frequently subject to unpredictable and lengthy delays, and during the process, the debtor company’s competitive position may erode, key management may depart and the debtor company may not be able to invest adequately. In some cases, the debtor company may not be able to reorganize and may be required to liquidate assets. The debt of companies in financial reorganization will, in most cases, not pay current interest, may not accrue interest during reorganization and may be adversely affected by an erosion of the issuer’s fundamental value.
In addition, lenders can be subject to lender liability claims for actions taken by them where they become too involved in the borrower’s business or exercise control over the borrower. For example, we could become subject to a lender liability claim (alleging that we misused our influence on the borrower for the benefit of its lenders), if, among other things, the borrower requests significant managerial assistance from us and we provide that assistance. To the extent we and an affiliate both hold investments in the same portfolio company that are of a different character, we may also face restrictions on our ability to become actively involved in the event that portfolio company becomes distressed
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as a result of the restrictions imposed on transactions involving affiliates under the 1940 Act. In such cases, we may be unable to exercise rights we may otherwise have to protect our interests as security holders in such portfolio company.
If we make subordinated investments, the obligors or the portfolio companies may not generate sufficient cash flow to service their debt obligations to us.
We may make subordinated investments that rank below other obligations of the obligor in right of payment. Subordinated investments are subject to greater risk of default than senior obligations as a result of adverse changes in the financial condition of the obligor or economic conditions in general. If we make a subordinated investment in a portfolio company, the portfolio company may be highly leveraged, and its relatively high debt-to-equity ratio may create increased risks that its operations might not generate sufficient cash flow to service all of its debt obligations.
The disposition of our investments may result in contingent liabilities.
Substantially all of our investments involve loans and private securities. In connection with the disposition of an investment in loans and private securities, we may be required to make representations about the business and financial affairs of the portfolio company typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers of such investment to the extent that any such representations turn out to be inaccurate or with respect to potential liabilities. These arrangements may result in contingent liabilities that ultimately result in funding obligations that we must satisfy through our return of distributions previously made to us.
We may not realize gains from our equity investments.
When we invest in loans and debt securities, we may acquire warrants or other equity securities of portfolio companies as well. We may also invest in equity securities directly. To the extent we hold equity investments, we will attempt to dispose of them and realize gains upon our disposition of them. However, the equity interests we receive may not appreciate in value and, may decline in value. As a result, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.
Our ability to enter transactions involving derivatives and financial commitment transactions may be limited.
Pursuant to SEC rules, BDCs that use derivatives are subject to a value-at-risk (“VaR”) leverage limit, certain other derivatives risk management program and testing requirements and requirements related to board reporting. These requirements apply unless the BDC qualified as a “limited derivatives user,” as defined in the SEC’s adopted rules. A BDC that enters into reverse repurchase agreements or similar financing transactions may either comply with the asset coverage requirements of Section 18 of the 1940 Act when engaging in reverse repurchase agreements or choose to treat such agreements as derivatives transactions under the adopted rule. A BDC may enter into an unfunded commitment agreement that is not a derivatives transaction, such as an agreement to provide financing to a portfolio company, if the BDC has a reasonable belief, at the time it enters into such an agreement, that it will have sufficient cash and cash equivalents to meet its obligations with respect to all of its unfunded commitment agreements, in each case as it becomes due. If the BDC cannot meet this test, it is required to treat unfunded commitments as a derivatives transaction subject to the requirements of the SEC rules. Collectively, these requirements may limit our ability to use derivatives and/or enter into certain other financial contracts.
Risks Relating to Our Common Stock
There is a risk that you may not receive distributions or that our distributions may not grow over time and a portion of our distributions may be a return of capital.
We intend to make distributions on a monthly basis to our stockholders out of assets legally available for distribution (i.e., not subject to any legal restrictions under Maryland law on the distribution thereof). We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. All distributions will be made at the discretion of our Board and will depend on our
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earnings, financial condition, maintenance of RIC status, compliance with applicable BDC requirements and SBA regulations and such other factors as our Board may deem relative from time to time. We cannot assure you that we will make distributions to our stockholders in the future.
Our ability to pay distributions might be adversely affected by the impact of one or more of the risk factors described in this Annual Report on Form 10-K. Due to the asset coverage test applicable to us under the 1940 Act as a BDC, we may be limited in our ability to make distributions. In addition, restrictions and provisions in our Credit Facility, the 2030 Notes Payable and any future credit facilities, as well as in the terms of any future debt securities we may issue, may limit our ability to make distributions in certain circumstances.
When we make distributions, we will be required to determine the extent to which such distributions are paid out of current or accumulated earnings and profits. Distributions in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of an investor’s basis in our stock and, assuming that an investor holds our stock as a capital asset, thereafter as a capital gain.
Stockholders may experience dilution in their ownership percentage if they do not participate in our dividend reinvestment plan (“DRIP”).
All distributions declared in cash payable to stockholders that are participants in our DRIP are generally automatically reinvested in shares of our common stock. As a result, stockholders that do not participate in the DRIP may experience dilution over time. Stockholders who receive distributions in shares of common stock may experience accretion to the net asset value of their shares if our shares are trading at a premium and dilution if our shares are trading at a discount. The level of accretion or discount would depend on various factors, including the proportion of our stockholders who participate in the plan, the level of premium or discount at which our shares are trading and the amount of the distribution payable to a stockholder.
Our shares might trade at premiums that are unsustainable or at discounts from net asset value.
Shares of BDCs like us may, during some periods, trade at prices higher than their net asset value per share and, during other periods, as frequently occurs with closed-end investment companies, trade at prices lower than their net asset value per share. The perceived value of our investment portfolio may be affected by a number of factors including perceived prospects for individual companies we invest in, market conditions for common stock generally, for initial public offerings and other exit events for venture capital backed companies, and the mix of companies in our investment portfolio over time. Negative or unforeseen developments affecting the perceived value of companies in our investment portfolio could result in a decline in the trading price of our common stock relative to our net asset value per share.
The possibility that our shares will trade at a discount from net asset value or at premiums that are unsustainable are risks separate and distinct from the risk that our net asset value per share will decrease. The risk of purchasing shares of a BDC that might trade at a discount or unsustainable premium is more pronounced for investors who wish to sell their shares in a relatively short period of time because, for those investors, realization of a gain or loss on their investments is likely to be more dependent upon changes in premium or discount levels than upon increases or decreases in net asset value per share.
Investing in our securities may involve an above average degree of risk.
The investments we make in accordance with our investment objective may result in a higher amount of risk, and higher volatility or loss of principal, than alternative investment options. Our investments in portfolio companies may be speculative and, therefore, an investment in our securities may not be suitable for someone with lower risk tolerance.
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The market price of our securities may fluctuate significantly.
The market price and liquidity of the market for our securities may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:
Risks Relating to Our Debt Securities
The 2030 Notes Payable are unsecured and therefore are effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future and rank pari passu with, or equal to, all outstanding and future unsecured indebtedness issued by and us and our general liabilities (total liabilities, less debt).
The 2030 Notes Payable are not and will not be secured by any of our assets or any of the assets of any of our subsidiaries. As a result, the 2030 Notes Payable are effectively subordinated to any secured indebtedness we or our subsidiaries have incurred and may incur in the future (or any indebtedness that is initially unsecured as to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the 2030 Notes Payable. In addition, the 2030 Notes Payable rank pari passu with, or equal to, all outstanding and future unsecured, unsubordinated indebtedness issued by us and our general liabilities (total liabilities, less debt). As of December 31, 2025, we had $236.6 million in outstanding indebtedness under our Credit Facility. The indebtedness under the Credit Facility is effectively senior to the 2030 Notes Payable to the extent of the value of the assets securing such indebtedness.
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The 2030 Notes Payable are structurally subordinated to the indebtedness and other liabilities of our subsidiaries.
The 2030 Notes Payable are obligations exclusively of Stellus Capital Investment Corporation, and not of any of our subsidiaries. None of our subsidiaries are or will be a guarantor of the 2030 Notes Payable, and the 2030 Notes Payable are not required to be guaranteed by any subsidiary we may acquire or create in the future. Any assets of our subsidiaries are not directly available to satisfy the claims of our creditors, including holders of the 2030 Notes Payable. Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors of our subsidiaries will have priority over our equity interests in such entities (and therefore the claims of our creditors, including holders of the 2030 Notes Payable) with respect to the assets of such entities. Even if we are recognized as a creditor of one or more of these entities, our claims would still be effectively subordinated to any security interests in the assets of any such entity and to any indebtedness or other liabilities of any such entity senior to our claims. Consequently, the 2030 Notes Payable are structurally subordinated to all indebtedness and other liabilities, including trade payables, of any of our existing or future subsidiaries, including the SBIC subsidiaries. As of December 31, 2025, our subsidiaries had total indebtedness outstanding of $299.0 million. Certain of these entities (excluding our SBIC subsidiaries) currently serve as guarantors under our Credit Facility, and in the future our subsidiaries may incur substantial additional indebtedness, all of which is and would be structurally senior to the Notes Payable.
The indenture under which the 2030 Notes Payable are issued contains limited protection for holders of the 2030 Notes Payable.
The indenture under which the 2030 Notes Payable are issued offers limited protection to holders of the 2030 Notes Payable. The terms of the indenture and the 2030 Notes Payable do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have a material adverse impact on an investment in the 2030 Notes Payable. In particular, the terms of the indenture and the 2030 Notes Payable do not place any restrictions on our or our subsidiaries’ ability to:
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Furthermore, the terms of the indenture and the 2030 Notes Payable do not protect holders of the 2030 Notes Payable in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, if any, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity.
Our ability to recapitalize, incur additional debt (including additional debt that matures prior to the maturity of the 2030 Notes Payable) and take a number of other actions that are not limited by the terms of the 2030 Notes Payable may have important consequences for holders of the 2030 Notes Payable, including making it more difficult for us to satisfy our obligations with respect to the 2030 Notes Payable or negatively affecting the market value of the 2030 Notes Payable.
Other debt we issue or incur in the future could contain more protections for its holders than the indenture and the 2030 Notes Payable, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for, trading levels, and prices of the 2030 Notes Payable.
There is no active trading market for the 2030 Notes Payable. If an active trading market does not develop for 2030 the Notes Payable, you may not be able to sell them.
The 2030 Notes Payable are debt securities for which there currently is no trading market. We do not intend to list the 2030 Notes Payable on any securities exchange or for quotation of the 2030 Notes Payable on any automated dealer quotation system. If the 2030 Notes Payable are traded after their initial issuance, they may trade at a discount to their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, our financial condition, performance and prospects, general economic conditions, or other relevant factors. Although the underwriter has informed us that it intends to make a market in the 2030 Notes Payable, it is not obligated to do so, and the underwriter may discontinue any market-making in the 2030 Notes Payable at any time at its sole discretion. Accordingly, we cannot assure you that a liquid trading market will develop or be maintained for the 2030 Notes Payable, that you will be able to sell your 2030 Notes Payable at a particular time or that the price you receive when you sell will be favorable. To the extent an active trading market does not develop, the liquidity and trading price for the 2030 Notes Payable may be harmed. Accordingly, you may be required to bear the financial risk of an investment in the 2030 Notes Payable for an indefinite period of time.
If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the 2030 Notes Payable.
Any default under the agreements governing our indebtedness, including a default under the Credit Facility or other indebtedness to which we may be a party, that is not waived by the required lenders or holders, and the remedies sought by the lenders or holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on
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the 2030 Notes Payable and substantially decrease the market value of the 2030 Notes Payable. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, as applicable, in the instruments governing our indebtedness (including the Credit Facility), we could be in default under the terms of the agreements governing such indebtedness, including the 2030 Notes Payable. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the Credit Facility or other debt we may incur in the future could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to refinance or restructure our debt, including the 2030 Notes Payable, sell assets, reduce or delay capital investments, seek to raise additional capital or seek to obtain waivers from the required lenders under the Credit Facility or other debt that we may incur in the future to avoid being in default. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under the 2030 Notes Payable or our other debt. If we breach our covenants under the Credit Facility or our other debt and seek a waiver, we may not be able to obtain a waiver from the required lenders or holders thereof. If this occurs, we would be in default under the Credit Facility or other debt, the lenders or holders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations, including the lenders under the Credit Facility, could proceed against the collateral securing the debt. Because the Credit Facility has, the indenture governing the 2030 Notes Payable has, and any future credit facilities will likely have, customary cross-default provisions, if the indebtedness under the 2030 Notes Payable, the Credit Facility or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due.
We may choose to redeem the 2030 Notes Payable when prevailing interest rates are relatively low.
The 2030 Notes Payable are redeemable in whole or in part upon certain conditions at any time or from time to time at our option. We may choose to redeem the 2030 Notes Payable from time to time, especially if prevailing interest rates are lower than the rate borne by the 2030 Notes Payable. If prevailing rates are lower at the time of redemption, and we redeem the 2030 Notes Payable, you likely would not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the interest rate on the 2030 Notes Payable being redeemed.
We may not be able to repurchase the 2030 Notes Payable upon a Change of Control Repurchase Event.
We may not be able to repurchase the 2030 Notes Payable upon a Change of Control Repurchase Event (as defined in the supplemental indenture governing the 2030 Notes Payable) because we may not have sufficient funds. We would not be able to borrow under our Credit Facility to finance such a repurchase of the 2030 Notes Payable, and we expect that any future credit facility would have similar limitations. Upon a Change of Control Repurchase Event, holders of the 2030 Notes Payable may require us to repurchase for cash some or all of the 2030 Notes Payable at a repurchase price equal to 100% of the aggregate principal amount of the 2030 Notes Payable being repurchased, plus accrued and unpaid interest to, but not including, the repurchase date. The terms of our Credit Facility provide that certain change of control events will constitute an event of default thereunder entitling the lenders to accelerate any indebtedness outstanding under our Credit Facility at that time and to terminate our Credit Facility. In addition, the occurrence of a Change of Control Repurchase Event enabling the holders of the 2030 Notes Payable to require the mandatory purchase of the 2030 Notes Payable will constitute an event of default under our Credit Facility, entitling the lenders to accelerate any indebtedness outstanding under our Credit Facility at that time and to terminate our Credit Facility. Our and our subsidiaries’ future financing facilities may contain similar restrictions and provisions. Our failure to purchase such tendered 2030 Notes Payable upon the occurrence of such Change of Control Repurchase Event would cause an event of default under the indenture governing the 2030 Notes Payable and a cross-default under the agreements governing the Credit Facility, which may result in the acceleration of such indebtedness requiring us to repay that indebtedness immediately. If the holders of the 2030 Notes Payable exercise their right to require us to repurchase 2030 Notes Payable upon a Change of Control Repurchase Event, the financial effect of this repurchase could cause a default under our current and future debt instruments, and we may not have sufficient funds to repay any such accelerated indebtedness.
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A downgrade, suspension or withdrawal of the credit rating assigned by a rating agency to us or the 2030 Notes Payable or change in the debt markets could cause the liquidity or market value of the 2030 Notes Payable to decline significantly.
Our credit ratings are an assessment by rating agencies of our ability to pay our debts when due. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of the 2030 Notes Payable. These credit ratings may not reflect the potential impact of risks relating to the structure or marketing of the 2030 Notes Payable. Credit ratings are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization in its sole discretion. Neither we nor the underwriter undertakes any obligation to maintain our credit ratings or to advise holders of 2030 Notes Payable of any changes in our credit ratings. There can be no assurance that our credit ratings will remain for any given period of time or that such credit ratings will not be lowered or withdrawn entirely by the rating agencies if in their judgment future circumstances relating to the basis of the credit ratings, such as adverse changes in our Company, so warrant. The conditions of the financial markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future, which could have an adverse effect on the market prices of the 2030 Notes Payable.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 1C. Cybersecurity
Risk Management and Strategy
We have processes in place for assessing, identifying, and managing material risks from potential unauthorized occurrences on or through our electronic information systems that could negatively impact the confidentiality, integrity, or availability of our information systems or the information held on such systems. These processes include controls, procedures, systems and tools that are designed to prevent, detect, or mitigate data loss, theft, misuse, unauthorized access, or other security incidents or vulnerabilities affecting the data. Such processes are set forth in our joint Cybersecurity Policy, Written Information Security Policy and Incident Response Plan with Stellus Capital Management (collectively, the “Cybersecurity Policy”). The Cybersecurity Policy also sets forth the role of our Chief Compliance Officer and our Information Security Team in preparing, implementing, and maintaining incident response procedures.
Our Chief Compliance Officer and Information Security Team are responsible for the development and implementation of policies and technical measures to reasonably prevent security incidents. At times we may also engage assessors, consultants, auditors or other third parties to assist with assessing, identifying and managing cybersecurity risk. As part of our risk management process, we conduct assessment and penetration testing, including regular trainings completed by employees of Stellus Capital Management who provide services to us pursuant to the Administration Agreement.
Material Impact of Cybersecurity Risks
As of the date of this Annual Report on Form 10-K, we are not aware of any material risks from cybersecurity threats that have materially affected, or are reasonably likely to materially affect, us, including our business strategy, results of operations, or financial condition. However, future incidents could have a material impact on our business. Additional information about the cybersecurity risks that we face is discussed in Item 1A of Part I, “Risk Factors,” in this Annual Report on Form 10-K under the heading “We, Stellus Capital Management and our portfolio companies are subject to risks associated with “phishing” and other cyber-attacks.”
Oversight of Cybersecurity Risks
Our cybersecurity risks and associated mitigation strategies are evaluated by our management and the Information Security Team as needed, but no less frequently than annually. On at least a quarterly basis, the Information Security Team reports to our Board on developments to cybersecurity risks we face. Such reports include, among other things, an overview of the controls and procedures related to assessing, identifying, and managing risks related to cybersecurity
threats, oversight of third-party service providers and related cybersecurity threats, and Information Security Team's evaluation of cybersecurity risks that are material to us.
Item 2. Properties
We do not own any real estate or other physical properties materially important to our operation. Our headquarters are located at 4400 Post Oak Parkway, Suite 2200, Houston, Texas. We also maintain offices in Charlotte, North Carolina and in the Washington, D.C. area. All locations are provided to us by Stellus Capital Management pursuant to the Administration Agreement. We believe that our office facilities are suitable and adequate for our business as we contemplate conducting it.
Item 3. Legal Proceedings
We, Stellus Capital Management or our subsidiaries are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us, Stellus Capital Management or our subsidiaries. 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 financial condition or results of operations.
Item 4. Mine Safety Disclosures
PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the NYSE under the symbol “SCM.” As of March 11, 2026, we had eight stockholders of record, which did not include stockholders for whom shares are held in nominee or street name.
We generally intend to pay distributions to our stockholders out of assets legally available for distribution. Our distributions and their frequency, if any, will be determined by our Board. During the period from January 2022 through March 2022, we paid monthly distributions of $0.0933 per share on our common stock. During the period from April 2022 through December 2025, we paid monthly distributions of $0.1333 per share on our common stock. Payment of dividends on our common stock is within the discretion of the Board, and depends on, among other factors, net earnings, capital requirements and our financial condition. However, we intend to continue to pay comparable dividends to stockholders in the future.
Recent Sales of Unregistered Securities
None.
Use of Proceeds from Recent Sales of Registered Securities
On November 16, 2021, we entered into an equity distribution agreement (as amended and restated on August 29, 2022, the “2021 Equity Distribution Agreement”) with Keefe Bruyette & Woods, Inc. and Raymond James & Associates, Inc., as sales agents and/or principals thereunder. Under the 2021 Equity Distribution Agreement, we could issue and sell, from time to time, up to $50,000,000 in aggregate offering price of shares of our common stock, par value $0.001 per share, with the intention to use the net proceeds from this at-the-market sales program to repay certain outstanding indebtedness and make investments in portfolio companies in accordance with our investment objective and strategies.
On August 11, 2023, we entered into an equity distribution agreement with Keefe Bruyette & Woods, Inc. and Raymond James & Associates, Inc., as sales agents and/or principals thereunder. Under the 2023 Equity Distribution Agreement, we may issue and sell, from time to time, up to $100,000,000 in aggregate offering price of shares of our common stock, par value $0.001 per share, with the intention to use the net proceeds from this at-the-market sales program to repay certain outstanding indebtedness and make investments in portfolio companies in accordance with our investment objective and strategies. Upon execution of the 2023 Equity Distribution Agreement, we no longer sold any shares under the 2021 Equity Distribution Agreement.
On September 9, 2025, we entered into an equity distribution agreement (the “2025 Equity Distribution Agreement” and together with the 2023 Equity Distribution Agreement and the 2021 Equity Distribution Agreement, the “Equity Distribution Agreements”) with Keefe Bruyette & Woods, Inc. and Raymond James & Associates, Inc., as sales agents and/or principal thereunder. Under the 2025 Equity Distribution Agreement, we may issue and sell, from time to time, up to $100.0 million in aggregate offering price of shares of our common stock, par value $0.001 per share, with the intention to use the net proceeds from this at-the-market sales program to repay certain outstanding indebtedness and make investments in portfolio companies in accordance with its investment objective and strategies. Upon execution of the 2025 Equity Distribution Agreement, we no longer sold any shares under the 2023 Equity Distribution Agreement. We refer to our issuance and sale of shares under the Equity Distribution Agreements as the “ATM Program.”
In January 2023, we sold 33,812 shares of common stock through the ATM Program for net proceeds of $459,187, which was used to repay borrowings under the Credit Facility.
In March 2023, we sold 547,802 shares of common stock through the ATM Program for net proceeds of $7,832,670, which was used to repay borrowings under the Credit Facility.
In April 2023, we sold 587,363 shares of common stock through the ATM Program for net proceeds of $8,027,626, which was used to repay borrowings under the Credit Facility.
In May 2023, we sold 730,424 shares of common stock through the ATM Program for net proceeds of $10,471,012, which was used to repay borrowings under the Credit Facility.
In June 2023, we sold 991,734 shares of common stock through the ATM Program for net proceeds of $13,566,642, which was used to repay borrowings under the Credit Facility.
In August 2023, we sold 294,993 shares of common stock through the ATM Program for net proceeds of $4,092,986, which was used to repay borrowings under the Credit Facility.
In September 2023, we sold 1,272,745 shares of common stock through the ATM Program for net proceeds of $17,477,976, which was used to repay borrowings under the Credit Facility.
In May 2024, we sold 1,154,611 shares of common stock through the ATM Program for net proceeds of $15,859,129, which was used to repay borrowings under the Credit Facility.
In June 2024, we sold 700,745 shares of common stock through the ATM Program for net proceeds of $9,531,069, which was used to repay borrowings under the Credit Facility.
In July 2024, we sold 1,150 shares of common stock through the ATM Program for net proceeds of $15,633, which was used to repay borrowings under the Credit Facility.
In August 2024, we sold 707,610 shares of common stock through the ATM Program for net proceeds of $9,631,798, which was used to repay borrowings under the Credit Facility.
In September 2024, we sold 349,606 shares of common stock through the ATM Program for net proceeds of $4,727,126, which was used to repay borrowings under the Credit Facility.
In October 2024, we sold 18,374 shares of common stock through the ATM Program for net proceeds of $247,994, which was used to repay borrowings under the Credit Facility.
In November 2024, we sold 183,199 shares of common stock through the ATM Program for net proceeds of $2,501,729, which was used to repay borrowings under the Credit Facility.
In December 2024, we sold 240,181 shares of common stock through the ATM Program for net proceeds of $3,282,112, which was used to repay borrowings under the Credit Facility.
In January 2025, we sold 38,388 shares of common stock through the ATM Program for net proceeds of $524,560, which was used to repay borrowings under the Credit Facility.
In March 2025, we sold 617,697 shares of common stock through the ATM Program for net proceeds of $8,593,514, which was used to repay borrowings under the Credit Facility.
In April 2025, we sold 278,945 shares of common stock through the ATM Program for net proceeds of $3,837,828, which was used to repay borrowings under the Credit Facility.
In September 2025, we sold 531,106 shares of common stock through the ATM Program for net proceeds of $7,324,060, which was used to repay borrowings under the Credit Facility.
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Purchases of Equity Securities
Dividend Reinvestment Plan
During the year ended December 31, 2025, as a part of our DRIP, we purchased 172,949 shares of our common stock for an average price per share of $13.58 in the open market in order to satisfy the reinvestment portion of our dividends. The following chart outlines such purchases of our common stock during the year ended December 31, 2025:
Total Number
Average Price
of Shares
Paid Per
Period
Purchased
Share
January 1, 2025 – January 31, 2025
14,267
13.96
February 1, 2025 – February 28, 2025
13,721
15.22
March 1, 2025 – March 31, 2025
15,314
13.92
April 1, 2025 – April 30, 2025
16,015
12.81
May 1, 2025 – May 31, 2025
14,687
13.37
June 1, 2025 – June 30, 2025
14,885
13.80
July 1, 2025 – July 31, 2025
11,444
August 1, 2025 – August 31, 2025
12,684
14.64
September 1, 2025 – September 30, 2025
13,300
14.11
October 1, 2025 – October 31, 2025
16,612
12.27
November 1, 2025 – November 30, 2025
14,162
12.07
December 1, 2025 – December 31, 2025
15,858
12.47
Total
172,949
13.58
Price Range of Common Stock
Our shares of common stock are traded on the NYSE under the symbol “SCM.” In connection with our initial public offering, our shares of common stock began trading on November 8, 2012, and before that date, there was no established trading market for shares of our common stock.
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The following table sets forth, for each fiscal quarter of the three most recent fiscal years, the range of high and low closing prices of our common stock as reported on the NYSE and the sales price as a percentage of our net asset value (“NAV”).
Premium or
Discount of
NAV Per
Closing Sales Price(2)
High Sales
Low Sales
Fiscal Year Ended
Share(1)
High
Low
NAV(3)
Fourth quarter
12.82
13.10
11.59
2.18
(9.59)
Third quarter
13.05
15.29
13.04
17.16
(0.08)
Second quarter
13.21
14.00
11.69
5.98
(11.51)
First quarter
13.25
15.50
13.64
16.98
2.94
December 31, 2024
13.46
14.33
13.14
6.46
(2.38)
13.55
14.41
13.39
6.35
(1.18)
13.36
14.35
12.97
7.41
(2.92)
13.41
13.48
12.56
0.52
(6.34)
December 31, 2023
13.26
13.73
12.34
3.54
(6.94)
13.19
15.27
13.60
15.77
3.11
13.67
15.00
9.73
(0.22)
13.87
15.97
15.14
(5.26)
On March 10, 2026, the last reported closing sales price of our common stock on the NYSE was $9.58 per share, which represented a discount of approximately 25.27% to the NAV per share reported by us as of December 31, 2025.
