SCM 10-K & 10-Q changes, risk factors and insider trading

From time to time, capital markets may experience periods of disruption and instability, including during portions of the past several fiscal years. In addition, between 2008 and 2009, the global capital markets were unstable, as evidenced by periodic disruptions in liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of major financial institutions. Despite actions of the U.S. federal government and foreign governments, these events contributed to worsening general economic conditions that materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole and financial services firms in particular. 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.

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.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.

Any public health emergency, including any outbreak of other 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.

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 twicethree times in 2024.2025. 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 thethere is potential for additional federal funds rate cuts,cuts therelater remainsin uncertainty around the rate and timing of decreases, including as a result of the new U.S. presidential administration.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.

Certain of our portfolio companies are in industries that have been impacted by inflation. RecentOngoing 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.

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 currentthen-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.

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 Subchaptersubchapter M of the Code.

To maintain our tax treatment as a RIC under Subchaptersubchapter M of the Code, we must meet certain source-of-income, asset diversification and distribution requirements. The distributionAnnual requirementDistribution Requirement for a RIC generally is satisfied 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 tax. To maintain our tax treatment as a RIC, we must also meet certain asset diversification requirements at the end of each calendar quarter. 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.income.

Legislative or other actions relating to taxes could have a negative effect on us. Matters pertaining to with 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. The Trump Administration has proposed significant changes to the Code and existing U.S federal income tax regulations and there are a number of proposals in Congress that, if enacted, would similarly modify the Code. The likelihood of any such legislation being enacted is uncertain, but newNew 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 shares.securities.

Since in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirementAnnual toDistribution 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,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 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 RICAnnual distributionDistribution requirementsRequirement 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.

If we are unable to meet the financial obligations under our 4.875%7.250% Notes due 20262030 (the “2030 Notes Payable”), as issued on JanuaryApril 14,1, 2021,2025 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 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.

Because we use debt to finance our investments and have issued, and may in the future issueissue, 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 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.

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 Topic 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.

AsA a result of the 2024 U.S. election, onesingle 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, we cannot be sure whether there willmay be increased challenges to existing agency regulations orand 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 U.S. Supreme Court’s 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,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.

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 of 1958, as amended,Act, or any rule or regulation promulgated thereunder. These actions by the SBA would, in turn, negatively affect us because our SBIC subsidiaries are our wholly owned subsidiaries.

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 of 1958, as amended, 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.

There are potential conflicts related to other arrangements we have with Stellus Capital Management.

The Investment Advisory Agreement and the Administration Agreement with Stellus Capital Management were not negotiated on an arm’s lengtharm’s-length basis and may not be as favorable to us as if they had been negotiated with an unaffiliated third party.

We believe that most of the investments that we may 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).

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.

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 the emergence of new technologies, such as artificial intelligence, which are able to identify and target new vulnerabilities in information technology systems.

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 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.

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.

Stockholders may experience dilution in their ownership percentage if they do not participate in our dividend reinvestment plan.plan (“DRIP”).

All distributions declared in cash payable to stockholders that are participants in our dividend reinvestment planDRIP are generally automatically reinvested in shares of our common stock. As a result, stockholders that do not participate in the dividend reinvestment planDRIP 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.

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, 2024,2025, we had $175.4$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.

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, 2024,2025, our subsidiaries had total indebtedness outstanding of $325.0$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:

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.

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 anyall issuerprivate operating companies, operating companies whose securities are not listed on a national securities exchange, and certain public operating companies that (i)have islisted organizedtheir securities on a national securities exchange and with their principal of business in the United States, (ii) is not an investment company (other than SBICs that are wholly owned subsidiaries of a BDC) or a company that would be an investment company but for certain exclusions under the 1940 Act, and (iii) satisfies any one of the following criteria: such company (a) hashave a market capitalization of less than $250 millionmillion, orin doeseach notcase haveorganized aand classwith their principal place of securitiesbusiness listed on a national securities exchange, (b) is controlled by a BDC or a group of companies including a BDC,in the BDCUnited actually exercises a controlling influence over the management or policies of the company, and, as a result thereof, the BDC has an affiliated person who is a director of the company, or (c) is a small and solvent company having total assets of not more than $4 million and capital and surplus of not less than $2 million.States.

We have electedelected, to be treated, qualify,qualified, and intend to continue to qualify annually to be treated for tax purposes as a RIC under Subchaptersubchapter 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, 2024,2025, we were in compliance with the RIC requirements. As a RIC, we generally will not be subjecthave to pay corporate level U.S. federal income taxes on any income we distribute to our stockholders.