Shares of BDCs’ common stock may trade at a market price that is less than the value of the net assets attributable to those shares of common stock. The possibility that our shares of common stock will trade at a discount from NAV or at premiums that are unsustainable over the long term are separate and distinct from the risk that our NAV will decrease. Since our shares of common stock began trading on November 8, 2012, in connection with our initial public offering, our shares of common stock have traded at times at a discount to the NAV attributable to those shares of common stock.
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Stock Performance Graph
This graph compares the return on our shares of common stock with that of the Standard & Poor’s 500 Stock Index, the Russell 2000 Financial Services Index, and the Raymond James BDC Index, for the period from inception through December 31, 2025. The graph assumes that, at inception, a person invested $100 in each share of our common stock, the S&P 500 Index, the Russell 2000 Financial Services Index, and the Raymond James BDC Index. The graph measures total stockholder return, which takes into account both changes in stock price and dividends. It assumes that dividends paid are invested in like securities.
The graph and other information furnished under this Part II, Item 5 of this Annual Report on Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act. The stock price performance included in the above graph is not necessarily indicative of future stock price performance.
Item 6. [Reserved]
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Some of the statements in this Annual Report on Form 10-K constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this Annual Report on Form 10-K 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 Annual Report on Form 10-K on information available to us on the date of this Annual Report on Form 10-K. 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.
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 lower middle-market companies.
We are an externally managed, non-diversified, closed-end investment company that has elected to be regulated as a BDC under the 1940 Act. Our investment activities are managed by our investment adviser, Stellus Capital Management.
As a BDC, we are required to comply with certain regulatory requirements. For instance, 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. Qualifying assets include investments in “eligible portfolio companies” (as defined in the 1940 Act). Under the relevant SEC rules, the term “eligible portfolio company” includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and certain public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal place of business in the United States.
We have elected, qualified, and intend to continue to qualify annually to be treated for tax purposes as a RIC under subchapter M of the Code. To maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. As of December 31, 2025, we were in compliance with the RIC requirements. As a RIC, we generally will not have to pay corporate level U.S. federal income taxes on any income we distribute to our stockholders.
Economic Developments
Economic activity has continued to accelerate across sectors and regions. Nonetheless, we have observed and continue to observe macroeconomic uncertainty as a result of various events and trends, including labor resource shortages, commodity inflation, fluctuating interest rates, economic sanctions in response to international conflicts and instances of geopolitical, economic and financial market instability in the United States and abroad, including as a result of the imposition of tariffs in the United States or against its trading partners and the prolonged shutdown of the government in October and November 2025. One or more of these factors may contribute to increased market volatility and may have long- and short-term effects in the United States and worldwide financial markets.
Portfolio Composition and Investment Activity
We originate and invest primarily in privately held lower middle-market companies (typically those with $5.0 million to $50.0 million of EBITDA) through first lien (including unitranche), second lien, and unsecured debt financing, often with a corresponding equity investment.
As of December 31, 2025, we had $1,007.6 million (at fair value) invested in 115 companies. As of December 31, 2025, our portfolio included approximately 90% of first lien debt (including unitranche investments), 1% of second lien
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debt, 0% of unsecured debt and 9% of equity investments at fair value. The composition of our investments at cost and fair value as of December 31, 2025 was as follows:
Fair Value
Senior Secured – First Lien(1)
951,615,061
908,669,800
Senior Secured – Second Lien
12,111,653
12,025,000
318,425
123,789
Equity
62,094,547
86,804,806
Total Investments at Fair Value
1,026,139,686
1,007,623,395
As of December 31, 2024, we had $953.5 million (at fair value) invested in 105 companies. As of December 31, 2024, our portfolio included approximately 90% of first lien debt (including unitranche investments), 1% of second lien debt, 1% of unsecured debt and 8% of equity investments at fair value. The composition of our investments at cost and fair value as of December 31, 2024 was as follows:
884,322,462
856,096,255
12,073,732
11,948,850
6,755,866
6,612,493
58,636,646
78,840,090
961,788,706
953,497,688
Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms and conditions of the underlying loan agreements. As of December 31, 2025 and December 31, 2024, we had unfunded commitments of $53.4 million and $41.3 million, respectively, to provide financing to 77 and 71 portfolio companies, respectively. As of December 31, 2025, we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded commitments should the need arise.
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The following is a summary of geographical concentration of our investment portfolio as of December 31, 2025:
% of Total
Investments at
California
199,175,312
192,583,333
19.12
Texas
149,955,251
147,396,649
14.63
Florida
102,086,659
96,730,609
9.60
New York
59,320,592
59,952,294
5.95
Illinois
69,282,731
55,796,619
5.54
Pennsylvania
47,721,299
49,296,019
4.89
Colorado
41,413,399
39,386,741
3.91
Arizona
34,208,744
37,526,211
3.72
Ohio
35,249,934
36,769,186
3.65
Canada
36,116,171
36,140,789
3.59
North Carolina
31,163,913
32,456,489
3.22
Massachusetts
24,283,990
25,043,277
2.49
Iowa
22,351,338
22,467,248
2.23
New Jersey
19,768,069
19,924,612
1.98
Tennessee
20,495,678
18,827,946
1.87
Virginia
17,506,416
17,764,137
1.76
Georgia
5,876,197
17,168,351
1.70
District of Columbia
10,685,508
14,469,710
1.44
Michigan
12,060,200
12,255,578
1.22
Minnesota
11,769,582
11,916,373
1.18
Missouri
10,898,062
11,109,063
1.10
Idaho
9,479,007
9,517,417
0.94
Louisiana
9,153,384
9,297,784
0.92
Oregon
8,860,277
9,202,699
0.91
7,530,655
7,549,733
0.75
Wisconsin
21,458,139
7,360,720
0.73
South Carolina
4,847,580
4,966,273
0.49
Washington
1,273,384
2,605,719
0.26
United Kingdom
2,148,215
2,141,816
0.21
Total Investments
100.00
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The following is a summary of geographical concentration of our investment portfolio as of December 31, 2024:
Investments
at Fair Value
159,028,754
154,041,942
16.15
160,285,777
152,583,692
16.00
108,434,730
104,718,969
10.98
66,486,029
56,591,435
5.94
53,271,774
54,438,594
5.71
43,552,887
46,839,063
4.91
36,116,358
36,306,098
3.81
33,645,676
35,847,804
3.76
32,107,256
32,375,749
3.40
31,283,806
28,218,186
2.96
27,935,159
23,352,084
2.45
22,711,852
26,654,283
2.80
12,391,680
23,345,077
20,946,327
22,314,018
2.34
20,490,429
20,703,772
2.17
19,965,590
20,559,398
2.16
18,590,476
18,712,569
1.96
13,486,486
1.41
11,763,648
11,830,192
1.24
11,181,815
11,754,323
1.23
11,389,446
11,510,608
1.21
9,216,389
9,371,830
0.98
9,293,896
9,373,367
8,193,234
8,216,962
0.86
7,529,294
7,526,300
0.79
6,448,091
6,452,144
0.68
4,836,178
4,984,667
Indiana
743,770
920,343
0.10
461,899
467,733
0.05
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The following is a summary of industry concentration of our investment portfolio as of December 31, 2025:
Services: Business
265,116,204
266,803,107
26.48
High Tech Industries
103,212,518
106,937,496
10.61
Healthcare & Pharmaceuticals
92,736,458
92,182,392
9.15
Media: Advertising, Printing & Publishing
78,965,841
79,030,004
7.84
Capital Equipment
61,644,736
65,191,527
6.47
Beverage & Food
54,323,129
58,129,551
5.77
Consumer Goods: Non-Durable
61,701,885
53,502,252
5.31
Services: Consumer
42,793,668
40,569,003
4.03
Construction & Building
36,950,838
37,219,214
3.69
Consumer Goods: Durable
35,569,885
31,655,077
3.14
Aerospace & Defense
28,192,548
25,968,951
2.58
Environmental Industries
20,190,193
22,323,773
2.22
Chemicals, Plastics, & Rubber
20,054,202
19,792,281
Transportation & Logistics
16,593,938
16,791,026
1.67
Media: Broadcasting & Subscription
12,057,869
15,196,592
1.51
Retail
14,715,878
14,756,518
1.46
Energy: Oil & Gas
11,802,297
11,077,160
Hotel, Gaming, & Leisure
9,181,622
9,331,063
0.93
Wholesale
8,900,149
8,921,351
0.89
FIRE: Real Estate
18,419,200
8,379,604
0.83
Media: Diversified & Production
7,495,599
7,566,694
Containers, Packaging, & Glass
20,714,369
6,360,684
0.63
Finance
-
6,187,401
0.61
Education
4,806,660
3,750,674
0.37
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The following is a summary of industry concentration of our investment portfolio as of December 31, 2024:
219,665,133
234,908,112
24.64
91,135,577
93,468,792
9.81
85,300,317
85,478,418
8.97
71,318,416
72,291,584
7.58
64,052,951
68,902,142
7.23
67,123,135
54,473,282
49,388,222
46,066,301
4.83
41,322,214
43,647,466
4.58
43,393,413
42,094,390
4.41
36,693,101
36,907,602
3.87
32,374,992
32,979,859
3.46
26,014,106
21,624,091
2.27
18,903,681
18,282,056
1.92
17,244,131
17,532,488
1.84
14,799,085
14,723,620
1.54
12,170,577
14,314,711
1.50
18,007,571
12,911,794
1.35
11,353,959
10,728,031
1.13
7,113,661
8,142,050
0.85
17,934,808
7,652,436
0.80
5,822,637
5,934,853
0.62
10,537,738
5,341,151
0.56
119,281
5,092,459
0.53
At December 31, 2025, our average portfolio company investment at amortized cost and fair value was approximately $8.9 million and $8.7 million, respectively, and our largest portfolio company investment at amortized cost and fair value was approximately $26.1 million and $19.2 million, respectively. At December 31, 2024, our average portfolio company investment at amortized cost and fair value was approximately $9.2 million and $9.2 million, respectively, and our largest portfolio company investment at amortized cost and fair value was approximately $23.2 million and $21.2 million, respectively.
At December 31, 2025, 91.6% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as the Secured Overnight Financing Rate (“SOFR”), and 8.4% bore interest at fixed rates. At December 31, 2024, 94.5% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as SOFR, and 5.5% bore interest at fixed rates.
The weighted average yield on all of our debt investments as of December 31, 2025 and December 31, 2024 was approximately 9.3% and 10.3%, respectively, including debt investments on non-accrual status. The weighted average yield on all of our investments, including non-income producing equity positions and debt investments on non-accrual status, as of December 31, 2025 and December 31, 2024 was approximately 8.7% and 9.7%, respectively. The decrease in weighted average yields from the year ended December 31, 2024 to the year ended December 31, 2025 was due primarily to falling interest rates. The weighted average yield was computed using the effective interest rates for all of our debt investments, including accretion of OID. The weighted average yield of our debt investments is not the same as a return on investment for our stockholders, but rather relates to a portion of our investment portfolio and is calculated before the payment of all of our subsidiaries’ fees and expenses.
As of December 31, 2025 and December 31, 2024, we had cash and cash equivalents of $25.1 million and $20.1 million, respectively, the majority of which was held in our SBIC subsidiaries.
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Investment Activity
During the year ended December 31, 2025, we made $194.1 million of investments in 18 new portfolio companies and 28 existing portfolio companies. During the year ended December 31, 2025, we received an aggregate of $139.7 million in proceeds from repayments of our investments.
During the year ended December 31, 2024, we made $221.2 million of investments in 21 new portfolio companies and 29 existing portfolio companies. During the year ended December 31, 2024, we received an aggregate of $151.8 million in proceeds from repayments of our 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 available to lower middle-market companies, the level of merger and acquisition activity in that sector, the general economic environment and the competitive environment for the types of investments we make.
In addition to various risk management and monitoring tools, Stellus Capital Management 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 category:
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The following is a summary of asset quality ratings of our investment portfolio as of December 31, 2025 and December 31, 2024:
As of December 31, 2025
As of December 31, 2024
(dollars in millions)
Number of
Portfolio
Investment Category
Companies(1)
227.3
227.2
590.2
564.5
148.4
112.0
35.1
41.3
6.6
8.5
100
117
953.5
106
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 December 31, 2025, we had loans to five portfolio companies that were on non-accrual status, which represented approximately 7.5% of our total investments at cost and 4.1% at fair value. As of December 31, 2024, we had loans to seven portfolio companies that were on non-accrual status, which represented approximately 8.3% of our loan portfolio at cost and 5.4% at fair value. As of December 31, 2025 and December 31, 2024, $11.2 million and $6.5 million of income from investments on non-accrual had not been accrued, respectively.
Results of Operations
An important measure of our financial performance is net increase (decrease) in net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income (loss) is the difference between our income from interest, dividends, fees and other investment income and our operating expenses, including interest on borrowed funds. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio.
Comparison of the Years Ended December 31, 2025, 2024, and 2023
Revenues
We generate revenue in the form of interest income on debt investments and capital gains and distributions, if any, on equity securities that we may acquire in portfolio companies. Our debt investments typically have a term of five to seven years and bear interest at primarily floating rates. Interest on our debt investments 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 PIK interest. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect that the total dollar amount of interest and any dividend income that we earn will increase as the size of our investment portfolio increases. In addition, we may generate revenue in the form of prepayment fees, commitment, loan origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees.
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The following shows the breakdown of our investment income for the years ended December 31, 2025, 2024, and 2023 (in millions).
For the year ended
Interest income(1)
91.5
95.4
96.9
PIK interest
5.7
3.3
3.8
Miscellaneous fees(1)
4.9
6.0
5.1
102.1
104.7
105.8
The decrease in investment income from the year ended December 31, 2024 to the year ended December 31, 2025 was due primarily to falling interest rates, offset by growth in the overall investment portfolio. The decrease in investment income from the year ended December 31, 2023 to the year ended December 31, 2024 was due primarily to falling interest rates and increased loans on non-accrual, offset by growth in the overall investment portfolio.
Expenses
Our primary operating expenses include the payment of fees to Stellus Capital Management 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:
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The following shows the breakdown of operating expenses for the years ended December 31, 2025, 2024, and 2023 (in millions).
Operating Expenses
Management fees
17.2
15.7
15.5
Valuation fees
0.4
Administrative services expenses
2.1
1.9
Income incentive fees
8.4
10.0
10.2
Capital gains incentive fee (reversal)
(0.6)
Professional fees
1.4
Directors’ fees
Insurance expense
0.5
Interest expense and other fees
34.9
31.5
32.0
Income tax expense
1.6
1.8
1.3
Other general and administrative expenses
0.9
Total Operating Expenses
68.6
64.6
63.9
Income incentive fee waiver
(3.3)
(1.8)
(0.3)
Total Operating Expenses, net of fee waivers
65.3
62.8
63.6
The increase in operating expenses for the year ended December 31, 2025 as compared to the year ended December 31, 2024 was due to higher management fee and interest expense due to overall portfolio growth, offset by lower income incentive fees. The decrease in operating expenses for the year ended December 31, 2024 as compared to the year ended December 31, 2023 was due to higher income incentive fee waivers due to the total return limitation, offset in part by higher income tax expense due to increased taxable spillover income.
Net Investment Income
For the year ended December 31, 2025, net investment income was $36.9 million, or $1.30 per common share based on 28,364,809 weighted-average common shares outstanding. For the year ended December 31, 2024, net investment income was $41.9 million, or $1.64 per common share based on 25,596,593 weighted-average common shares outstanding. For the year ended December 31, 2023, net investment income was $42.2 million, or $1.92 per common share based on 22,004,648 weighted-average common shares outstanding.
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Net investment income for the year ended December 31, 2025 decreased compared to the year ended December 31, 2024 as a result of decreased interest income, as explained in the “Revenues” section above, and increased operating expenses as explained in the “Expenses” section above.
Net investment income for the year ended December 31, 2024 was materially similar compared to the year ended December 31, 2023 as a result of decreased interest income as explained in the “Revenues” section above, offset by lower operating expenses as explained in the “Expenses” section above.
Net Realized Gains (Losses)
We measure net realized gains or losses by the difference between the net proceeds from the repayment, sale or other disposition and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized.
Proceeds from repayments of investments and amortization of certain other investments for the year ended December 31, 2025 totaled $139.7 million resulting in net realized gains (losses) on investments totaling $1.5 million and net realized losses on foreign currency translations of ($0.1) million, primarily from the realization of certain equity investments, partially offset from the realization of our debt investments in certain portfolio companies.
Proceeds from repayments of investments and amortization of certain other investments for the year ended December 31, 2024 totaled $151.8 million resulting in net realized losses on investments totaling ($15.7) million and net realized losses on foreign currency translations of ($0.1) million, primarily from losses from the realization of our debt investments in certain portfolio companies, partially offset from gains from the realization of our equity investments.
Proceeds from repayments of investments and amortization of certain other investments for the year ended December 31, 2023 totaled $141.3 million resulting in net realized losses on investments totaling ($30.2) million, primarily from losses from the realization of our debt investments in certain portfolio companies, partially offset from gains from the realization of our equity investments.
Net Change in Unrealized Appreciation (Depreciation)
Net change in unrealized appreciation (depreciation) primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded appreciation or depreciation when gains or losses are realized.
Net change in unrealized (depreciation) appreciation on investments and cash equivalents, including foreign currency translations, for the years ended December 31, 2025, 2024, and 2023 totaled ($11.1) million, $19.6 million, and $2.8 million, respectively.
The change in unrealized appreciation in 2025 was primarily due to company-specific write-downs, partially offset by realizations on investments previously written up. The change in unrealized appreciation in 2024 as primarily due to realizations on investments previously written down. The change in unrealized depreciation in 2023 was primarily due to realizations on investments previously written down and net company-specific write-downs.
Benefit (Provision) for Taxes on Unrealized Depreciation(Appreciation) on Investments
We have direct wholly owned subsidiaries that have elected to be treated as corporations for U.S. federal income tax purposes (the ”Taxable Subsidiaries”), and, as a result, the income of the Taxable Subsidiaries is subject to U.S. federal income tax imposed at corporate rates. The Taxable Subsidiaries permit us to indirectly hold equity investments in portfolio companies which are “pass-through” entities for U.S. federal income tax purposes and continue to comply with the “source income” requirements contained in RIC tax provisions of the Code. The Taxable Subsidiaries are not consolidated with us for U.S. federal income tax purposes and may independently generate income, gains, deductions or losses for U.S. federal income tax purposes as a result of their ownership of certain portfolio investments. The U.S.
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federal income tax expense, or benefit, if any, and related tax assets and liabilities of the Taxable Subsidiaries are reflected in our Consolidated Financial Statements.
For the years ended December 31, 2025, 2024 and 2023, we recognized a deferred tax benefit (provision) related to unrealized depreciation (appreciation) on certain equity investments for income tax at our Taxable Subsidiaries of approximately $0.0 million, $0.2 million, and ($0.1) million, respectively.
For the years ended December 31, 2024 and 2023, we recognized tax benefit related to losses realized on certain equity investments held at our Taxable Subsidiaries of less than $0.1 million and $3.0 million, respectively. There was no such tax expense for the year ended December 31, 2025. As of December 31, 2025 and 2024, a tax receivable related to the tax benefit on realized losses of $1.4 million and $1.3 million, respectively, was included on the Consolidated Statements of Assets and Liabilities. As of December 31, 2025 and 2024, there was no such deferred tax liability included in Consolidated Statements of Assets and Liabilities.
Net Increase in Net Assets Resulting from Operations
Net increase in net assets resulting from operations totaled $27.0 million, or $0.95 per common share based on 28,364,809 weighted-average common shares outstanding for the year ended December 31, 2025.
Net increase in net assets resulting from operations totaled $45.8 million, or $1.79 per common share based on 25,596,593 weighted-average common shares outstanding for the year ended December 31, 2024.
Net increase in net assets resulting from operations totaled $17.5 million, or $0.80 per common share based on 22,004,648 weighted-average common shares outstanding for the year ended December 31, 2023.
The decrease in the net increase in net assets resulting from operations for the year ended December 31, 2025 as compared to the year ended December 31, 2024 was primarily due to a decrease in net investment income and increase on unrealized depreciation. The increase in the net increase in net assets resulting from operations for the year ended December 31, 2024 as compared to the year ended December 31, 2023 was primarily due to a decrease in realized losses and increase on unrealized appreciation.
Financial Condition, Liquidity and Capital Resources
Cash Flows from Operating and Financing Activities
Our operating activities used net cash of $24.4 million for the year ended December 31, 2025, primarily in connection with the purchase of portfolio investments, offset by sales and repayments of portfolio investments. Our financing activities for the year ended December 31, 2025 provided cash of $29.4 million, primarily from our ATM Program, net issuances of 2030 Notes Payable and net borrowings on our Credit Facility, offset by repayments 2026 Notes Payable, repayments of SBA-guaranteed debentures and stockholder distributions.
Our operating activities used net cash of $28.6 million for the year ended December 31, 2024, primarily in connection with the purchase of portfolio investments, offset by sales and repayments of portfolio investments. Our financing activities for the year ended December 31, 2024 provided cash of $22.6 million, primarily from our ATM Program and net borrowings on our Credit Facility, offset by stockholder distributions.
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Our operating activities used net cash of $17.3 million for the year ended December 31, 2023, primarily in connection with the purchase of portfolio investments, offset by sales and repayments of portfolio investments. Our financing activities for the year ended December 31, 2023 used cash of ($4.7) million primarily from stockholder distributions and net payments on our Credit Facility, offset by proceeds from our ATM Program.
Liquidity and Capital Resources
Our liquidity and capital resources are derived from the Credit Facility, Notes Payable, the ATM Program, SBA-guaranteed debentures and cash flows from operations, including investment sales and repayments and income earned. Our primary use of funds from operations includes investments in portfolio companies and other operating expenses we incur, as well as the payment of dividends to the holders of our common stock. We used, and expect to continue to use, these capital resources, as well as proceeds from turnover within our portfolio and from public and private offerings of securities, to finance our investment activities.
Although we expect to fund the growth of our investment portfolio through net proceeds from future public and private equity offerings and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act, our plans to raise capital may not be successful. In this regard, if our common stock trades at a price below our then-current net asset value per share, we may be limited in our ability to raise equity capital given that we cannot sell our common stock at a price below net asset value per share unless our stockholders approve such a sale and our Board makes certain determinations in connection therewith. A proposal approved by our stockholders at our 2025 annual stockholders meeting authorizes us to sell up to 25% of our outstanding common stock at a price equal to or below the then-current net asset value per share in one or more offerings. This authorization will expire on the earlier of June 17, 2026, the one-year anniversary of our 2025 annual stockholders meeting, or the date of our 2026 annual stockholders meeting. We would need similar future approval from our stockholders to issue shares below the then-current net asset value per share any time after the expiration of the current approval.
In addition, we intend to distribute between 90% and 100% of our taxable income to our stockholders in order to satisfy the requirements applicable to RICs under subchapter M of the Code. Consequently, we may not have the funds available to allow us to fund new investments, make additional investments in our portfolio companies, fund our unfunded commitments to portfolio companies or repay borrowings. In addition, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.
Under the provisions of the 1940 Act, we are permitted, as a BDC that has satisfied certain requirements, to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 150% of our gross assets, less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. As of December 31, 2025 and December 31, 2024, our asset coverage ratio was 203% and 234%, respectively. The amount of leverage that we employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing, such as the maturity, covenant package and rate structure of the proposed borrowings, our ability to raise funds through the issuance of shares of our common stock and the risks of such borrowings within the context of our investment outlook. Ultimately, we only intend to use leverage if the expected returns from borrowing to make investments will exceed the cost of such borrowing. As of December 31, 2025 and December 31, 2024, we had cash and cash equivalents of $25.1 million and $20.1 million, respectively.
Credit Facility
We have entered into a senior secured revolving credit agreement, dated as of October 10, 2017, with Zions Bancorporation, N.A., dba Amegy Bank and various other lenders thereto (as amended and restated on September 18, 2020 and amended on December 21, 2021, February 28, 2022, May 13, 2022, November 21, 2023, October 30, 2024 and September 11, 2025.
The Credit Facility provides for borrowings up to a maximum of $335.0 million on a committed basis with an accordion feature that allows us to increase the aggregate commitments up to $365.0 million, subject to new or existing lenders agreeing to participate in the increase and other customary conditions.
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Pursuant to its terms, the Credit Facility will bear interest, subject to our election, on a per annum basis equal to (i) term SOFR plus 2.25% (or 2.50% during certain periods in which our asset coverage ratio is equal to or below 1.90 to 1.00) with a 0.25% SOFR floor, or (ii) 1.25% (or 1.50% during certain periods in which our asset coverage ratio is equal to or below 1.90 to 1.00) plus an alternate base rate based on the highest of the prime rate (subject to a 3% floor), Federal Funds Rate plus 0.50% and one-month term SOFR plus 1.00%. We pay unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility. The commitment to fund the revolver expires on September 11, 2029, after which we may no longer borrow under the Credit Facility and must begin repaying principal equal to 1/12 of the aggregate amount outstanding under the Credit Facility each month. Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on September 11, 2030. Our obligations to the lenders are secured by a first priority security interest in our portfolio of securities and cash not held at the SBIC subsidiaries, but excluding short-term investments. The Credit Facility contains certain covenants, including but not limited to: (i) maintaining a minimum liquidity test of at least $10.0 million, including cash, liquid investments and undrawn availability, (ii) maintaining an asset coverage ratio of at least 1.67 to 1.00, (iii) maintaining a minimum stockholder’s equity, and (iv) maintaining a minimum interest coverage ratio of at least 1.75 to 1.00. As of December 31, 2025, we were in compliance with these covenants.
As of December 31, 2025 and December 31, 2024, the outstanding balance under the Credit Facility was $236.6 million and $175.4 million, respectively. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value. The fair value of the Credit Facility is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Credit Facility is estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. We have incurred costs of $8.9 million in connection with the Credit Facility, which were capitalized and are being amortized over the life of the facility. Additionally, $0.3 million of costs from a prior credit facility will continue to be amortized over the remaining life of the Credit Facility. As of December 31, 2025 and 2024, $3.5 million and $3.1 million of such prepaid loan structure fees and administration fees had yet to be amortized, respectively. These prepaid loan fees are presented on our Consolidated Statements of Assets and Liabilities as a deduction from the debt liability attributable to the Credit Facility.
Interest on the Credit Facility is paid monthly or quarterly in arrears. The following table summarizes the interest expense and amortized loan fees on the Credit Facility for the years ended December 31, 2025, 2024, and 2023 (dollars in millions):
Interest expense
13.0
13.6
14.7
Loan fee amortization
1.1
0.7
Total interest and financing expenses
14.2
15.4
Weighted average interest rate
7.2
8.3
7.9
Effective interest rate (including fee amortization)
8.9
Average debt outstanding
180.2
164.3
186.1
Cash paid for interest and unused fees
12.9
13.5
14.5
SBA-Guaranteed Debentures
Due to the SBIC subsidiaries’ status as licensed SBICs, we can issue debentures guaranteed by the SBA at favorable interest rates. Under the regulations applicable to SBICs, a single licensee can have outstanding SBA-guaranteed debentures, subject to a regulatory leverage limit, up to two times the amount of regulatory capital. As of December 31, 2025 and 2024, the SBIC I subsidiary had $75.0 million in “regulatory capital” for both periods, as such term is defined by the SBA, and $124.0 million and $150.0 million of SBA-guaranteed debentures outstanding, respectively. During the year ended December 31, 2025, the SBIC I subsidiary repaid $26.0 million of SBA-guaranteed debentures that matured during the period. As of both December 31, 2025 and 2024, the SBIC II subsidiary had $87.5 million in regulatory capital and $175.0 million of SBA-guaranteed debentures outstanding.
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On August 12, 2014, we obtained exemptive relief from the SEC to permit us to exclude debt of the SBIC subsidiaries guaranteed by the SBA for purposes of complying with 150% asset coverage test under the 1940 Act. The exemptive relief provides us with increased flexibility under the 150% asset coverage test by permitting us to borrow up to $325.0 million more than we would otherwise be able to absent the receipt of this exemptive relief.
On a stand-alone basis, the SBIC subsidiaries held $492.7 million and $510.1 million in assets at December 31, 2025 and 2024, respectively, which accounted for approximately 47.3% and 52.0% of our total consolidated assets at December 31, 2025 and 2024, respectively.
SBA-guaranteed debentures have fixed interest rates that equal the prevailing rate for 10-year U.S. Treasury Notes plus a market spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the SBA-guaranteed debentures is not required to be paid before maturity, but may be pre-paid at any time with no prepayment penalty. SBA-guaranteed debentures are also subject to certain fees payable by the SBIC subsidiaries calculated at the time such debentures are drawn. As of December 31, 2025 and 2024, the SBIC subsidiaries had $299.0 million and $325.0 million of the SBA-guaranteed debentures outstanding, respectively.
As of December 31, 2025 and 2024, the carrying amount of the SBA-guaranteed debentures was $296.0 million and $321.3 million, respectively. At the measurement date, the estimated fair value of the SBA-guaranteed debentures as prepared for disclosure purposes was $290.4 million. As of December 31, 2024, the carrying amount of the SBA-guaranteed debentures approximated their fair value. The fair value of the SBA-guaranteed debentures is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the SBA-guaranteed debentures is estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. At December 31, 2025 and 2024, the SBA-guaranteed debentures would be deemed to be Level 3, as defined in Note 6 to our Consolidated Financial Statements.
We have incurred $11.1 million in financing costs related to the SBA-guaranteed debentures since the SBIC subsidiaries received their licenses, which were recorded as prepaid loan fees. As of December 31, 2025 and 2024, $3.0 million and $3.7 million of prepaid financing costs had yet to be amortized, respectively. These prepaid loan fees are presented on the Consolidated Statements of Assets and Liabilities as a deduction from the debt liability.
The following table summarizes the interest expense and amortized fees on the SBA-guaranteed debentures for the years ended December 31, 2025, 2024, and 2023 (dollars in millions):
10.5
Debenture fee amortization
1.0
10.7
11.5
11.3
3.2
3.5
308.2
325.0
318.8
Cash paid for interest
9.6
Notes Payable
The Notes Payable (as defined below) are institutional, non-traded notes. As of December 31, 2025 and 2024, the carrying amount of the Notes Payable was $122.7 million and $99.4 million, respectively. At the measurement date, the estimated fair value of the Notes Payable as prepared for disclosure purposes was $126.0 million.
On January 14, 2021, we issued $100.0 million in aggregate principal amount of 4.875% fixed-rate notes due 2026 (the “2026 Notes Payable”). The 2026 Notes Payable were redeemable in whole or in part at any time or from time to time at our option on or after December 31, 2025, at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest on the 2026 Notes Payable was payable semi-annually beginning September 30,
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2021. We used the net proceeds from the 2026 Notes Payable offering to fully redeem the 5.75% fixed-rate notes due September 15, 2022 and repay a portion of the amount outstanding under the Credit Facility.
On September 30, 2025, we prepaid $50.0 million in aggregate principal of the 2026 Notes Payable. On December 31, 2025, we prepaid the remaining $50.0 million in aggregate principal of the 2026 Notes Payable in full. In connection with the issuance and maintenance of the 2026 Notes Payable, we incurred $2.3 million of fees, which were amortized over the term of the 2026 Notes Payable. For the year ended December 31, 2025, we recorded a make-whole payment of less than $0.1 million and accelerated $0.2 million of unamortized upfront fees, which are recognized as a loss on debt extinguishment in the Consolidated Statemements of Operations.
On April 1, 2025 and September 25, 2025, we issued $75.0 million and $50.0 million, respectively, in aggregate principal amount of the 2030 Notes Payable (together with the 2026 Notes Payable, the “Notes Payable”). The 2030 Notes Payable are institutional, non-traded notes that will mature on April 1, 2030 and may be redeemed in whole or in part at any time or from time to time at our option on or after October 1, 2029, at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest on the 2030 Notes Payable is payable semi-annually beginning October 1, 2025. We used the net proceeds from the 2030 Notes Payable offering to fully redeem the 2026 Notes Payable and repay a portion of the amount outstanding under the Credit Facility.
In connection with the issuance and maintenance of the 2030 Notes Payable, we have incurred $2.7 million of fees, which are being amortized over the term of the 2030 Notes Payable. As of December 31, 2025, $2.3 million remained to be amortized. These financing costs are presented on the Consolidated Statements of Assets and Liabilities as a deduction from the debt liability.
The following table summarizes the interest expense and deferred financing costs on the 2026 Notes Payable for the years ended December 31, 2025, 2024, and 2023 (dollars in millions):
For the years ended
Deferred financing costs
4.6
5.3
6.2
74.7
100.0
5.5
The following table summarizes the interest expense and deferred financing costs on the 2030 Notes Payable for the year ended December 31, 2025 (dollars in millions):
0.3
5.4
%(1)
7.8
92.8
(1)
2.8
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ATM Program
On November 16, 2021, we entered into the 2021 Equity Distribution Agreement with Keefe Bruyette & Woods, Inc. and Raymond James & Associates, Inc., as sales agents and/or principal thereunder. Under the 2021 Equity Distribution Agreement, we were permitted to issue and sell, from time to time, up to $50.0 million in aggregate offering price of shares of our common stock, par value $0.001 per share, with the intention to use the net proceeds from this at-the-market sales program to repay certain outstanding indebtedness and make investments in portfolio companies in accordance with our investment objective and strategies.
On August 11, 2023, we entered into the 2023 Equity Distribution Agreement with Keefe Bruyette & Woods, Inc. and Raymond James & Associates, Inc., as sales agents and/or principal thereunder. Under the 2023 Equity Distribution Agreement, we may issue and sell, from time to time, up to $100.0 million in aggregate offering price of shares of our common stock, par value $0.001 per share, with the intention to use the net proceeds from this at-the-market sales program to repay certain outstanding indebtedness and make investments in portfolio companies in accordance with our investment objective and strategies. Upon execution of the 2023 Equity Distribution Agreement, we no longer sold any shares under the 2021 Equity Distribution Agreement.
On September 9, 2025, we entered into the 2025 Equity Distribution Agreement with Keefe Bruyette & Woods, Inc. and Raymond James & Associates, Inc., as sales agents and/or principal thereunder. Under the 2025 Equity Distribution Agreement, we may issue and sell, from time to time, up to $100.0 million in aggregate offering price of shares of our common stock, par value $0.001 per share, with the intention to use the net proceeds from this at-the-market sales program to repay certain outstanding indebtedness and make investments in portfolio companies in accordance with its investment objective and strategies. Upon execution of the 2025 Equity Distribution Agreement, we no longer sold any shares under the 2023 Equity Distribution Agreement.
We issued 1,466,136 shares and 3,355,476 shares during the fiscal years ended December 31, 2025 and 2024 under the ATM Program, respectively, for gross proceeds of $20.6 million and $46.5 million and underwriting fees and other expenses of $0.9 million and $1.1 million, respectively. The average per share offering price of shares issued in the ATM Program during the fiscal years ended December 31, 2025 and 2024 was $14.04 and $13.86, respectively. The Advisor agreed to reimburse us for underwriting fees and expenses to the extent the per share price of the shares to the public, less underwriting fees, was less than then-net asset value per share. For both the fiscal years ended December 31, 2025 and 2024, the Advisor was not required to reimburse underwriting fees as all shares were issued at a premium to net asset value.
Contractual Obligations
2031 and
2026
2027
2028
2029
2030
thereafter
(in millions)
Credit Facility payable
236.6
59.2
177.5
Notes payable
125.0
SBA-guaranteed debentures
299.0
39.0
82.5
2.5
11.0
164.0
660.6
61.7
313.5
Off-Balance Sheet Arrangements
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of December 31, 2025, our only off-balance sheet arrangements consisted of $53.0 million of unfunded commitments to provide debt financing to 75 existing portfolio companies and $0.4 million in unfunded equity commitments to two existing portfolio companies. As of December 31, 2024, our only off-balance sheet arrangements consisted of $41.0 million of unfunded commitments to provide debt financing to 70 existing portfolio companies and $0.3 million in unfunded equity commitments to one existing portfolio company. As of December 31, 2025, we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded commitments should the need arise.
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RIC Status and Dividends
We have elected to be treated and intend to qualify annually as a RIC under subchapter M of the Code. So long as we maintain our qualification as a RIC, we will not be subject to U.S. federal income tax to the extent that we timely distribute our investment company taxable income and realized net capital gains to stockholders as dividends.
Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Distributions declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.
To qualify for RIC tax treatment, we generally must, among other things, distribute to our stockholders, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). If we maintain our qualification as a RIC, we must also satisfy certain distribution requirements each calendar year to avoid a U.S. federal excise tax on our undistributed earnings of a RIC. As of December 31, 2025, we had $37.0 million of undistributed taxable income that will be carried forward toward distributions paid during the year ending December 31, 2026. As of December 31, 2024, we had $45.4 million of undistributed taxable income that was carried forward toward distributions paid during the year ending December 31, 2025.
We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, the covenants contained in the Credit Facility may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the Annual Distribution Requirement. In addition, we may retain for investment some or all our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in shares of our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividends for that fiscal year, a portion of those dividend distributions may be deemed a return of capital to our stockholders.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a BDC under the 1940 Act and due to provisions in the Credit Facility. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.
In accordance with certain applicable U.S. Treasury regulations and private letter rulings issued by the Internal Revenue Service (the “IRS”), a publicly offered RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in shares of our common stock). In no event will any stockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash, except as described below.
If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in shares of our common stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our common stock in accordance with these U.S. Treasury regulations or private letter rulings. However, we continue to monitor the Company’s liquidity position and the overall economy and will continue to assess whether it would be in our and our stockholders’ best interest to take advantage of the IRS rulings.
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Recent Accounting Pronouncements
See Note 1 to our Consolidated Financial Statements contained herein for a description of recent accounting pronouncements, if any, including the expected dates of adoption and the anticipated impact on the financial statements.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ materially.
For a description of our critical accounting policies, see Note 1 to our Consolidated Financial Statements included in this report. We consider the most significant accounting policies to be those related to our valuation of portfolio investments and revenue recognition.
Investment Portfolio Valuation
The most significant determination inherent in the preparation of our Consolidated Financial Statements is the valuation of our investment portfolio and the related amounts of unrealized appreciation and depreciation. We consider this determination to be a critical accounting estimate, given the significant judgments and subjective measurements required. As of December 31, 2025 and 2024, our investment portfolio at fair value represented approximately 96.8% and 97.2% of our total assets, respectively. We are required to report our investments for which market quotations are not readily available at fair value. We follow the provisions of ASC 820. ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires us to assume that the portfolio investment is to be sold in the principal market to independent market participants, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal market that are independent, knowledgeable and willing and able to transact. See Note 1 to the Consolidated Financial Statements contained herein for a detailed discussion of our investment portfolio valuation process and procedures.
Due to the inherent uncertainty in the valuation process, our Board’s determination of fair value for our investment portfolio may differ materially from the values that would have been determined had a ready market for the securities existed. In addition, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned. Our Board determines the fair value of each individual investment for which market quotations are not readily available in accordance with our valuation policy as adopted pursuant to Rule 2a-5 under the 1940 Act, and we record changes in fair value as unrealized appreciation or depreciation.
We believe our investment portfolio as of December 31, 2025 and 2024 approximates fair value as of those dates based on the markets in which we operate and other conditions in existence on those reporting dates.
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Subsequent Events
Investment Portfolio
We invested in the following portfolio companies subsequent to December 31, 2025:
c
Activity Type
Date
Company Name
Company Description
Investment Amount
Instrument Type
Add-On Investment
January 2, 2026
Bart & Associates, LLC*
Provider of content, information, tech-enabled services, and hosts competitions for the U.S. equine industry
2,000,000
Senior Secured – First Lien
43,413
New Investment
January 9, 2026
Silver Parent, LLC
Senior-care focused placement platform
7,130,301
100,000
Revolver Commitment
498,641
January 15, 2026
GRC Java Holdings, LLC*
Specialty coffee platform
42,783
January 20, 2026
EH Real Estate Services, LLC*
Offers residential property brokerage, title & settlement, and property and casualty insurance brokerage services to home buyersand sellers
380,186
January 21, 2026
evolv Holdco, LLC*
Digital transformation consulting firm
8,036
February 2, 2026
BI Investors, LLC*
Provider of center-based applied behavioral analysis therapyservices
5,743
February 3, 2026
Green Topco Holdings, LLC*
Cyber-security focused value-added reseller and associated service provider
16,598
Venbrook Buyer, LLC*
An independent insurance services broker
628,201
February 6, 2026
SP MWM Holdco LLC*
Provider of test and measurement services and equipment
194,667
February 18, 2026
190,093
February 25, 2026
1,256,415
March 3, 2026
Precision Strategies, LLC
Strategic communications and marketing agency
6,176,011
March 6, 2026
Synergy Health Partners
Provider of orthopedic and musculoskeletal care
4,000,000
500,000
Delayed Draw Term Loan Commitment
136,634
Existing portfolio company
We realized the following portfolio companies subsequent to December 31, 2025:
Proceeds Received
Realized Gain
Full Repayment
January 30, 2026
Luxium Solutions, LLC
Manufacturer and distributor of high-performance advanced materials and assemblies
8,169,324
1,182,247
Delayed Draw Term Loan
Camp Profiles LLC
Provider of digital marketing services to small and medium-sized businesses
12,041,875
Full Realization
969,138
719,138
Arctiq, Inc.
12,202,671
399,965
The outstanding balance of our the Credit Facility as of March 11, 2026 was $253.9 million.
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SBA-guaranteed Debentures
On February 27, 2026, the SBIC I subsidiary repaid $39.0 million of SBA-guaranteed debentures and related accrued interest related to SBA-guaranteed debentures maturing on March 1, 2026. The outstanding balance under SBA-guaranteed debentures as of March 11, 2026 was $260.0 million.
Dividend Declared
On January 16, 2026, our Board declared a regular monthly distribution for each of January, February and March 2026 as follows:
Ex-Dividend
Record
Payment
Amount per
Declared
1/16/2026
1/30/2026
2/13/2026
0.1133
2/27/2026
3/13/2026
3/31/2026
4/15/2026
Acquisition of Stellus Capital Management
On February 5, 2026, we announced that Stellus Capital Management entered into a definitive agreement with P10 Intermediate Holdings, LLC, an affiliate of Ridgepost Capital, Inc. (formerly known as P10, Inc.) (“Ridgepost”), pursuant to which Ridgepost will acquire Stellus Capital Management (the “Transaction”).
Pursuant to the terms of the Transaction, Stellus Capital Management will continue to be managed by its current partners, who will retain control of its day-to-day operations, including investment decisions and investment committee processes, and Stellus Capital Management will continue to serve as our external investment adviser. Consummation of the Transaction will result in a change of control of Stellus Capital Management, which will result in an assignment and corresponding termination of the Investment Advisory Agreement under the 1940 Act. Our Board and stockholders will therefore be asked to approve a new investment advisory agreement with Stellus Capital Management (the “New Investment Advisory Agreement”), the terms of which are expected to remain the same as the Investment Advisory Agreement, other than the initial term of the New Investment Advisory Agreement. Closing of the Transaction is expected to occur mid-2026 and is subject to customary conditions for a transaction of this nature. If approved, the New Investment Advisory Agreement will take effect following the closing of the Transaction.
Stock Repurchase Program
On March 3, 2026, our Board authorized a program for the purpose of repurchasing up to $20.0 million of our shares of common stock. The shares may be purchased from time to time at prevailing market prices, through open market transactions. The timing and amount of any stock repurchases will depend on the terms and conditions of the repurchase program and no assurances can be given that any common stock, or any particular amount, will be purchased. Unless extended by the Board, the stock repurchase program will terminate on March 2, 2027 and may be modified or terminated at any time for any reason without prior notice. We will retire all such shares of common stock that we purchase in connection with the stock repurchase program immediately.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
We are subject to financial market risks, including changes in interest rates. In March 2022, the Federal Reserve raised interest rates for the first time since December 2018, and subsequently raised interest rates several times, most recently in July 2023, bringing the target for the federal funds rate to 5.25% - 5.50%, the highest since January 2001. In September 2024, the Federal Reserve began easing its policy, most recently lowering the federal funds rate to a target range of 4.25% - 4.50% in December 2024, 4.00% - 4.25% in September 2025, 3.75% - 4.00% in October 2025 and 3.50% - 3.75% in December 2025. As of December 31, 2025 and December 31, 2024, 91.6% and 94.5% of the loans in our portfolio bore interest at floating rates, respectively. These floating rate loans typically bear interest in reference to SOFR, which is indexed to 30-day or 90-day SOFR rates, subject to an interest rate floor. As of December 31, 2025 and
December 31, 2024, the weighted average interest rate floor on our floating rate loans was 1.42% and 1.46%, respectively.
Assuming that the Consolidated Statements of Assets and Liabilities as of December 31, 2025 were to remain constant and no actions were taken to alter the existing interest rate sensitivity, the following table shows the annual impact on net income of changes in interest rates:
Interest
Net Interest
Change in Basis Points(2)
Income
Expense(3)
Income(1)
Up 200 basis points
17.0
(4.7)
12.3
Up 150 basis points
12.8
(3.5)
9.3
Up 100 basis points
(2.4)
6.1
Up 50 basis points
4.3
(1.2)
3.1
Down 50 basis points
(4.3)
(3.1)
Down 100 basis points
(8.5)
2.4
(6.1)
Down 150 basis points
(12.8)
(9.3)
Down 200 basis points
(16.6)
4.7
(11.9)
Although we believe that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet and other business developments that could affect net increase in net assets resulting from operations. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate. We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contacts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. For the years ended December 31, 2025 and 2024, we did not engage in interest rate hedging activities.
97
Item 8.Financial Statements and Supplementary Data
Index to Financial Statements
Page
Report of Independent Registered Public Accounting Firm (Deloitte & Touche LLP, Houston, Texas, PCAOB ID Number 34 and Grant Thornton LLP, Dallas, Texas, PCAOB ID Number 248)
99
Statements of Assets and Liabilities as of December 31, 2025 and December 31, 2024
104
Statements of Operations for the years ended December 31, 2025, 2024, and 2023
105
Statements of Changes in Net Assets for the years ended December 31, 2025, 2024, and 2023
Statements of Cash Flows for the years ended December 31, 2025, 2024, and 2023
107
Schedule of Investments as of December 31, 2025 and December 31, 2024
108
Notes to Financial Statements
142
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Stellus Capital Investment Corporation
Opinion on the financial statements
We have audited the accompanying consolidated statements of assets and liabilities of Stellus Capital Investment Corporation and subsidiaries (the “Company”), including the consolidated schedules of investments, as of December 31, 2025 and 2024, the related consolidated statements of operations, cash flows, and changes in net assets for each of the two years in the period then ended, financial highlights (in Note 8) for each of the two years in the period then ended, and the related notes (collectively referred to as the “financial statements and financial highlights”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2025 and 2024, and the results of its operations, changes in its net assets, and its cash flows for each of the two years in the period then ended, and the financial highlights for each of the two years in the period then ended in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2025, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2026, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for opinion
These financial statements and financial highlights are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements and financial highlights based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of investments owned as of December 31, 2025 and 2024, by correspondence with the custodian, loan agents, and borrowers; when replies were not received, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Fair Value – Level 3 Investments – Refer to Notes 1 and 6 to the financial statements
Critical Audit Matter Description
The Company held investments classified as Level 3 investments under accounting principles generally accepted in the United States of America. These investments included debt and equity securities with unique contract terms and conditions and/or complexity that considers a combination of multiple levels of market and asset specific inputs. The valuation techniques used in estimating the fair value of these investments vary and certain significant inputs used were unobservable.
We identified the valuation of Level 3 investments as a critical audit matter because of the judgments necessary for management to select valuation techniques and to use significant unobservable inputs to estimate their fair value. This required a high degree of auditor judgement and extensive audit effort to audit management’s estimate of fair value of Level 3 investments, including the need to involve fair value specialists possessing relevant valuation experience to evaluate the appropriateness of the valuation techniques and the significant unobservable inputs used in the valuation of certain investments.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the fair value of certain Level 3 investments included the following, among otherss:
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
March 11, 2026
We have served as the Company’s auditor since 2024.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Stellus Capital Investment Corporation and subsidiaries (the “Company”) as of December 31, 2025, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2025, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated schedule of investments, as of December 31, 2025, the related consolidated statements of operations, changes in net assets, and cash flows for the year ended December 31, 2025, the financial highlights (in Note 8) for the year ended December 31, 2025, and the related notes (collectively referred to as the “financial statements”), of the Company and our report dated March 11, 2026, expressed an unqualified opinion on those financial statements].
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
101
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate
102
Board of Directors and Shareholders
Stellus Capital Investment Corporation
We have audited the consolidated statement of assets and liabilities of Stellus Capital Investment Corporation (a Maryland corporation) and subsidiaries (the “Company”), including the consolidated schedule of investments, as of December 31, 2023 (not presented herein) the related consolidated statements of operations, changes in net assets and cash flows for the year ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our procedures included verification by confirmation of securities as of December 31, 2023, by correspondence with portfolio companies or agents, or by other appropriate auditing procedures where replies were not received. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We served as the Company’s auditor from 2012 to 2024.