On April 4, 2018,Under the Board, including a “required majority” of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2)provisions of the 1940 Act.Act, Atwe are permitted, as a BDC that has satisfied certain requirements, to issue senior securities in amounts such that our 2018 annual meeting of stockholders, our stockholders also approved the application of the modified asset coverage requirementsratio, setas forthdefined in Section 61(a)(2) of the 1940 Act.Act, Asequals aat result,least the asset coverage ratio applicable to us was decreased from 200% to 150%, effective June 29, 2018, which effectively increased the amount150% of leverageour wegross mayassets, incur.less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. As of December 31, 2024,2025, our asset coverage ratio was 234%.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.

Economic activity has continued to accelerate across sectors and regions. Nonetheless, we have observed and continue to observe supplymacroeconomic chainuncertainty interruptions,as a result of various events and trends, including labor resource shortages, commodity inflation, fluctuating interest rates, bank impairments and failures, economic sanctions in response to international conflicts and instances of geopolitical, economic and financial market instability in the United States and abroad.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.

The following is a summary of geographicalindustry concentration of our investment portfolio as of December 31, 20232025:

The weighted average yield on all of our debt investments as of December 31, 20242025 and December 31, 20232024 was approximately 10.3%9.3% and 11.9%,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, 20242025 and December 31, 20232024 was approximately 9.7%8.7% and 11.1%,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.

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,activity in that sector, the general economic environment and the competitive environment for the types of investments we make.

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, 2023, we had loans to four portfolio companies that were on non-accrual status, which represented approximately 4.2% of our loan portfolio at cost and 1.3% at fair value. As of December 31, 20242025 and December 31, 2023,2024, $6.5$11.2 million and $7.5$6.5 million of income from investments on non-accrual had not been accrued, respectively.

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 expensesexpenses, 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.

We generate revenue in the form of interest income on debt investments and capital gains and distributions, if any, on investmentequity 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 securitiesinvestments 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.

The following shows the breakdown of our investment income for the years ended December 31, 2025, 2024, 2023, and 20222023 (in millions).

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. The increase in interest income from the year ended December 31, 2022 to the year ended December 31, 2023 was due primarily to growth in the overall investment portfolio and rising interest rates.

Net Realized Gains and (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, 2024 totaled $151.8 million, net realized losses on investments totaled ($15.7) million and net realized losses on foreign currency translations of ($0.1) million. Net realized losses during the year ended December 31, 2024 resulted primarily from losses from the realization of our debt investments in certain portfolio companies, partially offset from gains from the realization of certain 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$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, 2022 totaled $127.5 million resulting in net realized gains totaling $3.7 million, primarily from gains from the realization of our equity investments in certain portfolio companies, offset by dispositions of loans in our portfolio.

Net Change in Unrealized Appreciation (Depreciation) of Investments

Net change in unrealized appreciation (depreciation) appreciation on investments and cash equivalents, including foreign currency translations, for the yearyears ended December 31, 2025, 2024, 2023, and 20222023 totaled ($11.1) million, $19.6 million, and $2.8 million, and ($17.5) 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 was primarily due to realizations on investments previously written down. The change in unrealized appreciation in 2023 wasas primarily due to realizations on investments previously written down. The change in unrealized depreciation in 20222023 was primarily due to write downsrealizations on specificinvestments investments.previously written down and net company-specific write-downs.

We have direct wholly owned subsidiaries that have elected to be treated as corporations for U.S. federal income tax purposes (the "”Taxable Subsidiaries"”), andand, 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 throughpass-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. federal income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in our Consolidated Financial Statements.

For the years ended December 31, 2024,2025, 20232024 and 2022,2023, 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, and ($0.2) 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, 2022.2025. As of December 31, 20242025 and 2023,2024, a tax receivable related to the tax benefit on realized losses of $1.3$1.4 million and $1.6$1.3 million, respectively, was included on the Consolidated Statements of Assets and Liabilities. As of December 31, 2023, a deferred tax liability of $0.2 million was included in Consolidated Statements of Assets2025 and Liabilities. As of December 31, 2024, there was no such deferred tax liability included in Consolidated Statements of Assets and Liabilities.

Net increase in net assets resulting from operations totaled $17.5$27.0 million, or $0.80$0.95 per common share based on 28,364,809 weighted-average common shares of 22,004,648 outstanding for the year ended December 31, 2023.2025.

Net increase in net assets resulting from operations totaled $14.5$45.8 million, or $0.74$1.79 per common share based on 25,596,593 weighted-average common shares of 19,552,931 outstanding for the year ended December 31, 2022.2024.

Our operating activities used net cash of $28.6$24.4 million for the year ended December 31, 2024,2025, 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, 20242025 provided cash of $22.6$29.4 millionmillion, primarily from our ATM ProgramProgram, 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 $56.3$28.6 million for the year ended December 31, 2022,2024, 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, 20222024 provided cash of $60.2$22.6 millionmillion, primarily from proceedsour fromATM SBA-guaranteed debenturesProgram and net borrowings on our Credit Facility.Facility, offset by stockholder distributions.