Dallas, Texas
March 4, 2024 (except for Note 14, as to which the date is March 4, 2025)
103
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
ASSETS
Controlled investments at fair value (amortized cost of $33,603,521 and $17,934,808, respectively)
14,953,132
Non-controlled, affiliated investments, at fair value (amortized cost of $4,806,660)
Non-controlled, non-affiliated investments, at fair value (amortized cost of $987,729,505 and $943,853,898, respectively)
988,919,589
945,845,252
Cash and cash equivalents
25,050,156
20,058,594
Receivable for sales and repayments of investments
581,509
335,689
Interest receivable
6,375,996
4,947,765
Income tax receivable
1,385,387
1,301,965
Other receivables
85,000
87,995
Related party receivable
3,687
Prepaid expenses
150,843
666,866
Total Assets
1,041,252,306
980,900,249
LIABILITIES
122,671,409
99,444,355
233,167,360
172,314,315
295,984,063
321,251,939
Dividends payable
3,858,669
3,663,233
Management fees payable
4,442,705
4,034,109
Income incentive fees payable
2,317,429
3,109,560
Interest payable
6,138,076
5,281,343
Unearned revenue
582,007
548,626
Administrative services payable
539,338
393,513
Other accrued expenses and liabilities
372,294
937,316
Total Liabilities
670,073,350
610,978,309
Commitments and contingencies (Note 7)
Net Assets
371,178,956
369,921,940
NET ASSETS
Common stock, par value $0.001 per share (100,000,000 shares authorized; 28,947,254 and 27,481,118 shares issued and outstanding, respectively)
28,947
27,481
Paid-in capital
397,829,793
379,549,272
Total distributable loss
(26,679,784)
(9,654,813)
Total Liabilities and Net Assets
Net Asset Value Per Share
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
INVESTMENT INCOME
From controlled investments:
Interest income
81,636
37,897
From non-controlled, affiliated investments
8,990
Payment-in-kind interest income
217,434
From non-controlled, non-affiliated investments
91,999,416
96,494,073
98,177,254
5,538,838
3,310,111
3,801,637
Other income
4,374,272
4,850,313
3,830,780
Total Investment Income
102,138,950
104,736,133
105,847,568
OPERATING EXPENSES
17,178,177
15,698,129
15,452,347
407,358
380,239
373,628
2,134,816
1,916,283
1,908,191
8,393,139
10,045,966
10,189,888
(569,528)
1,940,744
1,190,232
1,455,372
409,000
412,000
406,000
396,862
499,913
492,596
34,943,265
31,506,068
32,011,317
1,580,338
1,808,838
1,333,452
1,182,690
1,175,765
891,170
68,566,389
64,633,433
63,944,433
(3,310,981)
(1,826,893)
(307,442)
65,255,408
62,806,540
63,636,991
36,883,542
41,929,593
42,210,577
Net realized loss on controlled investments
(1,132,576)
Net realized loss on non-controlled, affiliated investments
(6,314,327)
Net realized gain (loss) on non-controlled, non-affiliated investments
8,977,487
(15,737,004)
(30,211,467)
Net realized loss on foreign currency translations
(68,844)
(94,730)
(112,481)
Loss on debt extinguishment
(226,095)
Net change in unrealized appreciation (depreciation) on controlled investments
4,395,102
826,772
(430,577)
Net change in unrealized appreciation on non-controlled, affiliated investments
4,140,601
Net change in unrealized (depreciation) appreciation on non-controlled, non-affiliated investments
(19,642,634)
18,743,637
3,222,729
Net change in unrealized appreciation (depreciation) on foreign currency translations
33,073
(14,755)
(6,504)
Benefit (provision) for taxes on net unrealized depreciation (appreciation) on investments
188,893
(126,957)
Benefit for taxes on net realized loss on investments
2,221
2,987,847
27,045,329
45,844,627
17,533,167
Net Investment Income Per Share—basic and diluted
1.30
1.64
Net Increase in Net Assets Resulting from Operations Per Share – basic and diluted
0.95
1.79
Weighted Average Shares of Common Stock Outstanding—basic and diluted
28,364,809
25,596,593
22,004,648
Distributions Per Share—basic and diluted
1.60
1.61
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
Number
Par
Paid-in
distributable
of shares
value
capital
(loss) earnings
Balances as of December 31, 2022
19,666,769
19,667
275,114,720
642,226
275,776,613
Net investment income
Net realized loss on investments
Net realized loss on foreign currency translation
Net change in unrealized appreciation on investments
2,792,152
Net change in unrealized depreciation on foreign currency translations
Provision for taxes on unrealized appreciation on investments
Benefit for taxes on realized loss on investments
Return of capital and other tax related adjustments
(1,348,766)
1,348,766
Distributions from net investment income
(35,080,734)
Distributions from net realized capital gains
(446,746)
Issuance of common stock, net of offering costs(1)
4,458,873
4,458
62,153,030
62,157,488
Balances at December 31, 2023
24,125,642
24,125
335,918,984
(16,003,321)
319,939,788
19,570,409
(1,727,556)
1,727,556
(40,679,308)
(544,367)
3,355,476
3,356
45,357,844
45,361,200
Balances at December 31, 2024
27,481,118
Net realized gain on investments
1,530,584
Net change in unrealized depreciation on investments
(11,106,931)
Net change in unrealized appreciation on foreign currency translations
(1,391,127)
1,391,127
(45,461,427)
1,466,136
1,466
19,671,648
19,673,114
Balances at December 31, 2025
28,947,254
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities
Net increase in net assets resulting from operations
Adjustments to reconcile net increase in net assets from operations to net cash used in operating activities:
Purchases of investments
(194,071,248)
(221,154,933)
(183,858,762)
Proceeds from sales and repayments of investments
139,652,991
151,834,875
134,223,224
Net change in unrealized depreciation (appreciation) on investments
11,106,931
(19,570,409)
(2,792,152)
Net change in unrealized (appreciation) depreciation on foreign currency translations
(33,073)
14,755
6,360
Increase in investments due to payment-in-kind income
(5,756,272)
(3,310,111)
(3,799,843)
Amortization of premium and accretion of discount, net
(2,891,683)
(2,715,802)
(2,749,543)
Deferred tax (benefit) provision
(188,893)
126,957
Amortization of loan structure fees
1,212,581
1,140,079
657,323
Amortization of deferred financing costs
692,393
447,943
446,720
Amortization of discount on Notes Payable
96,093
Amortization of premium on Notes Payable
(29,855)
Amortization of loan fees on SBA-guaranteed debentures
732,124
978,582
1,255,753
Net realized (gain) loss on investments
(1,530,584)
15,737,004
30,211,467
226,095
Changes in other assets and liabilities
Increase in interest receivable
(1,428,231)
(65,427)
(897,929)
(Increase) decrease in income tax receivable
(83,422)
286,743
(1,588,708)
Decrease (increase) in other receivables
2,995
(45,000)
(8,750)
Decrease (increase) in related party receivables
3,667
(3,687)
Decrease (increase) in prepaid expenses
516,023
(60,192)
60,593
Increase (decrease) in management fees payable
408,596
1,115,573
(4,231,871)
(Decrease) increase in income incentive fees payable
(792,131)
224,380
420,772
Decrease in capital gains incentive fees payable
Increase (decrease) in administrative services payable
145,825
(8,638)
45,232
Increase in interest payable
856,733
40,179
600,323
Decrease in related party payable
(1,060,321)
Increase in unearned revenue
33,381
150,901
77,050
Decrease in income tax payable
(1,175,373)
(Decrease) increase in other accrued expenses and liabilities
(565,022)
658,971
(197,248)
Net Cash Used in Operating Activities
(24,449,764)
(28,648,480)
(17,265,087)
Cash Flows from Financing Activities
Proceeds from the issuance of common stock
20,588,960
46,494,756
63,348,436
Sales load for common stock issued
(308,998)
(698,166)
(943,248)
Offering costs paid for common stock issued
(606,848)
(428,078)
(253,913)
Stockholder distributions paid
(45,265,991)
(37,560,442)
(35,527,480)
Proceeds from issuance of Notes Payable
124,877,750
Repayment of Notes Payable
(100,060,870)
Financing costs paid on Notes Payable
(2,574,553)
Repayments of SBA-guaranteed debentures
(26,000,000)
11,400,000
Financing costs paid on SBA-guaranteed debentures
(277,590)
Financing costs paid on Credit Facility
(1,622,524)
(691,137)
(2,663,106)
Borrowings under Credit Facility
300,550,000
187,900,000
108,400,000
Repayments of Credit Facility
(240,135,600)
(172,435,600)
(148,135,600)
Net Cash Provided (Used) by Financing Activities
29,441,326
22,581,333
(4,652,501)
Net Increase (Decrease) in Cash and Cash Equivalents
4,991,562
(6,067,147)
(21,917,588)
Cash and Cash Equivalents Balance at Beginning of Period
26,125,741
48,043,329
Cash and Cash Equivalents Balance at End of Period
Supplemental and Non-Cash Activities
Cash paid for interest expense
31,383,195
28,899,285
29,051,198
Income and excise tax paid
1,663,760
2,508,825
Exchange of investments
1,663,301
8,256,411
3,610,846
CONSOLIDATED SCHEDULE OF INVESTMENTS
Principal
% of
Investment
Headquarters/
Amount/
Amortized
Fair
Net
Footnotes
Security(2)
Coupon
Floor
Cash
PIK(8)
Maturity
Industry
Shares(3)
Value(1)
Assets
Control investments
(22)
EH Real Estate Services, LLC
Skokie, IL
Term Loan A-1
(16)
First Lien
9/3/2021
9/3/2026
265,092
0.00
Term Loan A-2
4/3/2023
154,848
Term Loan A-3
6/7/2023
62,791
Term Loan A-4
7/12/2023
1,505,537
1,159,263
0.31
Term Loan A-5
1/8/2024
5,734,549
4,415,603
1.19
Term Loan A-6
10/3/2025
1,096,456
0.30
Term Loan A-7
11/12/2025
9/30/2026
1,644,685
0.44
Revolver
(16)(21)
10/3/2023
63,597
0.02
EH Holdco, LLC Common Units
15,356
EH Holdco, LLC Series A Preferred Units
7,892
7,891,642
2.26
J.R. Watkins, LLC
San Francisco, CA
Term Loan (SBIC)
(4)(19)
4.09
12/22/2017
12/31/2026
10,082,316
2,520,579
5.00
3,514,892
878,723
0.24
Priority Revolver (SBIC)
5/3/2024
1,587,113
3,174,226
J.R. Watkins Ultimate Holdings, LLC Class A Units (SBIC)
(4)
4/9/2025
500
15,184,321
6,573,528
1.78
Total Control investments
33,603,521
4.04
Non-controlled, affiliated investments
(23)
Simpler Trading, LLC
Austin, TX
10.00
12/28/2021
3/21/2030
2,868,074
0.77
Simpler Trading, LLC Preferred Units (SBIC)
3/21/2025
1,657
1,656,650
882,600
Simpler Ultimate Holdings, LLC Class A Units (SBIC)
281,936
1.01
Total Non-controlled, affiliated investments
Non-controlled, non-affiliated investments
(4)(5)
2X LLC
Berwyn, PA
Term Loan
(11)
3M SOFR+
2.00
8.67
6/5/2023
6/5/2028
5,376,454
5,299,849
1.45
10/31/2023
1,415,799
1,394,300
0.38
12/2/2024
3,813,089
3,771,087
1.03
(9)(11)
62,500
2X Investors LP Class A Units
43,875
176,915
1,220,397
0.33
10,704,651
11,888,239
3.21
Ad.Net Acquisition, LLC
(9)
Los Angeles, CA
Term Loan (SBIC II)
(5)(11)
6.00
1.00
9.93
5/7/2021
5/7/2028
16,778,592
16,730,161
16,778,593
4.52
Ad.Net Holdings, Inc. Series A Common Stock (SBIC II)
(5)
8,644
86,444
0
Ad.Net Holdings, Inc. Series A Preferred Stock (SBIC II)
7,780
777,995
783,313
17,594,600
17,561,906
4.73
AdCellerant LLC
Denver, CO
Term A Loan (SBIC II)
1M SOFR+
9.72
12/12/2023
12/12/2028
9,800,000
9,670,440
9,751,000
2.63
AdCellerant Holdings, LLC Series A Units
728,710
567,340
0.15
10,399,150
10,318,340
2.78
ADS Group Opco, LLC
Lakewood, CO
6/4/2021
12/31/2027
13,101,406
13,071,113
11,856,773
3.19
Priority Revolver (SBIC II)
(5)(9)
9/30/2024
15,698
31,396
0.01
ADS Group Topco, LLC Class A Units
77,626
288,691
ADS Group Topco, LLC Class B Units
56,819
211,309
ADS Group Topco, LLC Class D Units
432
ADS Group Topco, LLC Class Y Units
4/11/2023
48,216
165,027
ADS Group Topco, LLC Class Z Units
6/15/2022
72,043
267,929
14,019,767
11,888,169
3.20
PIK
Advanced Barrier Extrusions, LLC
Rhinelander, WI
Term Loan B (SBIC)
(4)(11)(13)
9.50
11/30/2020
11/30/2026
16,843,750
16,781,420
Super Priority Term Loan (SBIC)
(4)(13)
12/6/2024
795,882
970,378
2,331,934
2/5/2025
875,000
2,563,750
0.69
3/26/2025
1,465,000
0.39
Term Loan A (SBIC)
2,607,637
565,204
Revolver (SBIC)
1,558,434
337,790
GP ABX Holdings Partnership, L.P. Partner Interests
8/8/2018
644,737
528,395
GP ABX Holdings Partnership, L.P. Series B Preferred Interests
1/5/2023
1,562
156,182
1.71
AGT Robotique Inc.
(7)(27)
Trois Rivieres, Canada
7.50
9.17
6/24/2024
6/22/2029
10,566,027
10,406,341
10,354,707
2.79
American Refrigeration, LLC
Jacksonville, FL
(4)(11)
3/31/2023
3/31/2028
8,048,097
7,942,571
98,250
97,500
0.03
AR-USA Holdings, LLC Class A Units
(6)
141
129,350
224,577
0.06
8,169,421
8,370,924
AMII Acquisition, LLC
Coral Gables, FL
Term Loan (SBIC II )
4.50
8.17
12/4/2024
12/4/2029
8,731,273
8,623,147
8,687,618
AMII Holdings, LP Class B Units
12/3/2024
14,246
142,460
176,331
8,765,607
8,863,949
2.39
Amika OpCo LLC
Brooklyn, NY
6M SOFR+
5.25
9.27
7/1/2022
7/1/2029
94,638
93,519
5.75
9.63
12/5/2023
9,511,775
9,377,401
2.56
Ishtar Co-Invest-B LP Partnership Interests
77,778
38,133
311,230
0.08
Oshun Co-Invest-B LP Partnership Interests
22,222
21,141
88,922
9,530,194
10,006,565
2.69
Anne Lewis Strategies, LLC
SG AL Investment, LLC Common Units
3/5/2021
Washington, DC
1,000
327,192
3,162,656
SG AL Investment, LLC Common-A Units
12/22/2023
239
482,200
985,826
0.27
809,392
4,148,482
1.12
APE Holdings, LLC
Deer Park, TX
Class A Units
9/5/2014
375,000
40,530
ArborWorks, LLC
Oakhurst, CA
6.50
10.34
11/6/2023
11/6/2028
4,031,455
1.09
1,815,868
ArborWorks Intermediate Holdco, LLC Class A-1 Preferred Units
16,037
3,610,847
6,317,213
ArborWorks Intermediate Holdco, LLC Class B-1 Preferred Units
ArborWorks Intermediate Holdco, LLC Class A-1 Common Units
1,923
9,458,170
12,164,536
3.28
Irvine, CA
9.67
8/8/2023
8/8/2028
10,918,921
10,754,010
11/6/2024
1,283,750
1,264,755
0.35
396,842
0.11
Green Topco Holdings, LLC Class A Units
271,401
202,628
365,976
12,618,235
12,968,612
3.50
Atmosphere Aggregator Holdings II, L.P.
Atlanta, GA
Common Units
1/26/2016
254,250
2,342,141
Stratose Aggregator Holdings, L.P. Common Units
6/30/2015
750,000
8,848,087
2.38
11,190,228
3.01
109
Axis Portable Air, LLC
Phoenix, AZ
3/22/2022
12/31/2030
9,310,000
9,230,695
2.51
4/17/2023
1,855,738
1,836,176
0.50
98,000
97,548
Axis Air Parent, LLC Preferred Units
4,436
443,636
2,882,638
0.78
11,608,055
14,146,376
3.82
Baker Manufacturing Company, LLC
Evansville, WI
BSC Blue Water Holdings, LLC Series A Units (SBIC II)
7/5/2022
1,000,036
Bart & Associates, LLC
McLean, VA
(4)(10)(12)
9.09
8/16/2024
8/16/2030
8,830,894
8,702,680
(10)(12)
1,724,720
1,710,769
0.46
B&A Partners Holding, LLC Series A Preferred Units
722,411
837,967
0.23
11,135,860
11,393,581
3.07
BL Products Parent, L.P.
Houston, TX
2/1/2022
879,060
983,608
1,142,767
Café Valley, Inc.
CF Topco LLC Units
8/28/2019
9,160
916,015
1,736,816
0.47
Boston, MA
9.07
9,814,375
9,780,539
2.64
2,227,500
2,213,033
0.60
CIVC VI-A 829 Blocker, LLC Units
250
250,000
900,363
12,243,572
12,942,238
3.48
Carolinas Buyer, Inc.
Charlotte, NC
12/20/2024
12/20/2030
6,779,838
6,676,390
6,610,342
Carolinas Holding, L.P. Class A Units
466
465,637
367,446
7,142,027
6,977,788
1.88
CEATI International Inc.
(7)(9)
Montreal, Canada
2/19/2021
8,349,501
8,342,798
2.25
3,166,966
3,147,329
CEATI Holdings, LP Class A Units
132,919
268,648
0.07
11,623,046
11,785,115
3.17
Cerebro Buyer, LLC
Columbia, SC
8.72
3/15/2023
3/15/2029
4,526,683
4,455,979
Cerebro Holdings Partnership, L.P. Series A Partner Interests
62,961
68,499
Cerebro Holdings Partnership, L.P. Series B Partner Interests
341,091
328,640
371,091
1.34
CF Arch Holdings LLC
8/10/2022
88,511
150,931
0.04
CF512, Inc.
Blue Bell, PA
9.98
9/1/2021
9/1/2026
13,222,035
13,176,452
13,155,926
9.86
2,855,259
2,850,147
2,840,983
9.74
9,000
8,955
StellPen Holdings, LLC Membership Interests
220,930
177,046
16,256,529
16,182,910
4.36
Champion Services Acquireco LLC
Round Rock, TX
9/19/2025
9/19/2030
11,970,000
11,740,066
11,730,600
3.16
Champion Services Holdings LLC Class A-1 Units
268,889
253,825
12,008,955
11,984,425
3.23
110
Channel Partners Intermediateco, LLC
Tampa Bay, FL
6.75
10.84
2/24/2022
2/7/2027
12,982,758
12,947,843
3.49
3/27/2023
1,655,482
1,649,757
0.45
10.82
54,070
20,276
10.94
10,138
10.74
6,759
10.86
27,035
3.97
CompleteCase, LLC
Seattle, WA
CompleteCase Holdings, Inc. Class A Common Stock (SBIC II)
12/21/2020
417
CompleteCase Holdings, Inc. Series A Preferred Stock (SBIC II)
522
521,734
151,068
CompleteCase Holdings, Inc. Class A Common Stock
4/27/2023
CompleteCase Holdings, Inc. Series C Preferred Stock
111
111,408
111,409
633,148
262,477
Compost 360 Acquisition, LLC
Tampa, FL
8/2/2023
8/2/2028
9,481,462
9,339,450
9,007,390
2.43
1,043,816
1,033,534
991,625
8.50
12.19
20,000
19,000
12.17
11,368
10,800
Compost 360 Investments, LLC Class A Units
3,124
300,041
92,336
Compost 360 Investments, LLC Preferred Units
8/29/2025
614
27,630
38,086
10,732,023
10,159,237
2.74
COPILOT Provider Support Services, LLC
Maitland, FL
6.25
10.07
11/22/2022
11/22/2027
4,837,500
4,793,779
QHP Project Captivate Blocker, Inc. Common Stock
285,714
376,673
5,079,493
5,214,173
1.40
Craftable Intermediate II Inc.
Dallas, TX
9.42
6/30/2023
6/30/2028
9,882,041
9,768,247
2.66
9.45
40,000
Gauge Craftable LP Partnership Interests
626,690
1,132,360
10,434,937
11,054,401
2.98
Curion Holdings, LLC
Chicago, IL
5.50
7/29/2022
12/31/2028
12,656,689
12,563,484
12,530,123
3.38
40,570
40,164
SP CS Holdings LLC Class A Units
867,173
756,722
0.20
13,471,227
13,327,009
DFO Enterprises, LLC
Rochester, MN
8.92
9/22/2025
9/22/2030
11,551,523
11,357,330
11,378,251
DFO Ultimate Holding, LP Class A Units
8,931
412,252
538,122
0.14
DMD Systems Recovery, LLC
Tempe, AZ
8/22/2025
8/22/2031
6,100,000
5,997,713
6,008,500
1.62
Phoenix Parent LLC Common Units
8/19/2025
180,000
169,710
6,177,713
6,178,210
DTE Holding Company, LLC
Roselle, IL
Class A-2 Units
4/13/2018
776,316
466,204
Class AA Units
723,684
1,189,888
Elder Care Opco LLC
Scarsdale, NY
7/31/2025
7/31/2030
7,785,007
7,660,131
7,668,232
2.07
Rallyday Elder Care Co-Investors LP Partnership Interests
910,966
916,719
1,056,301
0.28
8,576,850
8,724,533
2.35
Elliott Aviation, LLC
Moline, IL
8.00
11.87
1/31/2020
1/21/2026
9,594,927
9,115,182
2.46
SP EA Holdings LLC Term Loan
Unsecured
10/26/2023
1/31/2026
76,245
13,724
4.31
4/25/2025
59,833
56,841
Revolver A
1,585,290
0.43
Revolver B
3/1/2023
746,513
Revolver C (Priority)
3/7/2025
1,019,285
SP EA Holdings LLC Class A Units
105,938,486
901,594
13,983,687
12,536,835
Environmental Remedies, LLC
Hayward, CA
1/15/2025
1/15/2030
7,275,781
7,153,358
7,166,644
1.93
ERI Parent Holdings, LLC Class A Units
163,109
140,928
7,316,467
7,307,572
1.97
Equine Network, LLC
Boulder, CO
Term A Loan (SBIC)
10.33
5/22/2023
5/22/2028
6,949,183
6,845,973
Term A Loan
7/28/2025
2,117,063
2,070,832
0.57
166,667
98,150
Eskola LLC
Morristown, TN
11.90
12/19/2024
12/19/2029
7,482,765
7,372,876
6,996,385
2,770,797
2,753,379
2,590,695
0.70
Eskola Holdings, LLC Class A Units
314
893,747
58,588
Eskola Holdings, LLC Class C Units
6/4/2025
56,349
14,041
11,076,351
9,659,709
2.60
evolv Consulting, LLC
10.49
12/7/2023
12/7/2028
9,335,314
9,211,059
2.52
evolv Holdco, LLC Preferred Units
473,485
498,613
0.13
9,684,544
9,833,927
2.65
Evriholder Acquisition, Inc.
Anaheim, CA
(5)(9)(11)
10.57
1/23/2023
1/24/2028
12,104,445
11,956,146
12,043,924
3.24
KEJ Holdings LP Class A Units
873,333
940,212
0.25
12,829,479
12,984,136
Exacta Land Surveyors, LLC
(20)
Cleveland, OH
9.57
2/8/2019
16,308,509
15,656,170
4.22
7/15/2022
992,002
952,322
4/22/2024
6/30/2026
115,243
99,685
SP ELS Holdings LLC Class A Units
1,338,661
1,124,414
208,826
18,540,168
16,917,003
4.57
Exigo, LLC
3/16/2022
3/16/2027
8,631,371
8,594,584
2.33
Gauge Exigo Coinvest, LLC Common Units
377,535
328,204
0.09
8,972,119
8,959,575
2.42
FairWave Holdings, LLC
Kansas City, MO
10.42
4/1/2024
4/1/2029
7,481,998
7,360,162
7,444,588
2.01
12/31/2025
103,720
101,905
103,201
514,030
511,460
2,641,131
2,617,056
2,627,925
0.71
GRC Java Holdings, LLC Class A Units
2,985
304,909
421,889
3.00
Fidus Systems Inc.
Ottawa, Canada
10/17/2025
10/17/2031
4,759,099
4,677,532
1.26
Fidus Investments Holdings, L.P. Common Units
268
267,728
4,945,260
1.33
112
FiscalNote Boards LLC
Toronto, Canada
3/11/2024
3/12/2029
3,503,162
3,453,695
3,468,130
FCP-Connect Holdings LLC Class A Common Shares
5/28/2024
284
FCP-Connect Holdings LLC Series A Preferred Shares
190,382
176,211
3,644,077
3,644,341
General LED OPCO, LLC
San Antonio, TX
Second Lien
9.00
12.77
5/1/2018
4/30/2027
4,500,000
4,496,653
4,410,000
GS HVAM Intermediate, LLC
Carlsbad, CA
10.32
10/18/2019
12,123,673
12,121,297
3.27
1,944,444
10.51
176,768
10.50
88,384
HV GS Acquisition, LP Class A Interests
10/2/2019
2,144
563,209
4,468,228
1.20
15,336,022
19,243,417
5.18
GSF Buyer, LLC
North Andover, MA
8.84
4/30/2025
4/30/2031
4,249,351
4,191,024
1.14
GSF Group Holdings, L.P. Class A2 Units
241
240,595
233,513
4,431,619
4,482,864
Guidant Corp.
Erie, PA
10.17
9,853,707
9,608,518
422,283
Titan Meter Topco LP Class A Units
574,863
581,608
801,170
0.22
10,612,409
Husk AcquireCo Inc.
(7)
Vaughan, Canada
9.51
11/14/2024
11/15/2029
5,264,053
5,199,682
5,185,092
SK Spectra Holdings LP Class A Units
11/15/2024
298
297,765
226,274
5,497,447
5,411,366
HV Watterson Holdings, LLC
Schaumburg, IL
12.00
12/17/2021
12/17/2026
13,568,717
13,508,378
9,023,198
99,975
66,483
329,632
328,777
219,205
HV Watterson Parent, LLC Class A Units
1,632
1,631,591
15,568,721
9,308,886
I2P Holdings, LLC
Series A Preferred Units
1/31/2018
1,587,652
Identity Theft Guard Solutions, Inc.
Portland, OR
9.22
2/28/2025
2/28/2030
8,657,465
8,507,362
8,614,178
2.32
IDX Parent, LLC Class A-2 Units
352,915
588,521
0.16
2.48
Impact Home Services LLC
4/28/2023
4/28/2028
5,805,097
5,726,630
5,688,995
1.53
10/11/2023
529,089
521,434
518,507
263,868
260,204
258,591
(11)(17)
82,500
80,850
Impact Holdings Georgia LLC Class A Units
375
375,156
Impact Holdings Georgia LLC Class A-1 Units
1/31/2024
37,962
35,526
7,003,886
6,582,469
1.77
113
Infolinks Media Buyco, LLC
Ridgewood, NJ
11/1/2021
11/1/2026
7,168,033
7,138,013
7,132,193
6/6/2024
2,440,641
2,425,985
2,428,438
0.65
1,447,875
1,443,421
1,440,636
Tower Arch Infolinks Media, LP LP Interests
(6)(15)
10/28/2021
460,943
207,385
475,679
11,214,804
11,476,946
3.09
Informativ, LLC
Fresno, CA
7/30/2021
7/30/2027
8,308,013
8,285,463
2.24
3/31/2022
6,263,548
6,244,249
1.69
Credit Connection Holdings, LLC Series A Units
804,384
300,783
1,371,768
14,830,495
15,943,329
4.30
Inoapps Bidco, LLC
Term Loan B
3M SONIA+
9.88
2/15/2022
2/15/2027
£
9,650,000
13,015,616
12,903,217
9.58
80,000
9.85
80,625
80,388
Inoapps Holdings, LLC Series A-1 Preferred Units
739,844
783,756
1,088,044
0.29
13,959,760
14,151,886
iNovex Information Systems Incorporated
Columbia, MD
12/17/2024
12/17/2030
7,446,962
7,349,332
7,372,492
1.99
8.98
72,000
71,280
PRIME+
4.25
11.00
5,000
4,950
7,426,332
7,448,722
International Cybernetics Acquisition, LLC
Largo, FL
6/3/2025
6/3/2030
4,724,263
4,649,089
4,677,020
International Cybernetics Holdings, LP Class B Units
6/2/2025
1,051
105,113
93,640
4,754,202
4,770,660
1.29
Invincible Boat Company LLC
Opa Locka, FL
3.37
5,351,146
4,682,253
4,939,520
4,322,080
1.16
6/1/2021
1,099,108
961,720
11.37
1,489,362
1,303,192
Warbird Parent Holdco, LLC Class A Units
1,362,575
1,299,691
14,178,827
11,269,245
3.03
Ledge Lounger, Inc.
Katy, TX
11.55
11/9/2021
11/9/2027
7,893,466
7,862,441
7,064,652
1.90
88,989
79,645
SP L2 Holdings LLC Class A Units
11/3/2025
398,972
SP L2 Holdings LLC Class A Units (SBIC)
50,596,837
389,832
SP L2 Holdings LLC Class C Units (SBIC)
10/9/2024
140,834
34,504
8,375,766
7,144,297
Lightning Intermediate II, LLC
6/6/2022
11,214,012
11,137,405
3.02
Gauge Vimergy Coinvest, LLC Units
399
391,274
339,006
11,528,679
11,553,018
Deerfield Beach, OH
5/10/2024
12/1/2027
8,095,857
2.20
1,176,738
0.32
9,272,595
9,351,571
MacKenzie-Childs Acquisition, Inc.
Aurora, NY
9.32
9/2/2022
9/2/2027
86,331
85,813
MacKenzie-Childs Investment, LP Partnership Interests
171,068
185,813
257,399
114
Madison Logic Holdings, Inc.
New York, NY
7.00
10.72
12/30/2022
12/30/2028
3,627,720
3,577,518
3,319,364
11.22
906,930
894,380
829,841
BC Partners Glengarry Co-Investment LP Class 1 Interests
7/7/2023
404,964
45,355
4,876,862
4,194,560
MBH Management LLC
9,381,975
9,229,172
9,335,066
MBH Parent, LLC Common Units
646,944
986,162
9,876,116
10,321,228
MedLearning Group, LLC
3/26/2024
12/30/2027
4,263,337
4,212,827
4,220,704
2,498,733
2,469,128
2,473,746
0.67
2,040,545
2,016,437
2,020,140
0.54
8/5/2025
995,000
982,379
985,050
2,430,523
2,410,657
2,406,218
12,091,428
12,105,858
Michelli, LLC
New Orleans, LA
12/21/2023
12/21/2028
4,900,000
4,834,556
1.32
3,837,617
3,809,613
SP MWM Holdco LLC Class A Units
509,215
560,167
2.50
Microbe Formulas LLC
Meridian, ID
4/4/2022
4/3/2028
5,305,649
5,282,425
1.43
11/20/2024
4,211,768
4,196,582
Mobotrex Acquisition, LLC
Davenport, IA
6/6/2031
5,143,936
5,079,288
5,092,497
1.37
3,587,553
3,542,465
3,551,677
0.96
14,481
14,336
8.69
8,689
8,602
11/6/2025
256,807
255,226
254,239
2.40
MOM Enterprises, LLC
Richmond, CA
6.48
10.15
5/19/2021
5/19/2028
15,076,148
15,046,351
15,000,768
MBliss SPC Holdings, LLC Units
933,333
850,956
15,979,684
15,851,724
4.27
Monarch Behavioral Therapy, LLC
Addison, TX
6/6/2030
6,663,165
6,556,702
6,629,849
289,087
287,642
216,815
215,731
8.73
72,272
71,911
36,136
35,955
903,847
895,984
899,328
BI Investors, LLC Class A Units
4,286
424,738
525,713
8,491,734
8,666,129
Monitorus Holding, LLC
London, UK
10.18
5/24/2022
5/24/2027
105,248
104,923
103,669
6/27/2025
€
1,462,650
1,673,913
1,691,278
106,498
115,781
114,044
106,228
104,635
Sapphire Aggregator S.a r.l. Convertible Bonds
(14)
1/31/2025
8,977
9,454
10,380
Sapphire Aggregator S.a r.l. Class A Shares
9/1/2022
557,689
11,156
5,431
Sapphire Aggregator S.a r.l. Class B Shares
557,682
Sapphire Aggregator S.a r.l. Class C Shares
Sapphire Aggregator S.a r.l. Class D Shares
Sapphire Aggregator S.a r.l. Class E Shares
Sapphire Aggregator S.a r.l. Class F Shares
Sapphire Aggregator S.a r.l. Class G Shares
Sapphire Aggregator S.a r.l. Class H Shares
Sapphire Aggregator S.a r.l. Class I Shares
Sapphire Aggregator S.a r.l. Class 3 Ordinary Shares
3/31/2025
6,458,506
37,512
68,931
Morgan Electrical Group Intermediate Holdings, Inc.
Freemont, CA
9.97
8/3/2023
8/3/2029
4,065,515
4,002,647
4,024,860
1.08
1,607,266
1,594,242
1,591,193
Morgan Electrical Group Holdings, LLC Series A-2 Preferred Units
380
380,330
246,772
5,977,219
5,862,825
1.58
Naumann/Hobbs Material Handling Corporation II, Inc.
8/30/2019
8,054,946
7,934,122
2.14
5,079,479
5,003,287
1,789,578
1,762,734
Naumann Hobbs Holdings, L.P. Class A-1 Units
9/29/2022
123
220,379
Naumann Hobbs Holdings, L.P. Class A-2 Units
Naumann Hobbs Holdings, L.P. Class B Units
12/27/2024
142,200
546,782
Naumann Hobbs Holdings, L.P. Class W-1 Units
5/27/2025
Naumann Hobbs Holdings, L.P. Class W-2 Units
217,884
15,506,961
15,464,809
4.17
NINJIO, LLC
Westlake Village, CA
10/12/2022
10/12/2027
4,962,500
4,920,208
99,453
NINJIO Holdings, LLC Units
313,253
340,673
Gauge NINJIO Blocker LLC Preferred Units
9/22/2023
14,470
21,705
5,347,384
5,424,878
1.47
Norplex Micarta Acquisition, Inc.
Postville, IA
10/31/2024
10/31/2029
12,870,000
12,661,385
12,805,651
3.45
50,000
49,750
Norplex Micarta Parent, LP Preferred Units
739,804
690,496
0.19
13,451,189
13,545,897
NS412, LLC
8.25
12.02
5/6/2019
5/6/2027
7,615,000
2.05
NS Group Holding Company, LLC Class A Units
782
795,002
1,036,196
8,410,002
8,651,196
Onpoint Industrial Services, LLC
1.75
11/16/2022
11/16/2027
12,256,846
12,145,661
3.30
Spearhead TopCo, LLC Class A Units
606,742
1,078,794
12,752,403
13,335,640
Pacific Shoring Holdings, LLC
Santa Rosa, CA
1/10/2025
1/10/2030
8,436,250
8,312,084
8,351,888
PSP Ultimate Holding, LP Class A Units
10,606
498,491
610,672
8,810,575
8,962,560
2.41
116
PCP MT Aggregator Holdings, L.P.
Oak Brook, IL
3/29/2019
825,020
PCS Software, Inc.
Shenandoah, TX
7/1/2019
6/30/2027
13,816,136
13,747,056
3.70
1,811,952
1,802,892
440
431
438
955,424
950,647
PCS Software Parent, LLC Class A Common Units
9/16/2022
471,211
9,995
289,993
4.53
Pearl Media Holdings, LLC
(24)
Montclair, NJ
8/31/2022
8/31/2027
8,620,067
8,553,265
8,447,666
2.28
Peltram Group Holdings LLC
Auburn, WA
12/30/2021
508,516
451,142
799,295
Pilot Power Group Acquisition, Inc.
San Diego, CA
(5)(10)(12)
9.95
12/18/2025
12/18/2030
12,000,000
11,790,000
3.18
BCM Pilot Opportunity Parent, LLC Class A Common Interests
(28)
4,423
366,868
12,156,868
Plus Delta Buyer LLC
1/16/2025
1/16/2031
7,344,500
7,214,782
7,271,055
Plus Delta Parent LLC Class A Units
325,765
325,764
340,885
7,540,546
7,611,940
Premiere Digital Services, Inc.
11/3/2021
11/3/2026
12,070,359
3.25
Premiere Digital Holdings, Inc. Common Stock
10/18/2018
3,126,233
0.84
Pure Upper Holdco LLC
Newtown Square, PA
4.75
8.42
12/3/2025
12/3/2031
10,000,000
9,901,043
2.67
Xanitos Topco, LLC Class A Units
246,667
10,147,710
Recharged Opco, LLC
Bradenton, FL
(26)
12.50
2/7/2022
2/7/2028
5,324,759
5,283,494
2,901,994
(18)(26)
83,115
45,298
Priority Revolver
7/2/2024
20,223
40,446
9/13/2024
11/12/2024
45,000
90,000
1/3/2025
10,000
2/7/2025
31,000
62,000
10/22/2025
120,000
240,000
(9)(18)(26)
12/15/2025
32,500
65,000
98,473
98,030
53,668
Recharged Holdings, LLC Common Units
11/13/2025
61,182
5,743,362
3,558,406
Red's All Natural, LLC
Franklin, TN
9.13
1/31/2023
1/31/2029
8,815,327
8,708,727
2.37
Centeotl Co-Invest B, LP Common Units
710,600
352,910
9,419,327
9,168,237
2.47
RIA Advisory Borrower, LLC
5/1/2023
8/2/2027
5,835,000
5,782,654
1.57
73,915
RIA Advisory Aggregator, LLC Class A Units
104,425
165,078
277,592
RIA Products Aggregator, LLC Class A Units
81,251
78,390
39,195
6,100,037
6,225,702
Said Intermediate, LLC
6/13/2024
6/13/2029
7,368,312
7,258,150
7,294,629
FCP-Said Holdings, LLC Class A Common Shares
804
FCP-Said Holdings, LLC Series A Preferred Shares
852
350,649
323,546
7,608,799
7,618,175
2.06
Sales Benchmark Index, LLC
9.87
1/7/2020
7/7/2026
12,004,716
443,820
0.12
SBI Holdings Investments LLC Class A Units
66,573
665,730
458,148
13,114,266
12,906,684
3.47
Solid Surface Holdco, LLC
6/6/2025
5,665,801
5,562,303
5,637,472
1.52
9.69
2,220,766
2,198,813
2,209,662
1,736,753
1,719,585
1,728,069
9.70
313,185
310,089
311,619
Carolina Topco Holdings, LP Class A-1 Units
4,935
493,470
866,935
10,284,260
10,753,757
2.90
Strategus, LLC
Englewood, CO
1/27/2025
1/27/2031
7,762,432
7,642,498
7,645,996
CIVC Strategus Blocker, LLC Class A Units
170
170,362
203,173
7,812,860
7,849,169
2.11
TAC LifePort Holdings, LLC
Woodland, WA
3/1/2021
546,543
189,094
1,543,947
0.42
Teckrez, LLC
5/24/2024
11/30/2028
4,240,129
4,194,947
4,218,928
885,936
881,506
144,222
143,501
HH-Teckrez Parent, LP Preferred Units
90,139
162,373
5,315,244
5,406,308
The Hardenbergh Group, Inc.
Livonia, MI
10.27
8/7/2023
8/7/2028
10,265,605
10,110,799
2.77
793,981
782,369
10/1/2025
498,750
489,484
BV HGI Holdings, L.P. Class A Units
677,548
697,242
The Millennium Alliance LLC
7/31/2031
11,471,250
11,306,226
11,356,539
3.06
BV MA Blocker, Inc. Class A-2 Common Stock
515,556
656,334
0.18
11,821,782
12,012,873
Tiger 21, LLC
12/30/2024
12/30/2030
11,880,000
11,673,028
Tiger 21 Blocker, Inc. Class A-3 Common Stock
565
564,635
770,506
12,237,663
12,650,506
3.41
Tilley Distribution, Inc.
Baltimore, MD
9.82
4/1/2022
82,617
82,299
79,725
9,016
8,981
8,700
13,043
12,586
104,323
101,011
118
TradePending OpCo Aggregator, LLC
Carrboro, NC
3/2/2021
3/2/2026
9,428,788
9,417,687
2.54
8/4/2023
2,411,396
2,406,156
33,333
673,267
672,497
TradePending Holdings, LLC Series A Units
908,333
947,699
1,812,352
TradePending Holdings, LLC Series A-1 Units
132,783
260,254
365,808
13,737,626
14,724,944
TriplePoint Acquisition Holdings LLC
Columbus, OH
5/31/2024
5/31/2029
5,276,143
5,197,842
1.42
4/8/2025
1,760,506
1,730,596
TriplePoint Holdco LLC Class A Units
557,968
508,733
1,876,311
0.51
7,437,171
8,912,960
Unicat Catalyst Holdings, LLC
Alvin, TX
Unicat Catalyst, LLC Class A Units
4/27/2021
7,500
639,521
0.17
Unicat Catalyst, LLC Class A-1 Units
12/13/2023
974
58,446
59,014
808,446
698,535
U.S. Expediters, LLC
Stafford, TX
10.12
12/22/2021
12/22/2026
14,311,049
14,244,794
13,523,942
3.64
Cathay Hypnos LLC Units
1,737,087
1,353,155
200,084
15,597,949
13,724,026
USDTL AcquisitionCo, Inc.
Des Plaines, IL
12/9/2024
12/9/2030
5,940,000
5,837,398
5,880,600
8.70
19,800
USDTL Holdings, LLC Preferred Units
110,000
156,484
5,967,398
6,056,884
1.63
Valor Buyco, LLC
Leesburg, VA
8.44
12/23/2025
12/23/2031
6,000,000
Valor Holdco LLC Voting Common Units
4,306
430,556
6,370,556
1.72
Venbrook Buyer, LLC
(4)(25)
13.50
3/13/2020
5/27/2026
15,567,454
15,554,413
10,352,358
(25)
177,127
176,979
117,789
942,301
626,630
12/5/2025
471,156
313,319
2,750,080
1,828,803
5,308,287
5,305,704
3,530,011
Venbrook Holdings, LLC Convertible Term Loan
(14)(25)
12/20/2028
117,483
Venbrook Holdings, LLC Common Units
822,758
819,262
26,137,378
16,768,910
4.51
WER Holdings, LLC
Sugar Hill, GA
4/11/2024
4/11/2030
2,663,602
2,622,140
2,650,284
5/30/2025
424,750
418,979
422,626
461,483
459,176
1,326,339
1,314,855
1,319,707
0.36
884,786
878,440
880,362
Blade Landscape Investments, LLC Class A Units
1,803
180,300
245,968
5,978,123
Whisps Holdings LP
Elgin, IL
4/18/2019
Class A-1 Units
3/6/2023
280,939
182,610
682,610
Total Non-control, non-affiliated investments
987,729,505
266.42
271.47
LIABILITIES IN EXCESS OF OTHER ASSETS
(636,444,439)
(171.47)
119
120
Unused
Unfunded
Commitment
Security
Fee
37,500
0.50%
June 5, 2028
1,299,020
May 7, 2028
875,995
December 12, 2028
55,198
0.00%
December 31, 2027
March 31, 2028
December 4, 2029
Amika OpCo LLC *
July 1, 2028
250,895
November 6, 2028
Axis Portable Air LLC
December 31, 2030
September 3, 2026
2,216,358
1.00%
December 20, 2030
1,130,707
March 15, 2029
91,000
September 1, 2026
September 19, 2030
16,897
February 7, 2027
52,500
August 2, 2028
November 22, 2027
60,000
June 30, 2028
60,855
December 31, 2028
September 22, 2030
1,000,000
August 22, 2031
2,500,000
0.75%
July 31, 2030
2,681,986
January 15, 2030
Delayed Draw Term Loan**
3,918,298
December 19, 2029
1,363,636
December 7, 2028
January 24, 2028
March 16, 2027
628,259
April 1, 2029
579,226
3,172,733
October 17, 2031
391,962
March 12, 2029
2,847,136
April 30, 2031
633,424
December 17, 2026
February 28, 2030
July 30, 2027
February 15, 2027
23,000
December 17, 2030
3,561,003
June 3, 2030
121
106,383
September 2, 2027
52,632
December 30, 2027
November 15, 2029
1,296,076
December 21, 2028
April 3, 2028
1,292,891
June 7, 2030
150,606
May 19, 2028
173,452
June 6, 2030
108,408
August 3, 2029
October 12, 2027
450,000
October 31, 2029
January 10, 2030
1,317,703
June 30, 2027
3,753,955
January 16, 2031
576,923
November 3, 2026
December 3, 2031
February 7, 2028
26,085
August 2, 2027
1,168,831
June 13, 2029
July 7, 2026
March 21, 2030
138,000
2,524,737
January 27, 2031
412,063
November 30, 2028
August 6, 2028
July 31, 2031
December 30, 2030
86,957
December 31, 2026
66,667
March 2, 2026
743,957
May 31, 2029
30,000
December 22, 2026
December 9, 2030
Valor Buyco LLC
December 23, 2031
1,408,896
April 11, 2030
WER Holdings, LLC***
362,594
Total Unfunded Debt Commitments
52,991,159
122
* Included in this investment is Line of Credit in the amount of $4,861, with Line of Credit rate of 5.25% and a maturity of July 1, 2028.
** This a last-out delayed draw term loan with contractual rates higher than the applicable rates.
*** Included in this investment is Line of Credit in the amount of $81,144, with Line of Credit rate of 5.50% and a maturity of April 11, 2030.
Gross Additions
Gross Reductions
Amount of Realized
Amount of Unrealized
Interest Income
Value
(a)
(b)
Loss
Appreciation (Depreciation)
(c)
254,101
(1,617,134)
1,363,033
87,877
(496,095)
408,218
31,142
(167,887)
136,745
(346,274)
5,710,182
24,368
(1,318,947)
2,855,414
543,888
3,399,302
236,250
462,113
2,475,863
Class A Preferred
1,132,576
Total control investments
10,744,100
3,227,622
(2,281,116)
(a) Gross additions include increases in the cost basis of investments resulting from new investments, follow-on investments, payment-in-kind interest or dividends, the amortization of any unearned income or discounts on debt investments, as applicable.
(b) Gross reductions include decreases in the cost basis of investments resulting from principal repayments, sales and return of capital.
(c) Represents the total amount of interest, fees or dividends credited to income for the portion of the year an investment was included in the control category.
5,320,286
(1,579,771)
(5,605,667)
4,515,792
226,424
20,865
7,000
(46,000)
18,135
Trade Education Holdings, L.L.C. Class A Units
(662,660)
662,660
(774,050)
(281,936)
Total non-controlled, affiliated investments
2,163,020
(a) Gross additions include increases in the cost basis of investments resulting from new investments, follow-on investments, PIK interest or dividends, the amortization of any unearned income or discounts on debt investments, as applicable.
(c) Represents the total amount of interest, fees or dividends credited to income for the portion of the year an investment was included in the non-controlled, affiliated investments category.
124
Abbreviation LegendBSBY — Bloomberg Short-Term Bank Yield Index
PIK — Payment-In-Kind
SOFR — Secured Overnight Financing Rate
SONIA — Sterling Overnight Index Average
125
CONOLIDATED SCHEDULE OF INVESTMENTS
1,882,226
650,943
230,678
0.41
(16)(22)
9.33
5,431,456
5,329,224
5,404,299
1,430,283
1,401,610
1,423,132
3,851,702
3,795,049
3,832,443
1.04
12,500
12,438
58,949
589,496
779,253
11,127,879
11,451,565
10.59
5/7/2026
15,042,647
14,971,098
4.07
854,217
7,794
77,941
68,620
7,015
701,471
617,581
16,604,727
16,583,065
4.49
10.38
9,900,000
9,734,838
9,850,500
AdCellerant Holdings, LLC Serires A Units
633,353
10,463,548
10,483,853
2.83
(5)(25)
12,851,659
12,764,381
10,474,102
Revolver (SBIC II)
(5)(9)(25)
9,260
7,547
13,706,597
10,481,649
16,718,372
12,464,374
604,622
447,420
3.51
10,673,296
10,476,264
10,513,197
2.84
10.58
8,130,853
7,985,352
99,250
98,216
135,778
193,132
8,219,346
8,423,235
126
9.08
8,819,468
8,688,867
8,831,327
9.65
93,260
9,608,834
9,444,289
228,190
65,196
9,596,823
9,996,858
2.71
5/9/2028
9,096,354
9,044,354
4/15/2022
2,838,697
2,818,874
416,800
3,794,487
492,905
12,772,933
16,715,364
25,745
2,779,048
8,197,783
10,976,831
2.97
3,461,538
3,288,461
(9)(17)
700,195
665,185
2,750,612
0.74
7,772,580
6,704,258
1.81
10.23
3/22/2028
9,405,000
9,293,207
1,874,674
1,847,626
99,000
98,368
1,596,690
11,682,837
12,975,364
Evansville, IN
8,920,366
8,770,557
8,875,764
104,668
104,145
418,671
393,458
1,443,497
7.24
11.57
8/28/2026
15,372,619
15,372,618
4.16
1,801,833
16,288,633
17,174,452
4.65
127
9,916,875
9,839,972
2.68
2,250,000
2,217,644
770,951
12,307,616
12,937,826
6,796,831
6,677,886
Carolinas Holdings, L.P. Class A Units
465,633
7,143,523
7,143,519
1.94
8,439,915
8,394,322
10.35
3,200,000
3,171,714
0.87
272,853
11,698,955
11,912,768
9.36
4,439,292
71,365
333,925
386,619
197,987
10.69
13,360,125
13,256,520
13,293,324
10.52
2,885,002
2,873,374
2,870,577
181,659
16,350,824
16,345,560
4.42
11.93
13,117,995
13,054,902
12,986,815
1,672,682
1,662,516
1,655,955
11.44
81,667
3.98
12/21/2025
6,584,450
6,553,762
6,551,528
137,569
29,376
7,186,910
6,718,474
1.82
10.83
9,475,162
9,289,539
9,190,907
1,037,841
1,024,868
1,006,706
86,000
83,420
222,957
10,700,448
10,503,990
4,887,500
4,823,845
4,863,063
1.31
28,333
28,191
184,176
5,137,892
5,075,430
128
9,982,878
9,830,912
2.70
991,476
10,457,602
10,974,354
10.73
7/29/2027
12,766,151
12,619,342
12,702,320
3.43
86,211
85,780
739,999
795,702
13,445,552
13,583,802
3.67
DRS Holdings III, Inc.
St. Louis, MO
10.71
11/1/2019
11/1/2025
8,586,464
8,571,140
EHI Buyer, Inc.
Grand Prarie, TX
EHI Group Holdings, L.P. Class A Units
7/31/2023
618
430,653
1,073,808
6/30/2025
8,712,311
8,709,082
8,276,695
65,807
49,355
1,439,463
1,367,490
677,843
643,951
1,048,896
901,489
11,793,684
10,337,491
EOS Fitness Holdings, LLC
Class A Preferred Units
12/30/2014
Class B Common Units
3,017
889,366
11.28
7,020,201
6,881,178
10.97
133,333
11.35
99,150
7,252,684
Last Out Term Loan
9.96
7,558,348
7,426,077
Last Out Delayed Draw Term Loan
9.94
2,798,784
2,777,793
2,749,805
893,991
893,738
11,097,861
11,069,620
2.99
11.09
9,733,850
430,948
10,207,335
10,281,448
11.23
12,426,869
12,213,973
3.36
1,376,994
13,087,306
13,803,863
3.73
129
16,313,133
16,313,132
15,334,344
5..75
991,945
932,428
100,211
80,169
227,350
18,529,702
16,574,291
8,721,980
8,657,351
8,678,370
2.36
353,743
9,034,886
9,032,113
7,558,150
7,406,992
7,444,778
656,817
646,965
1,688,532
1,669,955
1,663,204
2,856
285,572
371,158
10,019,336
10,126,105
2.73
9.61
4,279,247
4,204,427
4,193,662
218,894
4,394,809
4,412,556
Florachem Corporation
4/29/2022
4/29/2028
9,750,000
9,630,079
53,213
SK FC Holdings, L.P. Class A Units
362
362,434
613,507
10,112,393
10,483,387
13.43
4,484,133
Green Intermediateco II, Inc.
11,030,624
10,814,754
10,920,318
2.95
10.36
1,296,750
1,271,726
1,283,783
404,046
399,952
400,006
219,664
362,217
12,706,096
12,966,324
11.24
2/28/2026
12,260,275
12,251,602
3.31
11.16
2,174,242
0.59
4,852,169
14,989,053
19,286,686
5.21
9,954,000
9,648,493
515,578
774,031
10,164,071
Heartland Business Systems, LLC
Little Chute, WI
8/26/2022
8/26/2027
9,775,000
9,658,966
49,125
48,799
AMCO HBS Holdings, LP Class A Units
2,861
219,823
616,165
9,927,588
10,440,290
2.82
130
(7)(11)
10.16
5,317,225
5,239,463
5,537,228
4.00
13,372,834
13,256,191
13,105,377
97,994
96,034
324,861
323,234
318,364
394,674
15,309,010
13,914,449
3.77
3,618,142
5,847,846
5,740,907
5,643,171
532,972
522,558
514,318
265,811
260,822
256,508
(11)(27)
79,613
23,001
7,019,905
6,516,611
9.83
7,107,521
2,411,660
0.66
1,462,725
1,453,825
0.40
452,781
208,809
682,924
7/30/2026
8,394,781
8,335,177
6,328,624
6,277,694
1,456,662
15,417,255
16,180,067
4.37
10.56
13,094,801
12,114,950
10.22
10.60
81,458
81,032
1,001,613
14,039,589
13,278,021
7,522,184
7,409,351
28,000
27,580
7,437,351
7,436,931
12.01
5,342,606
5,328,007
5,182,328
4,931,637
4,918,069
4,783,688
1,096,691
1,092,703
1,063,790
1,063,830
1,031,915
367,676
13,702,300
12,429,397
131
San Francisco,CA
5/3/2026
13,597,208
13,597,207
(4)(9)(19)
1,125,000
J.R. Watkins Holdings, Inc. Class A Preferred Stock
1,133
15,854,783
3,091,664
7,439,791
7,376,964
7,030,602
58,443
55,229
7,844,911
7,085,831
1.91
11.03
6/6/2027
12,899,115
12,758,237
12,834,619
125,618
13,149,511
12,960,237
Deerfield, OH
8,252,261
8,147,122
8,211,000
1,194,249
1,186,357
1,188,278
9,333,479
9,399,278
10.48
88,553
87,756
100,282
187,756
188,835
11.34
3,579,241
3,507,484
3,471,864
11.84
894,810
876,871
867,966
394,767
214,870
4,779,122
4,554,700
9,476,743
9,291,975
9,938,919
4,306,952
4,234,800
4,242,348
1.15
2,524,493
2,482,201
2,486,626
2,061,314
2,026,873
2,030,394
0.55
489,038
484,148
481,702
9,228,022
9,241,070
10.08
4,950,000
4,866,492
4,925,250
3,876,499
3,840,682
3,857,117
589,463
2.53
10.21
7,575,773
7,530,069
4,254,419
4,233,579
10.81
5/19/2026
15,890,333
15,787,537
15,810,880
37,313
746,138
16,758,370
16,594,331
4.48
132
6,730,812
6,605,639
6,663,504
1.80
9.34
35,775
382,715
378,952
378,888
434,111
7,445,465
7,512,278
2.03
106,248
105,711
105,186
114,623
107,237
106,165
11/15/2023
6,030
6,473
6,216
3/1/2024
12,241
13,291
12,620
11,629
13,002
11,989
12,326
Fremont, CA
4,395,044
4,313,186
4,373,069
1,705,604
1,688,941
1,697,076
308,668
6,382,457
6,378,813
11.08
8/30/2025
8,125,763
8,116,850
8,044,505
5,124,136
5,118,576
5,072,895
1,763,033
1,745,403
937,078
15,581,417
15,799,881
4.26
4,900,478
99,204
314,702
56,585
5,360,738
5,467,120
1.49
9.84
13,000,000
12,746,682
8.75
13.18
5/6/2026
7,589,599
7,538,850
2.04
598,221
8,384,601
8,137,071
133
NuSource Financial Acquisition, Inc.
Eden Prairie, MN
13.75
1/29/2021
1/31/2027
6,484,567
1.74
NuSource Holdings, Inc. Warrants (SBIC II)
54,966
11.33
12,351,615
12,190,355
3.34
986,938
12,797,097
13,338,553
3.61
1.38
1/1/2026
13,882,311
13,882,310
13,812,899
1,820,631
1,811,528
571,195
568,339
960,000
955,200
384,522
Garland, TX
8,680,556
8,577,517
8,593,750
492,499
693,537
9.59
12,196,092
2,118,619
Last Out Term Loan (SBIC II)
8,681,968
818,825
9,392,568
9,634,152
5,895,000
5,815,274
1.59
26,114
127,378
6,084,856
6,126,882
1.65
Rogers Mechanical Contractors, LLC
10.91
4/28/2021
9/28/2028
8,668,481
8,619,680
8,581,796
7,443,117
7,307,325
7,331,470
290,102
7,657,974
7,621,572
10.53
12,148,958
12,144,103
627,734
12,809,833
12,776,692
134
Service Minds Company, LLC
(11)(26)
5,431,921
5,373,590
3,340,631
0.90
(11)(18)(26)
83,533
51,373
99,116
98,498
60,956
5,640,844
3,538,183
513,825
804,951
11.21
4,283,396
4,225,574
4,261,979
721,110
717,504
127,187
5,036,823
5,106,670
10.93
10,370,624
10,168,144
802,021
786,798
434,504
337,963
11,760,000
12,324,635
3.33
92,610
91,943
89,369
Trade Education Acquisition, L.L.C.