Our liquidity and capital resources are derived from the Credit Facility, Notes Payable, SBA-guaranteed debentures and cash flows from operations, including investment sales and repayments, the ATM Program, and income earned. Our primary use of funds from operations includes investments in portfolio companies and other operating expenses we incur, as well as the payment of dividends to the holders of our common stock. We used, and expect to continue to use, these capital resources as well as proceeds from turnover within our portfolio and from public and private offerings of securities to finance our investment activities. Although we expect to fund the growth of our investment portfolio through the net proceeds from future public and private equity offerings and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act, our plans to raise capital may not be successful. In this regard, if our common stock trades at a price below our then-current net asset value per share, we may be limited in our ability to raise equity capital given that we cannot sell our common stock at a price below net asset value per share unless our stockholders approve such a sale and our Board makes certain determinations in connection therewith. A proposal approved by our stockholders at our 20242025 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 20,17, 2025,2026, the one-year anniversary of our 20242025 annual stockholders meeting, or the date of our 20252026 annual stockholders meeting. We would need similar future approval from our stockholders to issue shares below the then currentthen-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.

Also,Under the provisions of the 1940 Act, we are permitted, as a BDC,BDC wethat generallyhas aresatisfied requiredcertain requirements, to meetissue ansenior securities in amounts such that our asset coverage ratioratio, as defined in the 1940 Act, equals at least 150% of totalour gross assets, less all liabilities and indebtedness not represented by senior securities, overafter theeach aggregate amount of our senior securities, which includes all of our borrowings and any outstanding preferred stock, of at least 150% effective June 29, 2018 (at least 200% prior to June 29, 2018). This requirement limits the amount that we may borrow. We have received exemptive relief from the SEC to permit us to exclude the debt of the SBIC subsidiaries guaranteed by the SBA from the definitionissuance of senior securities in the asset coverage test under the 1940 Act. We were in compliance with the asset coverage ratio requirement at all times.securities. As of December 31, 20242025 and December 31, 2023,2024, our asset coverage ratio was 234%203% and 223%,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, 20242025 and December 31, 2023,2024, we had cash and cash equivalents of $20.1$25.1 million and $26.1$20.1 million, respectively.

OnWe October 11, 2017, wehave entered into a senior secured revolving credit agreement, as amended, dated as of October 10, 2017, thatwith wasZions 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, and October 30, 2024, with Zions Bancorporation, N.A., dba Amegy Bank2024 and variousSeptember other11, lenders.2025.

Pursuant to theits Fourth Amendment to Amended and Restated Senior Secured Revolving Credit Agreement,terms, the Credit Facility will bear interest, subject to our election, on a per annum basis equal to (i) term SOFR plus 2.50%2.25% (or 2.75%2.50% during certain periods in which our asset coverage ratio is equal to or below 1.90 to 1.00) plus a SOFR credit spread adjustment (0.10% for one-month term SOFR and 0.15% for three-month term SOFR), with a 0.25% SOFR floor, or (ii) 1.50%1.25% (or 1.75%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. Interest is payable monthly or quarterly in arrears. The commitment to fund the revolver expires on NovemberSeptember 21,11, 2027,2029, 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 NovemberSeptember 21,11, 2028.2030. 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 termshort-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, 2024,2025, we were in compliance with these covenants.

As of December 31, 20242025 and December 31, 2023,2024, the outstanding balance under the Credit Facility was $175.4$236.6 million and $160.1$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 $7.3$8.9 million in connection with the current 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, 20242025 and 2023,2024, $3.1$3.5 million and $3.5$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.

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 both December 31, 20242025 and 2023,2024, the SBIC I subsidiary had $75.0 million in “regulatory capital”, for both periods, as such term is defined by the SBA, and $150$124.0 million and $150.0 million of SBA-guaranteed debentures outstanding.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, 20242025 and 2023,2024, the SBIC II subsidiary had $87.5 million in regulatory capital and $175$175.0 million of SBA-guaranteed debentures outstanding.

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 both December 31, 20242025 and 2023,2024, the SBIC subsidiaries had $299.0 million and $325.0 million of the SBA-guaranteed debentures outstanding.outstanding, respectively.

During the three and six months ended MarchJune 31,30, 2026, there have been no material changes to the risk factors discussed in our SEC filings referenced above.

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 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 MarchJune 31,30, 2026, 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 MarchJune 31,30, 2026, our asset coverage ratio was 199%.206%. 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.