(4)(28)
12/28/2027
9,944,460
9,836,078
(9)(28)
9.25
39,000
9,527,778
9,473,791
2,436,128
2,411,250
680,137
676,477
1,973,113
520,010
13,802,804
15,170,499
4.10
5,329,708
5,232,677
5,303,059
549,818
953,034
5,782,495
6,256,093
(21)
10.96
4/27/2026
6,843,750
6,801,773
1.85
819,105
701
38,683
53,090
7,590,456
7,715,945
2.08
135
10.78
14,460,123
14,331,044
14,315,522
975,688
15,684,199
15,291,210
4.13
5,881,196
19,604
109,998
6,011,196
6,010,798
5.48
14,603,639
14,541,079
13,873,457
3.75
166,160
165,448
157,852
2,579,814
2,450,823
4,979,640
4,967,241
4,730,658
1.28
108,991
23,181,835
21,212,790
5.73
2,690,643
2,641,658
2,650,283
0.72
133,870
131,862
824,382
816,172
812,016
192,289
3,772,000
3,786,450
Xanitos, Inc.
6/25/2021
6/25/2026
12,352,000
12,267,321
140,000
2,176,309
2,168,201
Pure TopCo, LLC Class A Units
442,133
1,053,478
1,245,129
0.34
15,629,000
15,913,438
943,853,898
255.69
257.76
(583,575,748)
(157.76)
136
137
87,500
444,803
May 7, 2026
60,149
1,526,600
June 22, 2029
May 9, 2028
1,325,032
March 22, 2028
942,010
August 16, 2030
1,733,387
18,333
December 21, 2025
14,000
71,667
35,499
July 29, 2027
909,091
November 1, 2025
May 22, 2028
Eskola, LLC**
976,811
485,473
627,139
April 29, 2028
477,273
February 28, 2026
1,055,707
2,006
1,571,984
April 28, 2028
138
July 30, 2026
337,433
May 3, 2026
24,915
November 9, 2027
June 6, 2027
1,956,150
May 19, 2026
701,036
686,582
1,145,662
746,948
January 1, 2026
73,886
83,333
September 28, 2028
1,109,551
July 26, 2026
41,000
December 28,2027
1,339,123
514,059
267,739
June 25, 2026
40,989,533
139
*** Included in this investment is Line of Credit in the amount of $41,071, with Line of Credit rate of 5.50% and a maturity of April 11, 2030.
140
Amount of Interest
Gross Additions
Gross Reductions
Credited to Income
Gain (loss)
(1,628,125)
Term Loan A-1 (SBIC)
3,042,204
(5,255,564)
2,213,360
325,059
80,664
(317,846)
Term Loan A-2 (SBIC)
650,118
(1,140,558)
490,440
111,979
34,223
(115,060)
Term Loan A-3 (SBIC)
223,959
(392,910)
168,951
496,828
1,003,691
5,018
Term Loan A-4 (SBIC)
993,654
(1,003,691)
10,037
332,190
68,434
(337,027)
(3)
Total Control Investments
6,175,994
8,779,420
(8,129,750)
(c) Represents the total amount of interest, fees or dividends credited to income for the portion of the year an investment was included in the Control category.
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 (“ASC Topic 946”). 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 has elected to be treated, qualifies, and intends to qualify annually to be 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 its investment adviser, Stellus Capital Management, LLC (“Stellus Capital” or the “Advisor”).
As of December 31, 2025, the Company had issued a total of 28,947,254 shares and raised $419,105,333 in gross proceeds since Inception, incurring an aggregate of $13,093,525 in offering expenses and underwriting fees. Additionally, the Company has received $672,917 in offering expenses reimbursements from the Advisor for net proceeds from offerings of $406,684,725. The Company’s shares are currently listed on the New York Stock Exchange under the symbol “SCM”. See Note 4 to the consolidated financial statements contained herein for further details.
The Company has established the following wholly owned subsidiaries: SCIC — Consolidated Blocker, Inc., SCIC — Invincible Blocker 1, Inc., SCIC — SKP Blocker 1, Inc., SCIC — APE Blocker 1, Inc., SCIC — Venbrook Blocker, Inc., SCIC — CC Blocker 1, Inc., SCIC — ERC Blocker 1, Inc., and SCIC — Hollander Blocker 1, Inc., which are structured as Delaware entities to hold equity or equity-like investments in portfolio companies organized as limited liability companies, or LLCs (or other forms of pass-through entities) (collectively, the “Taxable Subsidiaries”). The Taxable Subsidiaries are consolidated for U.S. generally accepted accounting principles (“U.S. GAAP”) reporting purposes, and the portfolio investments held by them are included in the consolidated financial statements.
On June 14, 2013, the Company formed Stellus Capital SBIC, LP (the “SBIC I 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 I 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 Act of 1958, as amended (the “SBIC Act”). The SBIC I subsidiary and its general partner are consolidated for U.S. GAAP reporting purposes, and the portfolio investments held by it are included in the consolidated financial statements.
On November 29, 2018, the Company formed Stellus Capital SBIC II, LP (the “SBIC II subsidiary”) a Delaware limited partnership. On August 14, 2019, the SBIC II subsidiary received a license from the SBA to operate as an SBIC under Section 301(c) of the SBIC Act. The SBIC II subsidiary and its general partner are consolidated for U.S. GAAP reporting purposes, and the portfolio investments held by it are included in the consolidated financial statements.
The SBIC licenses allow the SBIC I subsidiary and the SBIC II subsidiary (together, the “SBIC subsidiaries”), to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and a ten-year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity, but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with 10 year maturities. The SBA, as a creditor, will have a superior claim to the SBIC subsidiaries’ assets over the Company’s stockholders in the event the Company liquidates one or both of the SBIC subsidiaries or the SBA exercises its remedies under the SBA-guaranteed debentures issued by the SBIC subsidiaries upon an event of default. For the SBIC I subsidiary, SBA regulations limit the amount that the SBIC I subsidiary may borrow to a maximum of $150,000,000 when it has at least $75,000,000 in regulatory capital, as such term is defined by the SBA. For the SBIC II subsidiary, SBA regulations limit the amounts that the SBIC II subsidiary may borrow to $175,000,000 when it has at least $87,500,000 in regulatory capital, as such
term is defined by the SBA. For two or more SBICs under common control, the maximum amount of outstanding SBA-guaranteed debentures cannot exceed $350,000,000.
As of December 31, 2025, the SBIC I subsidiary had $75,000,000 in regulatory capital and $124,000,000 of SBA-guaranteed debentures outstanding. As of December 31, 2024, the SBIC I subsidiary had $75,000,000 in regulatory capital and $150,000,000 of SBA-guaranteed debentures outstanding.
As of both December 31, 2025 and 2024, the SBIC II subsidiary had $87,500,000 in regulatory capital and $175,000,000 of SBA-guaranteed debentures outstanding.
See footnotes (4) and (5) of the Consolidated Schedule of Investments for additional information regarding the treatment of investments in the SBIC subsidiaries with respect to the Credit Facility (as defined in Note 9).
Under the provisions of the 1940 Act, the Company is permitted, as a BDC that has satisfied certain requirements, to issue senior securities in amounts such that its asset coverage ratio, as defined in the 1940 Act, equals at least 150% of its gross assets, less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. As of December 31, 2025, the Company’s asset coverage ratio was 203%.
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 lower middle-market companies. The Company seeks to achieve its investment objective by originating and investing primarily in private U.S. lower 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 unsecured debt financings, often with corresponding equity co-investments. The Company sources investments primarily through the extensive network of relationships that the principals of Stellus Capital have developed with financial sponsor firms, financial institutions, lower middle-market companies, management teams and other professional intermediaries.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. GAAP and pursuant to the requirements for reporting on Form 10-K and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, certain disclosures accompanying the annual financial statements prepared in accordance with U.S. GAAP are omitted. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.
In the opinion of management, the consolidated financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the periods included herein. Certain reclassifications have been made to certain prior period balances to conform with current presentation.
In accordance with Regulation S-X under the Exchange Act, the Company does not consolidate portfolio company investments. The accounting records of the Company are maintained in U.S. dollars.
143
Economic activity has continued to accelerate across sectors and regions. Nonetheless, the Company has observed and continues to observe macroeconomic uncertainty as a result of various events and trends, including labor resource shortages, commodity inflation, fluctuating interest rates, economic sanctions in response to international conflicts and instances of geopolitical, economic and financial market instability in the United States and abroad, including as a result of the imposition of tariffs in the United States or its trading partners and the prolonged shutdown of the government in October and November 2025. One or more of these factors may contribute to increased market volatility and may have long- and short-term effects in the United States and worldwide financial markets.
Portfolio Investment Classification
The Company classifies its portfolio investments in accordance with the requirements of the 1940 Act as follows: (a) “Control Investments” are defined as investments in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation, (b) “Affiliate Investments” are defined as investments in which the Company owns between 5% and 25% of the voting securities and does not have rights to maintain greater than 50% of the board representation, and (c) “Non-controlled, non-affiliate investments” are defined as investments that are neither Control Investments nor Affiliate Investments.
Cash and Cash Equivalents
Cash consists of bank demand deposits. The Company deems certain money market mutual funds, U.S. Treasury Bills, and other high-quality, short-term debt securities as cash equivalents.
At December 31, 2025, cash balances totaling $19,352 did not exceed Federal Deposit Insurance Corporation ("FDIC") insurance protection levels of $250,000. In addition, as of December 31, 2025, the Company held $25,030,804 in cash equivalents in money market mutual funds, which are carried at net asset value, which is considered a Level 1 valuation technique. At December 31, 2025, the Company held foreign currency of $353 (acquisition cost of $353). 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.
Fair Value Measurements
The Company accounts for all of its 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. The Company believes that the carrying amounts of its financial instruments related to receivables and payables approximate the fair value of these items due to the short maturity of these instruments, which are considered Level 2 in the fair value hierarchy.
The Credit Facility, SBA-guaranteed debentures, and Notes Payable (as defined in Note 11) are carried at amortized cost in the Consolidated Statements of Assets and Liabilities. As of December 31, 2025, the estimated fair value of the Credit Facility approximates the carrying value because the interest rates adjust to the current market interest rate (Level 3 classification). Valuation techniques and significant inputs used to determine fair value include company details; credit, market and liquidity risk and events; financial health of the company; place in the capital structure; interest rate; and terms and conditions of the Credit Facility. The estimated fair value of the SBA-guaranteed debentures was determined by discounting projected remaining payments using market interest rates for borrowings of the Company and entities with similar credit risks at the measurement date. Notes Payable for which readily available market quotations do not exist are valued using prices provided by independent pricing services, which may incorporate matrix pricing and/or independent broker quotations. At the measurement date, the estimated fair values of the SBA-guaranteed debentures and Notes Payable as prepared for disclosure purposes was $290,359,247 (Level 3 classification) and $126,000,000
144
(Level 2 classification), respectively. See Note 6 to the Consolidated Financial Statements contained herein for further discussion regarding the fair value measurements and hierarchy.
Consolidation
As permitted under Regulation S-X under the Exchange Act and ASC Topic 946, the Company generally does not consolidate its investments in a portfolio company other than an investment company subsidiary. Accordingly, the Company consolidated the results of the SBIC subsidiaries and the Taxable Subsidiaries. All intercompany balances have been eliminated upon consolidation.
Use of Estimates
The preparation of the Consolidated Statements of Assets and Liabilities in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially. Additionally, as explained in Note 1 contained herein, the Consolidated Financial Statements includes investments in the portfolio whose values have been determined in good faith by the Board, pursuant to procedures approved by the Board, in the absence of readily available market quotations. Because of the inherent uncertainty of the investment portfolio valuations, those estimated values may differ materially from the values that would have been determined had a ready market for the securities existed.
Deferred Financing Costs
Deferred financing costs, prepaid loan fees on SBA-guaranteed debentures and prepaid loan structure fees consist of fees and expenses paid in connection with the closing of the Company’s Credit Facility, Notes Payable, and SBA-guaranteed debentures and are capitalized at the time of payment. These costs are amortized using the straight-line method over the term of the respective instrument and are presented as an offset to the corresponding debt on the Consolidated Statements of Assets and Liabilities.
Offering Costs
Deferred offering costs consist of fees and expenses incurred in connection with the offer and sale of the Company’s common stock, including legal, accounting, printing fees and other related expenses, as well as costs incurred in connection with the filing of a shelf registration statement and related prospectuses. These costs are capitalized when incurred and recognized as a reduction of offering proceeds when the offering is consummated, and are shown on the Consolidated Statements of Changes in Net Assets and Liabilities as a reduction to paid-in capital. During the year ended December 31, 2025, the Company incurred $606,848 of costs related to the preparation of its shelf registration statement and related prospectuses, which were capitalized and treated as discussed above as part of the Company’s ATM Program (as defined in Note 4) throughout various ATM Program offerings in 2025. As of December 31, 2025, no costs related to the preparation of a registration statement were capitalized and need to be treated as discussed above in the event an offering is consummated.
Rule 2a-5 under the 1940 Act (“Rule 2a-5”) establishes requirements for determining the fair value of a BDC’s investments in good faith for purposes of the 1940 Act. Rule 2a-5 permits boards of directors of BDCs to designate certain parties to perform fair value determinations, subject to oversight of the board of directors and compliance with certain conditions. Rule 2a-5 also defines when market quotations are “readily available” for purposes of the 1940 Act and the threshold for determining whether a board of directors must determine the fair value of a security. Rule 31a-4 under the 1940 Act (“Rule 31a-4”), establishes additional recordkeeping requirements related to fair value determinations. While the board of directors of the Company (the “Board”) has not elected to designate the Advisor as the valuation designee, the Company has adopted certain revisions to its valuation policies and procedures in order to comply with the applicable requirements of Rule 2a-5 and Rule 31a-4.
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As a BDC, the Company will generally invest in illiquid loans and securities, including debt and equity securities of private lower middle-market companies. Section 2(a)(41) of the 1940 Act requires that a BDC value its assets as follows: (i) the third party price for securities for which a market quotation is readily available; and (ii) for all other securities and assets, fair value, as determined in good faith under procedures adopted by a BDC's board or valuation designee, as applicable. Under procedures established by the Board, the Company values investments for which market quotations are readily available at such market quotations. The Company obtains these market quotations from an independent pricing service or at the midpoint of 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 quotations are not readily available will be valued at fair value as determined in good faith by the Board. Such determination of fair value 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.
Debt and equity investments purchased within approximately 90 days of the valuation date will be valued at cost plus accreted discount, or minus amortized premium, which approximates fair value. With respect to unquoted securities, the Board 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 in determining the valuation. Because the Company expects that there will not be a readily available market quotation for many of the investments in its portfolio, the Company expects to value most of its portfolio investments at fair value as determined in good faith by the Board using a documented valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market quotation, the fair value of the Company’s 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 include, as relevant, but are not limited to:
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Revenue Recognition
The Company records interest income on an accrual basis to the extent such interest is deemed collectible. Payment-in-kind (“PIK”) interest represents contractual interest accrued and added to the loan balance that generally becomes due at maturity. The Company will not accrue any form of interest on loans and debt securities if it has reason to doubt its ability to collect such interest. Loan origination fees, original issue discount and market discounts or premiums are capitalized, and the Company then accretes or amortizes 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. The Company records prepayment premiums on loans and debt securities as other income. Dividend income, if any, will be recognized on the ex-dividend date.
A presentation of the interest income the Company has earned from portfolio companies for the years ended December 31, 2025, 2024, and 2023 is as follows:
Loan interest
88,285,712
92,316,007
93,976,863
PIK income
5,756,272
Fee amortization income(1)
3,186,846
3,074,492
2,954,512
Fee income acceleration(2)
535,848
1,185,210
1,283,776
Total Interest Income
97,764,678
99,885,820
102,016,788
To maintain the Company’s treatment as a RIC, substantially all of this income must be paid to stockholders in the form of distributions, even if the Company has not collected any cash.
Management considers portfolio company-specific circumstances as well as other economic factors in determining collectability of income. As of December 31, 2025, the Company had five loans on non-accrual status, which represented approximately 7.5% of the Company’s total investments at cost and 4.1% at fair value. As of December 31, 2024, the Company had seven loans on non-accrual status, which represented approximately 8.3% of the Company’s loan portfolio at cost and 5.4% at fair value. As of December 31, 2025 and 2024, $11,182,515 and $6,509,852 of income from investments on non-accrual has not been accrued, respectively. If a loan or debt security’s status significantly improves regarding the debtor’s ability to service the debt or other obligations, or if a loan or debt security is sold or written off, the Company will remove it from non-accrual status.
Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation
Realized gains or losses are measured by the difference between the net proceeds from the repayment, sale or disposition and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.
Foreign currency amounts are translated into U.S. dollars (USD) on the following basis:
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Investment Transaction Costs
Costs that are material and 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 Transactions
The Company records all investments on a trade date basis.
U.S. Federal Income Taxes
The Company has elected and intends to qualify annually to be treated as a RIC under subchapter M of the Code. To qualify as a RIC, among other things, the Company generally is required to timely distribute to its stockholders at least 90% of its 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 be subject to U.S. federal income tax 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.
The Company generally is subject to a nondeductible 4% U.S. federal excise tax if it does not distribute to its stockholders in a timely manner in each taxable year, an amount at least equal to the sum of (i) 98% of its ordinary income for such calendar year, (ii) 98.2% the amount by which the Company’s capital gain exceeds its capital loss (adjusted for certain ordinary losses) for the one-year period ending October 31 in that calendar year, and (iii) certain undistributed amounts from previous years on which the Company paid no U.S. federal income tax. The Company, at its discretion, may choose not to distribute all its taxable income for the calendar year and pay a non-deductible 4% excise tax on this income. If the Company chooses to do so, all other things being equal, this would increase expenses and reduce the amount of cash 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. As of December 31, 2025, the Company had approximately $37,016,258 of undistributed taxable income that was carried forward toward distributions to be paid in 2026.
Current income tax expense for the years ended December 31, 2025, 2024, and 2023 of $1,580,338, $1,808,838, and $1,333,452, respectively, is related to federal and state income taxes and federal excise taxes.
The Company evaluates tax positions taken or expected to be taken while preparing its tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the applicable period.
As of December 31, 2025, 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 ongoing 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 years ended December 31, 2025, 2024, and 2023 were de minimis.
The Taxable Subsidiaries are direct wholly owned subsidiaries of the Company that have elected to be treated as corporations for U.S. federal income tax purposes, and as a result, the income of the Taxable Subsidiaries is subject to U.S. federal income tax at corporate rates. The Taxable Subsidiaries permit the Company to hold equity investments in portfolio companies that are “pass through” entities for tax purposes and continue to comply with the “source-of-income” requirements contained in RIC tax provisions of the Code. The Taxable Subsidiaries are not consolidated with the Company for 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
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related tax assets and liabilities of the Taxable Subsidiaries are reflected in the Company’s Consolidated Financial Statements.
The Taxable Subsidiaries use the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory tax rates in effect for the year in which the temporary differences are expected to reverse. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. Taxable income generally excludes net unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized.
For the years ended December 31, 2025, 2024, and 2023, the Company recorded deferred income tax benefit (provision) of $0, $188,893, and ($126,957), respectively, related to the Taxable Subsidiaries. For the years ended December 31, 2025, 2024, and 2023, the Company recorded income tax benefit on net realized loss on investments of $0, $2,221, and $2,987,847, respectively, related to the Taxable Subsidiaries. As of December 31, 2025 and 2024, the Company had a net deferred tax liability of $0 and $0, respectively.
Earnings per Share
Basic per share calculations are computed utilizing the weighted average number of shares of the Company’s common stock outstanding for the period. The Company has no common stock equivalents. 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 shares of its common stock on a net basis to (i) capital stock and (ii) paid-in capital in excess of par value, excluding all commissions and marketing support fees.
Distributable Loss
The components that make up distributable loss on the Consolidated Statements of Assets and Liabilities as of December 31, 2025 and 2024 were as follows:
Accumulated net realized loss from investments, net of cumulative dividends of $30,352,761 for both periods
(39,963,218)
(41,267,707)
(282,145)
(213,301)
Net unrealized depreciation on investments and cash equivalents, net of deferred tax liability of $0 for both periods
(18,419,231)
(7,312,300)
Net unrealized appreciation (depreciation) on foreign currency translations
17,854
(15,219)
Accumulated undistributed net investment income
31,966,956
39,153,714
Recently Issued Accounting Standards
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2023-09 (“ASU 2023-09”), Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 enhances income tax disclosures, including disclosure of income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company’s adoption of ASU 2023-09 did not have a material impact on the consolidated financial statements.
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In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (“ASU 2024-03”), which requires disaggregated disclosure of certain costs and expenses, including purchases of inventory, employee compensation, depreciation, amortization and depletion, within relevant income statement captions. ASU 2024-03 is effective for fiscal years beginning after December 15, 2026, and interim periods beginning with the first quarter ended March 31, 2028. Early adoption and retrospective application is permitted. The Company is still assessing the impact of the new guidance.
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. The Company believes the impact of the recently issued standards and any that are not yet effective will not have a material impact on its consolidated financial statements upon adoption.
NOTE 2 — RELATED PARTY ARRANGEMENTS
The Company has entered into an Investment Advisory Agreement (the “Investment Advisory Agreement”) with Stellus Capital, pursuant to which Stellus Capital serves as its investment adviser. Pursuant to this agreement, the Company has agreed to pay to Stellus Capital an annual base management fee of 1.75% of gross assets, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents, and an incentive fee.
For the years ended December 31, 2025, 2024, and 2023, the Company recorded an expense for base management fees of $17,178,177, $15,698,129, and $15,452,347, respectively. As of December 31, 2025 and December 31, 2024, $4,442,705 and $4,034,109, respectively, was payable to Stellus Capital.
The incentive fee has two components, the investment income incentive fee and the capital gains incentive fee, as follows:
Investment Income Incentive Fee
The investment income component of the incentive fee (“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 Income Incentive Fee is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre-incentive fee net investment income is payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then-current and 11 preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding quarters. In other words, any Income Incentive Fee that is payable in a calendar quarter is limited to the lesser of (i) 20% of the amount by which the Company’s pre-incentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, subject to the
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Catch-up, and (ii) (x) 20% of the cumulative net increase in net assets resulting from operations for the then-current and 11 preceding quarters minus (y) the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the amount, if positive, of the sum of pre-incentive fee net investment income, realized gains and losses and unrealized appreciation and depreciation of the Company for the then-current and 11 preceding calendar quarters. In addition, the Advisor is not paid the portion of such incentive fee that is attributable to deferred interest until the Company actually receives such interest in cash.
For the years ended December 31, 2025, 2024, and 2023, the Company incurred $8,393,139, $10,045,966, $10,189,888, respectively, of Income Incentive Fees. As of December 31, 2025 and 2024, $2,317,429 and $3,109,560, respectively, of such incentive fees were payable to the Advisor, of which $1,539,724 and $2,351,703, respectively, were currently payable (as explained below). As of December 31, 2025 and 2024, $777,705 and $757,857, respectively, of Income Incentive Fees incurred but not paid by the Company were generated from deferred interest (i.e. PIK, certain discount accretion and deferred interest) and are not payable until such amounts are received by the Company in cash. For the years ended December 31, 2025 and 2024, $3,310,981 and $1,826,893, respectively, of Income Incentive Fees accrued but not paid by the Company were permanently written off due to the Cumulative Pre-Incentive Fee Net Return limitation.
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 Advisory Agreement, as of the termination date). The Capital Gains Incentive Fee is equal to 20.0% of the Company’s cumulative aggregate realized capital gains from Inception through the end of that calendar year, computed net of the cumulative aggregate realized capital losses and cumulative aggregate unrealized capital depreciation through the end of such year. The aggregate amount of any previously paid Capital Gains Incentive Fees is subtracted from such Capital Gains Incentive Fee calculated.
U.S. GAAP requires that the Capital Gains Incentive Fee accrual considers the cumulative aggregate realized gains and losses and unrealized capital appreciation or depreciation of investments and other financial instruments in the calculation, as an incentive fee would be payable if such unrealized capital appreciation or depreciation were realized, even though such unrealized capital appreciation or depreciation is not permitted to be considered in calculating the Capital Gains Incentive Fee actually payable under the Investment Advisory Agreement. There can be no assurance that unrealized appreciation or depreciation will be realized in the future. Accordingly, such fees, as calculated and accrued, may not necessarily be payable under the Investment Advisory Agreement, and may never be paid based upon the computation of incentive fees in subsequent periods. For the years ended December 31, 2025, 2024, and 2023, the Company incurred (reversed) Capital Gains Incentive Fees of $0, $0, and ($569,528), respectively. As of both December 31, 2025 and December 31, 2024, $0 of Capital Gains Incentive Fees were accrued.
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The following tables summarize the components of the incentive fees discussed above:
Investment income incentive fees incurred
Capital gains incentive fees incurred (reversed)
Income incentive fees waived
Incentive fees expense
5,082,158
8,219,073
9,312,918
Investment income incentive fee currently payable
1,539,724
2,351,703
Investment income incentive fee deferred
777,705
757,857
Incentive fee payable
Director Fees
For the years ended December 31, 2025, 2024, and 2023, the Company recorded an expense relating to director fees of $409,000, $412,000, and $406,000, respectively. As of both December 31, 2025 and 2024, the Company owed its independent directors no unpaid director fees.
Co-Investments
On May 9, 2022, the Company received a new exemptive order (the “Order”) that superseded prior co-investment exemptive relief orders and permits the Company to co-invest with additional types of private funds, other BDCs, and registered investment companies managed by Stellus Capital or an adviser that is controlled, controlling, or under common control with Stellus Capital, subject to the conditions included therein. Pursuant to the Order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Company’s independent directors must make certain conclusions in connection with a co-investment transaction, including that (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; (2) the transaction is consistent with the interests of the Company’s stockholders and is consistent with its investment objectives and strategies; (3) the investment by the Company’s affiliates would not disadvantage the Company, and the Company’s participation would not be on a basis different from or less advantageous than that on which the Company’s affiliates are investing and (4) the proposed investment by the Company would not benefit the Advisor, the other affiliated funds that are participating in the investment, or any affiliated person of any of them (other than parties to the transaction), except to the extent permitted by the Order and applicable law, including the limitations set forth in Section 57(k) of the 1940 Act.
The Company co-invests, subject to the conditions in the Order, with a private BDC and private credit funds managed by Stellus Capital or an affiliate thereof that have investment strategies that are similar or identical to the Company’s investment strategy, and the Company may co-invest with other BDCs, registered investment companies and private credit funds managed by Stellus Capital or an adviser that is controlled, controlling, or under common control with Stellus Capital in the future. The Company believes that such co-investments may afford it additional investment opportunities and an ability to achieve greater diversification.
Administrative Agent
The Company serves as the administrative agent on certain investment transactions, including co-investments with its affiliates under the Order. As of December 31, 2025 and 2024, there was no cash due to related parties or other investment funds related to interest paid by a borrower to the Company as administrative agent.
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
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Company has a right to use the “Stellus Capital” name for so long as Stellus Capital or one of its affiliates remains its investment adviser. Other than with respect to this limited license, the Company has no legal right to the “Stellus Capital” name. This license agreement will remain in effect for so long as Stellus Capital or one of its affiliates remains the Company's investment adviser.
The Company has entered into an administration agreement (the “Administration Agreement”) with Stellus Capital, pursuant to which Stellus Capital furnishes the Company with office facilities and equipment and provides the Company with the clerical, bookkeeping, recordkeeping and other administrative services necessary to conduct day-to-day operations. Under this Administration Agreement, Stellus Capital performs, or oversees the performance of, its 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 years ended December 31, 2025, 2024, and 2023, the Company recorded expenses of $1,789,018, $1,589,680, and $1,561,394, respectively, related to the Administration Agreement, which are included in administrative services expenses on the Consolidated Statement of Operations. As of December 31, 2025 and December 31, 2024, $530,739 and $389,502, respectively, remained payable to Stellus Capital relating to the Administration Agreement, which were included in administrative services payable on the Consolidated Statements of Assets and Liabilities.
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 the Company’s investment adviser.
The Company has also entered into indemnification agreements with its directors. The indemnification agreements are intended to provide the Company’s directors the maximum indemnification permitted under Maryland law and the 1940 Act. Each indemnification agreement provides that the Company shall indemnify the director who is a party to the agreement (an “Indemnitee”), including the advancement of legal expenses, if, by reason of his or her corporate status, the Indemnitee is, or is threatened to be, made a party to or a witness in any threatened, pending, or completed proceeding, other than a proceeding by or in the right of the Company.
NOTE 3 — DISTRIBUTIONS
Distributions are generally declared by the Company’s Board each calendar quarter and recognized as distribution liabilities on the declaration date. Stockholder distributions, if any, will be determined by the Board. Any distribution to stockholders will be declared out of assets legally available for distribution. The Company has declared distributions of $18.15 per share on its common stock from Inception through December 31, 2025.
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The following table reflects the Company’s distributions declared and paid on its common stock since Inception:
Date Declared
Record Date
Payment Date
Per Share(1)
Fiscal 2012
Fiscal 2013
1.36
Fiscal 2014
Fiscal 2015
Fiscal 2016
Fiscal 2017
Various
Fiscal 2018
Fiscal 2019
Fiscal 2020
Fiscal 2021
Fiscal 2022
Fiscal 2023
Fiscal 2024
Fiscal 2025
January 9, 2025
January 31, 2025
February 14, 2025
0.1333
February 28, 2025
March 14, 2025
March 31, 2025
April 15, 2025
April 4, 2025
April 30, 2025
May 15, 2025
May 30, 2025
June 13, 2025
June 30, 2025
July 15, 2025
July 2, 2025
July 31, 2025
August 15, 2025
August 29, 2025
September 15, 2025
September 30, 2025
October 15, 2025
October 8, 2025
October 31, 2025
November 14, 2025
November 28, 2025
December 15, 2025
18.15
The Company has adopted an “opt out” dividend reinvestment plan (“DRIP”), pursuant to which a stockholder whose shares are held in their own name will receive distributions in shares of the Company’s common stock under the Company’s DRIP unless they elect to receive distributions in cash. Stockholders whose shares are held in the name of a broker or the nominee of a broker may have distributions reinvested only if such service is provided by the broker or the nominee, or if the broker of the nominee permits participation in the DRIP.
Although distributions paid in the form of additional shares of the Company’s common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, investors participating in the Company’s DRIP will not receive any corresponding cash distributions with which to pay any such applicable taxes. Any distributions reinvested through the issuance of shares through the Company’s DRIP will increase the Company’s gross assets on which the base management fee and the incentive fee are determined and paid to Stellus Capital. The Company did not issue any new shares in connection with the DRIP during the years ended December 31, 2025 and December 31, 2024.
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NOTE 4 — EQUITY OFFERINGS AND RELATED EXPENSES
The table below illustrates the number of shares of common stock the Company has issued since Inception through various equity offerings and pursuant to the Company’s DRIP.
Average
Gross
Underwriting
Offering
Fees Covered
Issuance of Common Stock
Shares
Proceeds(1)(2)
Fees
by Advisor
Proceeds(3)
Price
Year ended December 31, 2012
12,035,023
180,522,093
4,959,720
835,500
174,726,873
14.90
Year ended December 31, 2013
63,998
899,964
14.06
Year ended December 31, 2014
380,936
5,485,780
75,510
29,904
5,380,366
14.47
Year ended December 31, 2017
3,465,922
48,741,406
1,358,880
307,021
47,075,505
Year ended December 31, 2018
7,931
93,737
11.85
Year ended December 31, 2019
3,177,936
45,862,995
1,015,127
559,261
37,546
44,326,153
14.43
Year ended December 31, 2020
354,257
5,023,843
5,680
84,592
66,423
4,999,994
14.40
Year ended December 31, 2021
31,592
449,515
6,744
53,327
4,255
393,699
14.23
Year ended December 31, 2022
149,174
2,070,935
31,066
530,842
87,605
1,596,632
13.88
Year ended December 31, 2023
62,871,349
943,248
247,701
477,088
14.10
Year ended December 31, 2024
698,166
435,390
13.65
Year ended December 31, 2025
308,998
606,848
13.83
419,105,333
9,403,139
3,690,386
672,917
406,684,725
On November 16, 2021, the Company entered into an equity distribution agreement, as amended and restated on August 29, 2023 (the “2021 Equity Distribution Agreement”) with Keefe Bruyette & Woods, Inc. and Raymond James & Associates, Inc., as sales agents and/or principal thereunder. Under the 2021 Equity Distribution Agreement, the Company was permitted to issue and sell, from time to time, up to $50,000,000 in aggregate offering price of shares of common stock, par value $0.001 per share, with the intention to use the net proceeds from this at-the-market sales program to repay certain outstanding indebtedness and make investments in portfolio companies in accordance with its investment objective and strategies.
On August 11, 2023, the Company entered into an equity distribution agreement (the “2023 Equity Distribution Agreement”) with Keefe Bruyette & Woods, Inc. and Raymond James & Associates, Inc., as sales agents and/or principal thereunder. Under the 2023 Equity Distribution Agreement, the Company was permitted to issue and sell, from time to time, up to $100,000,000 in aggregate offering price of shares of common stock, par value $0.001 per share, with the intention to use the net proceeds from this at-the-market sales program to repay certain outstanding indebtedness and make investments in portfolio companies in accordance with its investment objective and strategies. Upon execution of the 2023 Equity Distribution Agreement, the Company no longer sold any shares under the 2021 Equity Distribution Agreement.
On September 9, 2025, the Company entered into an equity distribution agreement (the “2025 Equity Distribution Agreement” and together with the 2023 Equity Distribution Agreement and the 2021 Equity Distribution Agreement, the “Equity Distribution Agreements”) with Keefe Bruyette & Woods, Inc. and Raymond James & Associates, Inc., as sales agents and/or principal thereunder. Under the 2025 Equity Distribution Agreement, the Company may issue and sell, from time to time, up to $100,000,000 in aggregate offering price of shares of common stock, par value $0.001 per share, with the intention to use the net proceeds from this at-the-market sales program to repay certain outstanding indebtedness and make investments in portfolio companies in accordance with its investment objective and strategies.
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Upon execution of the 2025 Equity Distribution Agreement, the Company no longer sold any shares under the 2023 Equity Distribution Agreement. The Company refers to its issuance and sale of shares under the Equity Distribution Agreements as the “ATM Program”.
The Company issued 1,466,136 shares during the year ended December 31, 2025 under the ATM Program, for gross proceeds of $20,588,960 and underwriting fees and other expenses of $915,846. The average per share offering price of shares issued in the ATM Program during the year ended December 31, 2025 was $14.04. The Company issued 3,355,476 shares during the year ended December 31, 2024 under the ATM Program, for gross proceeds of $46,494,756 and underwriting fees and other expenses of $1,133,556. The average per share offering price of shares issued in the ATM Program during the year ended December 31, 2024 was $13.86. The Advisor agreed to reimburse the Company for underwriting fees and expenses incurred in connection with the ATM Program to the extent the per share price of the shares to the public, less underwriting fees, was less than the then-current net asset value per share. For both the fiscal years ended December 31, 2025 and 2024, the Advisor was not required to reimburse underwriting fees as all shares were issued at a premium to net asset value.
The Company did not issue any new shares of common stock through the DRIP for the years ended December 31, 2025 and 2024.
NOTE 5 — NET INCREASE IN NET ASSETS PER COMMON SHARE
The following information sets forth the computation of net increase in net assets resulting from operations per common share for the years ended December 31, 2025, 2024, and 2023.
Weighted average common shares
Net increase in net assets resulting from operations per common share
NOTE 6 — PORTFOLIO INVESTMENTS AND FAIR VALUE
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Company discloses the fair value of its investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:
Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 — Quoted prices in markets that are not considered to be active or financial instruments for which significant inputs are observable, either directly or indirectly; and
Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by management.
The Board 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 Board 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
156
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 December 31, 2025, the Company had investments in 115 portfolio companies. The total cost and fair value of the investments were $1,026,139,686 and $1,007,623,395, respectively. The composition of the Company’s investments as of December 31, 2025 was as follows:
At December 31, 2024, the Company had investments in 105 portfolio companies. The total cost and fair value of the investments were $961,788,706 and $953,497,688, respectively. The composition of the Company’s investments as of December 31, 2024 was as follows:
The Company’s investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of December 31, 2025 and December 31, 2024, the Company had 77 and 71 such investments with aggregate unfunded commitments of $53,380,015 and $41,286,752, respectively. The Company maintains sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded commitments should the need arise.
157
The fair values of the Company’s 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, 2025 were as follows:
Quoted Prices
in Active
Markets
Significant Other
Significant
for Identical
Observable
Unobservable
Securities
Inputs
(Level 1)
(Level 2)
(Level 3)
The fair values of the Company’s 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, 2024 were as follows:
The aggregate values of Level 3 portfolio investments changed during the year ended December 31, 2025 as follows:
Senior Secured
Loans-First
Loans-Second
Lien
Debt
Fair value at beginning of period
186,821,022
8,904,074
195,734,550
5,188,864
561,606
5,802
Sales and redemptions
(121,906,047)
(7,021,819)
(12,566,138)
(141,494,004)
Realized (losses) gains
(5,651,690)
7,114,167
1,462,477
Change in unrealized (depreciation) appreciation included in earnings(1)
(15,593,776)
38,229
(53,944)
4,502,560
Change in unrealized appreciation on foreign currency included in earnings
874,729
2,680
4,251
881,660
2,840,443
37,921
13,319
2,891,683
Fair value at end of period
There were no Level 3 transfers during the year ended December 31, 2025.
158
The aggregate values of Level 3 portfolio investments changed during the year ended December 31, 2024 as follows:
774,789,320
21,957,500
5,956,280
71,757,583
874,460,683
213,545,132
117,066
7,492,735
221,154,933
2,824,403
485,708
(126,924,841)
(9,782,348)
(14,985,096)
(151,692,285)
(1,580,768)
(20,475,000)
6,212,362
(15,843,406)
(9,026,597)
20,187,185
40,312
8,369,509
Change in unrealized depreciation on foreign currency included in earnings
(169,778)
(1,778)
(7,003)
(178,559)
2,639,384
61,513
14,905
2,715,802
There were no Level 3 transfers during the year ended December 31, 2024.
159
The following is a summary of geographical concentration of the Company’s investment portfolio as of December 31, 2025:
160
The following is a summary of geographical concentration of the Company’s investment portfolio as of December 31, 2024:
161
The following is a summary of industry concentration of the Company’s investment portfolio as of December 31, 2025:
162
The following is a summary of industry concentration of the Company’s investment portfolio as of December 31, 2024:
The following provides quantitative information about Level 3 fair value measurements as of December 31, 2025. During the year ended December 31, 2025, investments valued at $81,810,288 changed valuation methods from
163
transaction value to the income and market approaches due to the transaction price no longer being reflective of current market conditions.
Description:
Valuation Technique
Unobservable Inputs
Range (Weighted Average)
First lien debt
788,539,535
Income approach(1)(2)
HY credit spreads
-1.89% to 11.20% (-0.14%)
Risk free rates
-2.03% to 1.73% (-0.33%)
87,821,690
Market approach(1)
EBITDA multiple
4.4x to 10.1x (6.8x)(3)
32,308,575
Transaction value
Transaction price
N/A
Second lien debt
-0.17% to 2.35% (0.75%)
-0.16% to -0.10% (-0.14%)
Unsecured debt
-0.59% to -0.59% (-0.59%)
-0.31% to -0.31% (-0.31%)
113,409
4.4x to 8.7x (8.5x)(3)
Equity investments
66,907,041
Market approach(4)
3.2x to 18.2x (10.2x)
Revenue multiple
7.0x to 9.0x (7.7x)
19,897,765
Total Long Term Level 3 Investments
164
The following provides quantitative information about Level 3 fair value measurements as of December 31, 2024:
778,177,769
-3.39% to 8.32% (-0.54%)
-1.18% to 2.44% (0.19%)
4.6x to 26.3x (13.3x)(3)
77,918,486
-0.72% to -0.32% (-0.46%)
-0.35% to 0.14% (-0.04%)
5.3 to 11.8x (9.4x)(3)
6,581,668
0.18% to 0.18% (0.18%)
-0.18% to -0.18% (-0.18%)
30,825
64,002,282
3.5x to 18.3x (10.4x)
14,837,808
165
NOTE 7 — COMMITMENTS AND CONTINGENCIES
The Company is currently not subject to any material legal proceedings, nor, to its knowledge, is any material legal proceeding threatened against it. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of its rights under contracts with its portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not expect that these proceedings will have a material effect upon its business, financial condition or results of operations.
As of December 31, 2025, the Company had $52,991,159 in unfunded debt commitments and $388,856 in unfunded equity commitments to 77 existing portfolio companies. As of December 31, 2024, the Company had $40,989,533 in unfunded debt commitments and $297,219 in unfunded equity commitments to 71 existing portfolio companies. As of both December 31, 2025 and 2024, the Company did not record any fair value adjustments that resulted in any unrealized gains (losses) on these positions. As of December 31, 2025, the Company had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded loan commitments should the need arise.
166
NOTE 8 — FINANCIAL HIGHLIGHTS
December 31,
2025
2024
2023
2022
2021
Per Share Data:(1)
Net asset value at beginning of period
14.02
14.61
14.03
Change in unrealized (depreciation) appreciation on investments
(0.39)
0.76
(0.90)
(0.36)
Net realized gain (loss)
(0.62)
(1.38)
(0.01)
(0.03)
Benefit (provision) for taxes on net realized losses (gains) on investments
(0.15)
Total from operations
Sales load
(0.04)
Offering costs
(0.02)
Stockholder distributions from:
(1.60)
(1.59)
(1.11)
(1.09)
Net realized capital gains
(0.19)
(0.05)
Accretive effect of stock offerings (issuing shares above net asset value per share)
Other(3)
Net asset value at end of period
Per share market value at end of period
12.68
13.76
12.85
13.02
Total return based on market value(4)
3.63
18.89
12.32
30.78
Weighted average shares outstanding for the period
19,552,931
19,489,750
Ratio/Supplemental Data:
Net assets at end of period
285,111,233
Weighted average net assets
375,498,196
343,272,777
301,285,626
281,745,332
274,188,692
Annualized ratio of gross operating expenses to net assets(7)
18.26
18.77
21.27
16.59
16.90
Annualized ratio of net operating expenses to net assets(7)
17.38
18.24
21.16
Annualized ratio of interest expense and other fees to net assets(2)
9.31
9.18
10.62
8.68
6.83
Annualized ratio of net investment income before fee waiver to net assets(7)
8.94
11.68
13.91
Annualized ratio of net investment income to net assets(7)
12.21
14.01
7.21
Portfolio turnover(5)
16.82
15.38
15.26
39.11
125,000,000
100,000,000
236,649,288
175,386,301
160,085,705
199,200,425
177,340,000
299,000,000
325,000,000
313,600,000
250,000,000
Asset coverage ratio(6)
x
167
2020
2019
2018
2017
2016
14.14
14.09
13.81
13.69
1.39
Change in unrealized appreciation (depreciation) on investments
(0.85)
(0.11)
Net realized (loss) gain
(0.52)
1.07
(1.05)
(Provision) benefit for taxes on net unrealized (appreciation) depreciation on investments
Total from investment operations
1.86
Sales Load
(0.06)
(0.09)
(1.15)
(0.54)
(1.03)
(1.20)
(1.36)
(0.82)
(0.33)
(0.16)
10.88
12.95
12.06
(13.73)
21.97
20.29
42.83
19,471,500
18,275,696
15,953,571
14,870,981
12,479,959
273,360,649
270,571,173
224,845,007
220,247,242
170,881,785
253,034,571
259,020,507
223,750,302
195,211,550
165,189,142
Annualized ratio of gross operating expenses to net assets(7)(8)
13.72
11.10
13.20
Annualized ratio of net operating expenses to net assets(7)(8)
6.29
5.78
5.51
4.02
4.84
10.09
9.21
8.58
8.64
Portfolio Turnover(5)
23.17
32.29
48.31
15.80
48,875,000
25,000,000
174,000,000
161,550,000
99,550,000
40,750,000
116,000,000
176,500,000
161,000,000
150,000,000
90,000,000
65,000,000
2.29
2.21
168
NOTE 9 — CREDIT FACILITY
The Company entered into a senior secured revolving credit agreement, dated as of October 10, 2017, with Zions Bancorporation, N.A., dba Amegy Bank and various other lenders (as amended and restated on September 18, 2020 and subsequently amended on December 22, 2021, February 28, 2022, May 13, 2022, November 21, 2023, October 30, 2024 and September 11, 2025, the “Credit Facility”).
The Credit Facility provides for borrowings up to a maximum of $335,000,000 on a committed basis with an accordion feature that allows the Company to increase the aggregate commitments up to $365,000,000, subject to new or existing lenders agreeing to participate in the increase and other customary conditions.
Pursuant to its terms, the Credit Facility will bear interest, subject to the Company’s election, on a per annum basis equal to (i) term SOFR plus 2.25% (or 2.50% during certain periods in which the Company’s asset coverage ratio is equal to or below 1.90 to 1.00) with a 0.25% SOFR floor, or (ii) 1.25% (or 1.50% during certain periods in which the Company’s asset coverage ratio is equal to or below 1.90 to 1.00) plus an alternate base rate based on the highest of the prime rate (subject to a 3% floor), Federal Funds Rate plus 0.50% and one-month term SOFR plus 1.00%. The Company pays unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Facility. The commitment to fund the revolver expires on September 11, 2029, after which the Company may no longer borrow under the Credit Facility and must begin repaying principal equal to 1/12 of the aggregate amount outstanding under the Credit Facility each month. Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on September 11, 2030.
The Company’s obligations to the lenders are secured by a first priority security interest in its portfolio of securities and cash not held at the SBIC subsidiaries, but excluding short-term investments. The Credit Facility contains certain covenants, including but not limited to: (i) maintaining a minimum liquidity test of at least $10,000,000, including cash, liquid investments and undrawn availability, (ii) maintaining an asset coverage ratio of at least 1.67 to 1.00, (iii) maintaining a minimum stockholder’s equity, and (iv) maintaining a minimum interest coverage ratio of at least 1.75 to 1.00. As of December 31, 2025, the Company was in compliance with these covenants.
As of December 31, 2025 and December 31, 2024, the outstanding balance under the Credit Facility was $236,649,288 and $175,386,301, respectively. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value. The fair value of the Credit Facility is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Credit Facility is estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. The Company has incurred costs of $8,944,051 in connection with the current Credit Facility, which are being amortized over the life of the facility. Additionally, $341,979 of costs from a prior credit facility will continue to be amortized over the life of the Credit Facility. As of December 31, 2025 and 2024, $3,481,928 and $3,071,986 of such prepaid loan structure fees and administration fees had yet to be amortized, respectively. These prepaid loan fees are presented on the Consolidated Statements of Assets and Liabilities as a deduction from the debt liability.
The following is a summary of the Credit Facility, net of prepaid loan structure fees:
Prepaid loan structure fees
(3,481,928)
(3,071,986)
Credit Facility payable, net of prepaid loan structure fees
169
Interest is paid monthly or quarterly in arrears. The following table summarizes the interest expense and amortized loan fees on the Credit Facility for the years ended December 31, 2025, 2024, and 2023:
12,953,758
13,561,089
14,723,463
14,166,339
14,701,168
15,380,786
180,241,351
164,265,069
186,144,622
12,870,599
13,548,076
14,523,350
NOTE 10 — SBA-GUARANTEED DEBENTURES
Due to the SBIC subsidiaries’ status as licensed SBICs, the Company has the ability to issue debentures guaranteed by the SBA at favorable interest rates. Under the regulations applicable to SBIC funds, a single licensee can have outstanding debentures guaranteed by the SBA subject to a regulatory leverage limit, up to two times the amount of “regulatory capital,” as such term is defined by the SBA. SBA-guaranteed debentures have fixed interest rates that equal prevailing 10 year U.S. Treasury Note rates plus a market spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the SBA-guaranteed debentures is not required to be paid before maturity, but may be pre-paid at any time with no prepayment penalty. SBA-guaranteed debentures are also subject to certain fees payable by the SBICs at the time such debentures are drawn. SBA-guaranteed debentures drawn before October 1, 2019 incur upfront fees of 3.425%, which consists of a 1.00% commitment fee and a 2.425% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. SBA-guaranteed debentures drawn after October 1, 2019 incur upfront fees of 3.435%, which consists of a 1.00% commitment fee and a 2.435% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. Once pooled, which occurs in March and September of each applicable year, the SBA-guaranteed debentures bear interest at a fixed rate that is set to the current 10 year treasury rate plus a spread at each pooling date.
As of both December 31, 2025 and 2024, the SBIC I subsidiary had $75,000,000 in regulatory capital and $124,000,000 and $150,000,000 of SBA-guaranteed debentures outstanding, respectively. During the year ended December 31, 2025, the SBIC I subsidiary repaid $26,000,000 of SBA-guaranteed debentures that matured during the period. As of both December 31, 2025 and 2024, the SBIC II subsidiary had $87,500,000 in regulatory capital and $175,000,000 of SBA-guaranteed debentures outstanding.
On August 12, 2014, the Company obtained exemptive relief from the SEC to permit it to exclude the SBA-guaranteed debentures of the SBIC subsidiaries from the definition of senior securities in the asset coverage requirement applicable to the Company under the 1940 Act. The exemptive relief provides the Company with increased flexibility under the asset coverage requirement by permitting it to borrow up to $325,000,000 more than it would otherwise be able to absent the receipt of this exemptive relief.
On a stand-alone basis, the SBIC subsidiaries collectively held $492,710,365 and $510,105,270 in assets at December 31, 2025 and 2024, respectively, which accounted for approximately 47.3% and 52.0% of the Company’s total consolidated assets at December 31, 2025 and 2024, respectively.
The following table summarizes the SBIC I subsidiary’s SBA-guaranteed debentures as of December 31, 2025:
Issuance Date
Licensee
Maturity Date
Debenture Amount
Interest Rate
SBA Annual Charge
October 22, 2015
SBIC I subsidiary
March 1, 2026
6,500,000
1,500,000
November 10, 2015
8,800,000
November 18, 2015
November 25, 2015
December 16, 2015
2,200,000
December 29, 2015
9,700,000
November 28, 2017
March 1, 2028
April 27, 2018
September 1, 2028
40,000,000
3.55
July 30, 2018
17,500,000
September 25, 2018
March 1, 2029
Total SBIC I subsidiary SBA-guaranteed Debentures
124,000,000
The following table summarizes the SBIC II subsidiary’s SBA-guaranteed debentures as of December 31, 2025:
SBIC II SBA-guaranteed Debentures
October 17, 2019
SBIC II subsidiary
March 1, 2030
November 15, 2019
5,000,000
December 17, 2020
March 1, 2031
9,000,000
February 16, 2021
13,500,000
February 26, 2021
March 2, 2021
April 21, 2021
September 1, 2031
May 14, 2021
6,700,000
May 28, 2021
7,300,000
July 23, 2021
16,000,000
February 25, 2022
March 1, 2032
March 29, 2022
September 1, 2032
April 1, 2022
6,670,000
April 12, 2022
6,665,000
April 21, 2022
June 30, 2022
3,600,000
July 28, 2022
6,400,000
September 9, 2022
March 1, 2033
5.17
November 9, 2022
7,600,000
August 8, 2023
September 1, 2033
9,120,000
5.69
September 19, 2023
March 1, 2034
2,280,000
5.04
Total SBIC II subsidiary SBA-guaranteed Debentures
175,000,000
Total SBA-guaranteed Debentures
The fair values of the SBA-guaranteed debentures are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants
171
at the measurement date under current market conditions. The fair values of the SBA-guaranteed debentures are estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. As of December 31, 2025, the estimated fair values of the SBA-guaranteed debentures as prepared for disclosure purposes was $290,359,247. As of December 31, 2024, the carrying amount of the SBA-guaranteed debentures approximated their fair value. At December 31, 2025 and 2024, the SBA-guaranteed debentures would be deemed to be Level 3, as defined in Note 6.
As of December 31, 2025, the Company has incurred $11,148,750 in financing costs related to the SBA-guaranteed debentures since receiving its licenses, which were recorded as prepaid loan fees. As of December 31, 2025 and 2024, $3,015,937 and $3,748,061 of prepaid financing costs had yet to be amortized, respectively. These prepaid loan fees are presented on the Consolidated Statements of Assets and Liabilities as a deduction from the debt liability.
The following is a summary of the SBA-guaranteed debentures, net of prepaid loan fees:
SBA-guaranteed Debentures payable
Prepaid loan fees
(3,015,937)
(3,748,061)
SBA-guaranteed Debentures, net of prepaid loan fees
The following table summarizes the interest expense and amortized fees on the SBA-guaranteed debentures for the years ended December 31, 2025, 2024, and 2023:
9,968,297
10,497,375
10,047,058
10,700,421
11,475,957
11,302,811
308,224,658
318,847,123
10,228,054
10,470,211
9,646,849
NOTE 11 — NOTES
The Notes Payable are institutional, non-traded notes. The Notes Payable are carried at cost. At the measurement date, the estimated fair value of the Notes Payable as prepared for disclosure purposes was $126,000,000. See Note 1 to the Consolidated Financial Statements for further discussion regarding the fair value measurements and hierarchy.
In connection with the issuance and maintenance of the Notes Payable, the Company incurred $2,327,835 of fees, which are being amortized over the term of the Notes Payable, of which $0 and $555,645 remains to be amortized as of December 31, 2025 and 2024, respectively. These financing costs are presented on the Consolidated Statements of Assets and Liabilities as a deduction from the debt liability.
On January 14, 2021, the Company issued $100,000,000 in aggregate principal amount of 4.875% fixed-rate notes due 2026 (the “2026 Notes Payable”). On September 30, 2025, the Company prepaid $50,000,000 in aggregate principal of the 2026 Notes Payable. On December 31, 2025, the Company prepaid the remaining $50,000,000 in aggregate principal of the 2026 Notes Payable in full. For the year ended December 31, 2025, the Company recorded a make-whole payment of $54,000 and accelerated $172,095 of unamortized upfront fees which are recognized as a loss on debt extinguishment in the Consolidated Statemements of Operations.
The 2026 Notes Payable were redeemable in whole or in part at any time or from time to time at the Company’s option on or after December 31, 2025, at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest on the 2026 Notes Payable was payable semi-annually beginning September 30, 2021.
172
The Company used the net proceeds from the 2026 Notes Payable offering to fully redeem the Company’s 5.75% fixed-rate notes due September 15, 2022 (the “2022 Notes Payable”) and repay a portion of the amount outstanding under the Credit Facility.
On April 1, 2025 and September 25, 2025, the Company issued $75,000,000 and $50,000,000, respectively, in aggregate principal amount of 7.250% fixed-rate notes due 2030 (the “2030 Notes Payable” and together with the 2026 Notes Payable, the “Notes Payable”). The 2030 Notes Payable will mature on April 1, 2030 and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after October 1, 2029, at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest on the 2030 Notes Payable is payable semi-annually beginning October 1, 2025. As of December 31, 2025, the aggregate carrying amount of the 2030 Notes Payable was approximately $122,671,409.
In connection with the issuance and maintenance of the 2030 Notes Payable, the Company incurred $2,696,803 of fees, which are being amortized over the term of the 2030 Notes Payable. As of December 31, 2025, $2,328,591 of prepaid financing costs had yet to be amortized. These financing costs are presented on the Consolidated Statements of Assets and Liabilities as a deduction from the debt liability.
The following is a summary of the 2026 Notes Payable, net of deferred financing costs:
2026 Notes Payable
(555,645)
2026 Notes Payable, net of deferred financing costs and discount
The following table summarizes the interest expense and deferred financing costs on the 2026 Notes Payable for the years ended December 31, 2025, 2024, and 2023:
4,258,083
4,881,000
390,420
4,648,503
5,328,943
5,327,720
74,657,534
5,490,375
The following is a summary of the 2030 Notes Payable, net of deferred financing costs:
2030 Notes Payable
(2,272,580)
Premium on 2030 Notes Payable
618,145
Discount on 2030 Notes Payable
(674,156)
2030 Notes Payable, net of deferred financing costs and discount
173
The following table summarizes the interest expense and deferred financing costs on the 2030 Notes Payable for the year ended December 31, 2025:
5,059,792
301,973
Discount amortization
Premium amortization
(29,856)
5,428,002
92,818,182
(1)
2,794,167
The indenture and supplements thereto relating to the Notes Payable contain certain covenants, including but not limited to (i) a requirement that the Company comply with the asset coverage requirements of the 1940 Act or any successor provisions, and (ii) a requirement to provide financial information to the holders of the notes and the trustee under the indenture if the Company should no longer be subject to the reporting requirements under the Exchange Act. As of December 31, 2025, the Company was in compliance with these covenants.
NOTE 12 — INCOME TAXES
As of December 31, 2025 and December 31, 2024, the Company had $37,016,258 and $44,184,991, respectively, of undistributed ordinary income. (1) Undistributed capital gains were $0 and $0 for the periods ended December 31, 2025 and December 31, 2024, respectively. Undistributed qualified dividends were $0 and $1,256,046 for the periods ended December 31, 2025 and December 31, 2024, respectively. All of the undistributed ordinary income as of December 31, 2025 will have been distributed within the required period of time such that the Company will not be subject to U.S. federal income tax related to 2025 taxable income. The Company will be subject to a 4% nondeductible U.S. federal excise tax on its undistributed income to the extent it did not distribute an amount equal to at least 98% of its net ordinary income plus 98.2% of its capital gain net income attributable to the period. As a result, the Company’s effective U.S. federal income tax rate is expected to be 0%, exclusive of any excise taxes and income taxes incurred by any taxable subsidiaries. Accordingly, a reconciliation of the differences between the Company’s reported income tax expense and the U.S. federal statutory income tax rate of 21% is not considered meaningful.
The Company has accrued $1,450,802 and $1,743,964 of U.S. federal excise tax for the tax years ended December 31, 2025 and December 31, 2024, respectively, independent of prior year adjustments. See Note 1 for further discussion of tax expense in each year.
174
Ordinary dividend distributions from a RIC do not qualify for the reduced maximum tax rate on qualified dividend income from domestic corporations, except to the extent that the RIC received the income in the form of qualifying dividends from domestic corporations and qualified foreign corporations. The tax character(2) of distributions paid in the years ended December 31, 2025 and 2024 was as follows:
Ordinary income
44,255,588
40,674,964
Qualified dividends
1,205,839
4,344
Distributions of long-term capital gains(2)
544,367
Total distributions paid to common stockholders
45,461,427
41,223,675
Listed below is a reconciliation of “Net increase in net assets resulting from operations” to taxable income and total distributions declared to common stockholders for the years ended December 31, 2025, 2024, and 2023:
Net increase in net assets resulting from operations (includes net investment income, realized gain (loss), unrealized appreciation (depreciation) and taxes)
Net change in unrealized depreciation (appreciation)
11,073,858
(19,555,654)
(2,785,648)
Income tax provision
(191,114)
(2,860,890)
Pre-tax expense, loss reported at Taxable Subsidiaries, not consolidated for tax purposes
2,120,912
1,810,914
20,172,550
(Decrease) increase in long term capital loss carryover
(1,988,306)
20,257,106
Book income and tax income differences, including debt origination, interest accrual, income from pass-through investments, dividends, realized gains (losses) and changes in estimates
(3,021,577)
1,501,004
11,860,086
Estimated taxable income(1)
37,036,649
49,666,883
43,919,265
Taxable income earned in prior year and carried forward for distribution in current year
45,441,036
36,997,828
28,606,043
Adjustment for cumulative effect of distributions carried forward
Taxable income earned prior to period end and carried forward
(40,874,927)
(49,104,269)
(36,997,828)
Distribution payable as of period end and paid in following period
Total distributions accrued or paid to common stockholders
35,527,480
The aggregate gross unrealized appreciation and depreciation, the net unrealized appreciation, and the aggregate cost of the Company’s portfolio company securities for U.S. federal income tax purposes as of December 31, 2025 and December 31, 2024 were as follows:
175
Aggregate cost of portfolio company securities
Gross unrealized appreciation of portfolio company securities
59,298,870
47,590,719
Gross unrealized depreciation of portfolio company securities
(77,718,103)
(54,903,019)
Gross unrealized appreciation on foreign currency translations of portfolio company securities
26,900
3,973
Gross unrealized depreciation on foreign currency translations of portfolio company securities
(123,958)
(982,691)
Aggregate fair value of portfolio company securities
As of December 31, 2025 and 2024, the Taxable Subsidiaries had unrealized losses in investments and NOL carryovers creating a deferred tax asset equal to $6,631,206 and $5,520,821, respectively, as reflected below. As of December 31, 2025, for U.S. federal income tax purposes, the Taxable Subsidiaries had net operating loss carryforwards totaling $19,265,177, of which $918,232 will expire during the tax years 2034 through 2037 if unused. Due to the nature of the Taxable Subsidiaries’ holdings, a valuation allowance was established as the Company determined it is more likely than not that some of the deferred tax assets will not be realized prior to expiration. Although the Company’s future projections indicate that it may be able to realize a portion of these deferred tax assets, due to the degree of uncertainty of these projections, management has recorded a deferred tax asset valuation allowance of $6,631,206 and $5,520,821 as of December 31, 2025 and 2024, respectively.
Deferred tax asset
6,631,206
5,520,821
Deferred tax liability
Total deferred tax asset before valuation allowance
Deferred tax valuation allowance
(6,631,206)
(5,520,821)
Net deferred tax asset (liability)
The Company has recorded a tax reclassification of stockholders’ equity in accordance with U.S. GAAP to reduce paid-in capital and to increase distributable earnings (increasing accumulated undistributed investment income) for book to tax differences that it has determined to be permanent. For the years ended December 31, 2025 and 2024, this reclassification was $1,391,127 and $1,727,556, respectively. The total adjustment on the Consolidated Statements of Assets and Liabilities as of December 31, 2025 and 2024 was $8,825,985 and $7,434,858, respectively.
The Company remains subject to examination by the IRS for tax years 2022 through 2024.
176
NOTE 13 — SENIOR SECURITIES
Information about the Company’s senior securities is shown in the following table for the fiscal years ended December 31, 2016 through 2025.
Outstanding
Involuntary
Exclusive of
Asset
Liquidating
Treasury
Coverage per
Preference
Market Value
Class and Year
Securities(1)
Unit(2)
per Unit(3)
per Unit(4)
(In thousands, except per unit amounts)
150,000
161,000
176,500
313,600
325,000
299,000
Original Credit Facility(6)
109,500
2,220
116,000
2,210
40,750
3,460
99,550
2,520
161,550
2,286
174,000
2,230
177,340
2,030
199,200
1,920
160,086
175,386
2,340
236,649
125,000
2026 Notes Payable(9)
2022 Notes Payable(8)
48,875
25.34
25.18
24.43
23.64
6.50% Notes due 2019(7)
25,000
25.11
177
NOTE 14 — REPORTABLE SEGMENTS
An operating segment is defined as a component of a public entity that engages in business activities from which it may recognize revenues and incur expenses, has operating results that are regularly reviewed by the public entity’s chief operating decision maker (“CODM”) to make decisions about resources to be allocated to the segment and assess its performance, and has discrete financial information available. The Company operates under one operating segment and reporting unit, investment management. The CODM is the Chief Executive Officer of the Company, who is responsible for determining the Company’s investment strategy, capital allocation, expense structure, and significant transactions impacting the Company. The operating expenses as disclosed on the consolidated statement of operations represent the significant expense categories that are provided to the CODM. Key metrics considered by the CODM in making decisions on the allocation of invested capital include, but are not limited to, net investment income and net increase in net assets resulting from operations that is reported on the Consolidated Statement of Operations, fair value of Investments as disclosed on the Consolidated Schedule of investments, as well as distributions made to the Company’s shareholders.
178
NOTE 15 — SUBSEQUENT EVENTS
The Company invested in the following portfolio companies subsequent to December 31, 2025:
The Company realized the following portfolio companies subsequent to December 31, 2025:
The outstanding balance under the Credit Facility as of March 11, 2026 was $253,900,000.
179
On February 27, 2026, the SBIC I subsidiary repaid $39,000,000 of SBA-guaranteed debentures and related accrued interest related to SBA-guaranteed debentures maturing on March 1, 2026. The outstanding balance of SBA-guaranteed debentures as of March 11, 2026 was $260,000,000.
Distributions Declared
On January 16, 2026, the Company’s Board declared a regular monthly distribution for each of January, February and March 2026 as follows:
Acquisition of Stellus Capital
On February 5, 2026, the Company announced that Stellus Capital entered into a definitive agreement with P10 Intermediate Holdings, LLC, an affiliate of Ridgepost Capital, Inc. (formerly known as P10, Inc.) (“Ridgepost”), pursuant to which Ridgepost will acquire Stellus Capital (the “Transaction”).
Pursuant to the terms of the Transaction, Stellus Capital will continue to be managed by its current partners, who will retain control of its day-to-day operations, including investment decisions and investment committee processes, and Stellus Capital will continue to serve as the Company’s external investment adviser. Consummation of the Transaction will result in a change of control of Stellus Capital, which will result in an assignment and corresponding termination of the Investment Advisory Agreement under the 1940 Act. The Board and stockholders will therefore be asked to approve a new investment advisory agreement with Stellus Capital (the “New Investment Advisory Agreement”), the terms of which are expected to remain the same as the Investment Advisory Agreement, other than the initial term of the New Investment Advisory Agreement. Closing of the Transaction is expected to occur mid-2026 and is subject to customary conditions for a transaction of this nature. If approved, the New Investment Advisory Agreement will take effect following the closing of the Transaction.
On March 3, 2026, our Board authorized a program for the purpose of repurchasing up to $20,000,000 of our shares of common stock. The shares may be purchased from time to time at prevailing market prices, through open market transactions. The timing and amount of any stock repurchases will depend on the terms and conditions of the repurchase program and no assurances can be given that any common stock, or any particular amount, will be purchased. Unless extended by the Board, the stock repurchase program will terminate on March 12, 2027 and may be modified or terminated at any time for any reason without prior notice. We will retire all such shares of common stock that we purchase in connection with the stock repurchase program immediately.
180
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
As of December 31, 2025 (the end of the period covered by this report), we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f), and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2025. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by our Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2025 based upon the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, management determined that our internal control over financial reporting was effective as of December 31, 2025.
(c) Attestation Report of the Independent Registered Public Accounting Firm
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on the effectiveness of our internal control over financial reporting, which is set forth under the heading “Report of Independent Registered Public Accounting Firm” on page F-101.
(d) Changes in Internal Controls Over Financial Reporting
There have been no changes in our internal control over financing reporting that occurred during the calendar year 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
Fees and Expenses
The following table is intended to assist you in understanding the various costs and expenses that an investor in our common stock will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. The footnotes to the fee table state which items are estimates. The following table should not be considered a representation of our future expenses; actual expenses may be greater or less than shown. Except where the context suggests otherwise, whenever this Annual Report on Form 10-K contains a reference to fees or expenses paid by “you,” “us,” “the Company” or “Stellus,” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in us.
Stockholder transaction expenses:
Sales load (as percentage of offering price)
Offering expenses born by us (as a percentage of offering price)
(2)
Dividend reinvestment plan expenses
(3)
Total stockholder transaction expenses paid by us (as a percentage of offering price)
Annual expenses (as a percentage of net assets attributable to common stock)(5):
Base management fee
4.79
% (6)
Incentive fees payable under Investment Advisory Agreement
% (7)
Interest payments on borrowed funds
9.75
% (8)
Other expenses
% (9)
Total annual expenses
18.12
% (10)
Example
The following example demonstrates the projected dollar amount of total cumulative expenses over various periods with respect to a hypothetical investment in us. In calculating the following expense amounts, we have assumed we would have no additional leverage, that none of our assets are cash or cash equivalents and that our annual operating expenses would remain at the levels set forth in the table above. Transaction expenses are not included in the following example.
1 year
3 years
5 years
10 years
You would pay the following expenses on a $1,000 investment, assuming a 5.0% annual return
453
657
975
You would pay the following expenses on a $1,000 investment, assuming a 5.0% annual return resulting entirely from net realized capital gains (all of which is subject to our incentive fee on capital gains)
187
463
668
981
The foregoing table is to assist you in understanding the various costs and expenses that an investor in our common stock will bear directly or indirectly. While the example assumes, as required by the SEC, a 5.0% annual return, our performance will vary and may result in a return greater or less than 5.0%. Assuming a 5.0% annual return, the incentive fee under the Investment Advisory Agreement would either not be payable or have an insignificant impact on the expense amounts shown above. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, our expenses, and returns to our investors, would be higher. In addition, while the example assumes reinvestment of all distributions at net asset value, if our Board authorizes and we declare a cash dividend, participants in our dividend reinvestment plan who have not otherwise elected to receive cash will receive a number of shares of our common stock, determined by dividing the total dollar amount of the distribution payable to a participant by the market price per share of our common stock at the close of trading on the valuation date for the distribution.
This example and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses (including the cost of debt, if any, and other expenses) may be greater or less than those shown.
Rule 10b5-1 Trading Plans
During the fiscal year ended December 31, 2025, none of the our directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any non-Rule 10b5-1 trading arrangement.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
We will file with the SEC a definitive Proxy Statement for our 2026 Annual Meeting of Stockholders, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to the Annual Report on Form 10-K. Only those sections of our definitive Proxy Statement that specifically address the items set forth herein are incorporated by reference.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 is hereby incorporated by reference from the Company’s definitive Proxy Statement relating to our 2026 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of the Company’s fiscal year.
We have adopted a code of business conduct and ethics that applies to our directors, officers and employees. This code of ethics is published on our website at www.stelluscapital.com. We intend to disclose any future amendments to, or waivers from, this code of conduct within four business days of the waiver or amendment through a website posting.
We have adopted an insider trading policy that applies to our directors and officers. This insider trading policy can be found as Exhibit 19.1 to this Annual Report on Form 10-K.
Item 11. Executive Compensation
The information required by Item 11 is hereby incorporated by reference from the Company’s definitive Proxy Statement relating to the Company’s 2026 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of the Company’s fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 is hereby incorporated by reference from the Company’s definitive Proxy Statement relating to the Company’s 2026 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of the Company’s fiscal year.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 is hereby incorporated by reference from the Company’s definitive Proxy Statement relating to the Company’s 2026 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of the Company’s fiscal year.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 is hereby incorporated by reference from the Company’s definitive Proxy Statement relating to the Company’s 2026 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of the Company’s fiscal year.
Item 15. Exhibits, Financial Statement Schedules
a. Documents Filed as Part of this Report
The following financial statements are set forth in Item 8:
b. Exhibits
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
Articles of Amendment and Restatement (Incorporated by reference to Exhibit (a)(1) to the Registrant’s Registration Statement on Form N-2 (File No. 333-184195), filed on October 23, 2012).
Bylaws (Incorporated by reference to Exhibit (b)(1) to the Registrant’s Registration Statement on Form N-2 (File No. 333-184195), filed on October 23, 2012).
4.1
Form of Stock Certificate (Incorporated by reference to Exhibit (d) to the Registrant’s Registration Statement on Form N-2 (File No. 333-184195), filed on October 23, 2012).
Form of Indenture (Incorporated by reference to Exhibit (d)(2) to the Registrant’s Registration Statement on Form N-2 (File No. 333-189938), filed January 29, 2014).
Fourth Supplemental Indenture, dated as of April 1, 2025, by and between Stellus Capital Investment Corporation and U.S. Bank Trust Company, National Association (as successor in interest to U.S. Bank National Association), as trustee (Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 814-00971), filed on April 2, 2025).
4.4
Form of Global Note with respect to the 7.250% Notes due 2030 (Incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 814-00971), filed on April 2, 2025).
4.5
Description of Securities (Incorporated by reference to Exhibit 4.8 to the Registrant’s Annual Report on Form 10-K (File No. 814-00971), filed on March 1, 2023).
10.1
Form of Investment Advisory Agreement between Registrant and Stellus Capital Management, LLC (Incorporated by reference to Exhibit (g) to the Registrant’s Registration Statement on Form N-2 (File No. 333-184195), filed on October 23, 2012).
Custody Agreement between Registrant and ZB, National Association (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 814-00971), filed on November 7, 2017).
10.3
Administration Agreement between Registrant and Stellus Capital Management, LLC (Incorporated by reference to Exhibit (k)(1) to the Registrant’s Registration Statement on Form N-2 (File No. 333-184195), filed on October 23, 2012).
10.4
Dividend Reinvestment Plan (Incorporated by reference to Exhibit (e) to the Registrant’s Registration Statement on Form N-2 (File No. 333-184195), filed on October 23, 2012).
Form of License Agreement between the Registrant and Stellus Capital Management (Incorporated by reference to Exhibit (k)(2) to the Registrant’s Registration Statement on Form N-2 (File No. 333-184195), filed on October 23, 2012).
10.6
Form of Indemnification Agreement between the Registrant and the directors (Incorporated by reference to Exhibit (k)(3) to the Registrant’s Registration Statement on Form N-2 (File No. 333-184195), filed on October 23, 2012).
Form of Guarantee and Security Agreement, the Registrant, ZB, N.A., dba Amegy Bank, as administrative agent, and ZB, N.A. dba Amegy Bank, as collateral agent (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 814-00971), filed on October 13, 2017).
186
10.8
Senior Secured Revolving Credit Agreement, dated October 10, 2017, between the Registrant, as a borrower, the lenders party thereto and ZB, N.A. dba Amegy Bank, as administrative agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 814-00971), filed on October 13, 2017).
10.9
Consent and Waiver, dated March 28, 2018, between the Registrant, as a borrower, the lenders party hereto and ZB, N.A. dba Amegy Bank, as administrative agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 814-00971), filed on May 8, 2018).
10.10
First Amendment to Senior Secured Revolving Credit Agreement and Commitment Increase, dated August 2, 2018, between the Registrant, as a borrower, the lenders party thereto and ZB, N.A. dba Amegy Bank, as administrative agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 814-00971), filed on August 8, 2018).
10.11
Second Amendment to Senior Secured Revolving Credit Agreement and Commitment Increase, dated September 13, 2019, between the Registrant, as a borrower, the lenders party thereto and ZB, N.A. dba Amegy Bank, as administrative agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 814-00971), filed on September 18, 2019).
Increase Agreement, dated December 27, 2019, between the Registrant, as a borrower, the lenders party thereto and ZB, N.A. dba Amegy Bank, as administrative agent (Incorporated by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K (File No. 814-00971), filed on March 3, 2020).
10.13
Third Amendment to Senior Secured Revolving Credit Agreement and Commitment Increase, dated May 15, 2020, between the Registrant, as a borrower, the lenders party thereto and ZB, N.A. dba Amegy Bank, as administrative agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 814-00971), filed on May 18, 2020).
10.14
Amended and Restated Senior Secured Revolving Credit Agreement, dated September 18, 2020, between the Registrant, as a borrower, the lenders party thereto and ZB, N.A. dba Amegy Bank, as administrative agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 814-00971), filed on September 21, 2020).
First Amendment and Commitment Increase to Amended and Restated Senior Secured Revolving Credit Agreement, dated December 22, 2021, between the Registrant, as a borrower, the lenders party thereto and ZB, N.A. dba Amegy Bank, as administrative agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 814-00971), filed on December 22, 2021).
Third Amendment and Commitment Increase to Amended and Restated Senior Secured Revolving Credit Agreement, dated as of May 13, 2022, between the Registrant, as borrower, the lenders party thereto, and Zions Bancorporation, N.A. dba Amegy Bank, as the administrative agent. (Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 814-00971), filed on May 19, 2022).
Custody Agreement, dated November 2, 2022, by and among Stellus Capital SBIC LP and Frost Bank, as custodian. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 814-00971), filed on November 3, 2022).
Fourth Amendment to Amended and Restated Senior Secured Revolving Credit Agreement, dated as of November 21, 2023, among Stellus Capital Investment Corporation, the lenders party thereto, and Zions Bancorporation, N.A. dba Amegy Bank, as the administrative agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 814-00971), filed on November 22, 2023.
10.19
Increase Agreement, dated October 30, 2024, between the Company, as a borrower, Zions Bancorporation, N.A. dba Amegy Bank, as the administrative agent, and the lenders that are party thereto (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 814-00971), filed on November 1, 2024).
10.20
Equity Distribution Agreement, dated September 9, 2025, by and among Stellus Capital Investment Corporation and Stellus Capital Management, LLC, on the one hand, and Keefe, Bruyette & Woods, Inc. and Raymond James & Associates, Inc., on the other hand (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No.814-00971), filed on September 10, 2025).
Sixth Amendment to Amended and Restated Senior Secured Revolving Credit Agreement, dated as of September 11, 2025, between Stellus Capital Investment Corporation, the lenders party thereto, and Zions Bancorporation, N.A., d/b/a Amegy Bank, as Administrative Agent, Swingline Lender, Issuing Bank and Multicurrency Lender (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No.814-00971), filed on September 15, 2025).
14.1
Code of Ethics (Incorporated by reference to Exhibit (r)(1) to the Registrant’s Registration Statement on Form N-2 (File No. 333-184195), filed on October 23, 2012).
19.1*
Insider Trading Policy
21.1
Subsidiaries of the Registrant and jurisdiction of incorporation/organizations:
Stellus Capital SBIC, LP — Delaware
Stellus Capital SBIC GP, LLC — Delaware
Stellus Capital SBIC II, LP — Delaware
Stellus Capital SBIC III, LP — Delaware
SCIC-SKP Blocker 1, Inc. — Delaware
SCIC-ERC Blocker 1, Inc. — Delaware
SCIC-Consolidated Blocker, Inc. — Delaware
SCIC-CC Blocker 1, Inc. — Delaware
SCIC-APE Blocker 1, Inc. — Delaware
SCIC-Hollander Blocker 1, Inc. — Delaware
SCIC-Invincible Blocker 1, Inc. — Delaware
SCIC-Venbrook Blocker, Inc. — Delaware
23.1*
Consent of Deloitte & Touche LLP
23.2*
Consent of Grant Thornton LLP
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1*
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
188
97.1
Dodd-Frank Compensation Recoupment Policy (Incorporated by reference to Exhibit 97.1 to the Registrant’s Annual Report on Form 10-K (File No. 814-00971), filed on March 4, 2025).
101.INS*
XBRL Instance Document — the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 104
Cover Page Interactive Data File — The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Filed herewith.
c. Financial statement schedules
No financial statement schedules are filed herewith because (1) such schedules are not required or (2) the information has been presented in the aforementioned financial statements.
Item 16. Form 10-K Summary
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 11, 2026
/s/ Robert T. Ladd
Robert T. Ladd
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated.
Chief Executive Officer, President andChairman of the Board of Directors
/s/ W. Todd Huskinson
W. Todd Huskinson
Chief Financial Officer, Chief Compliance Officerand Secretary
(Principal Accounting and Financial Officer)
/s/ Dean D’Angelo
Dean D’Angelo
Director
/s/ J. Tim Arnoult
J. Tim Arnoult
/s/ Bruce R. Bilger
Bruce R. Bilger
/s/ William C. Repko
William C. Repko