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

As of MarchJune 31,30, 2026, we had $990.0$968.2 million (at fair value) invested in 116 portfolio companies. As of MarchJune 31,30, 2026, our portfolio included approximately 90%89% of first lien debt (including unitranche investments), 1% of second lien debt, 0% of unsecured debt and 9%10% of equity investments at fair value. The composition of our investments at cost and fair value as of MarchJune 31,30, 2026 was as follows:

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 MarchJune 31,30, 2026 and December 31, 2025, we had unfunded commitments of $48.2$45.7 million and $53.4 million, respectively, to provide financing to 7677 and 77 portfolio companies, respectively. As of MarchJune 31,30, 2026, we had sufficient liquidity (through cash on hand and available borrowings under the Credit Facility (as defined below)) to fund such unfunded commitments should the need arise.

The following is a summary of geographical concentration inof our investment portfolio as of MarchJune 31,30, 2026:

The following is a summary of geographical concentration of inour investment portfolio as of December 31, 2025:

The following is a summary of industry concentration inof our investment portfolio as of MarchJune 31,30, 2026:

The following is a summary of industry concentration inof our investment portfolio as of December 31, 2025:

At MarchJune 31,30, 2026, our average portfolio company investment at amortized cost and fair value was approximately $8.8$8.4 million and $8.5$8.4 million, respectively, and our largest portfolio company investment at amortized cost and fair value was approximately $28.0$30.9 million and $18.5$26.0 million, respectively. 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 MarchJune 31,30, 2026 and December 31, 2025, 91.5%91.7% and 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”), respectively, and 8.5%8.3% and 8.4% bore interest at fixed rates, respectively.

The weighted average yield on all of our debt investments as of MarchJune 31,30, 2026 and December 31, 2025 was approximately 9.0% and 9.3%, respectively. The weighted average yield on all of our investments, including non-income producing equity positions, as of MarchJune 31,30, 2026 and December 31, 2025 was approximately 8.5%8.4% and 8.7%, respectively. The weighted average yield was computed using the effective interest rates for all of our debt investments, including accretion of original issue discount. The weighted average yield of our debt investments is not the same as a return on investment for our 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 MarchJune 31,30, 2026 and December 31, 2025, we had cash and cash equivalents of $3.4$5.1 million and $25.1 million, respectively.

During the threesix months ended MarchJune 31,30, 2026, we made an aggregate of $27.7$45.7 million of investments in threesix new portfolio companies and nine11 existing portfolio companies. During the threesix months ended MarchJune 31,30, 2026, we received an aggregate of $41.7$90.9 million in proceeds from repayments of our investments.

During the threesix months ended MarchJune 31,30, 2025, we made an aggregate of $55.4$78.2 million of investments in sevennine new portfolio companies and five13 existing portfolio companies. During the threesix months ended MarchJune 31,30, 2025, we received an aggregate of $15.0$46.6 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,activity, the general economic environment and the competitive environment for the types of investments we make.

We will not accrue interest on loans and debt securities if we have reason to doubt our ability to collect such interest. As of MarchJune 31,30, 2026, we had loans to sixfive portfolio companies that were on non-accrual status, which represented approximately 9.2%8.5% of our total investments at cost and 5.2%5.4% at fair value. 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 MarchJune 31,30, 2026 and December 31, 2025, $13.2$14.9 million and $11.2 million of income from investments on non-accrual had not been accrued, respectively.

Comparison of the Three and Six Months Ended MarchJune 31,30, 2026 and 2025

The following shows the breakdown of investment income for the three and six months ended MarchJune 31,30, 2026 and 2025 (in millions).

The decrease in investment income for the three and six months ended MarchJune 31,30, 2026 was due primarily to a decrease in prevailing market rates on our loans, typically in reference to the SOFR.Secured Overnight Financing Rate (“SOFR”) and a decrease in our principal debt outstanding.

The following shows the breakdown of operating expenses for the three and six months ended MarchJune 31,30, 2026 and 2025 (in millions).

The decrease in gross operating expenses for the three and six months ended MarchJune 31,30, 2026, as compared to the three and six months ended MarchJune 31,30, 2025, was due to the decrease in income incentive fees, partially offset by higher management fees and interest expense due to overall portfolio growth, and increased professional fees. The increase in net operating expenses for the three months ended March 31, 2026, as compared to the three months ended March 31, 2025, was due to the decrease in income incentive fees waived.

For the three months ended MarchJune 31,30, 2026, net investment income was $7.5 million, or $0.26 per common share (based on 28,947,25428,869,028 weighted average shares outstanding for the three months ended MarchJune 31,30, 2026).

For the three months ended MarchJune 31,30, 2025, net investment income was $9.8$9.6 million, or $0.35$0.34 per common share (based on 27,602,61228,412,849 weighted average shares outstanding for the three months ended MarchJune 31,30, 2025).

NetThe decrease in net investment income forover the respective three and six months endedperiods Marchwas 31, 2026 decreased compareddue to the three months ended March 31, 2025 as a result of decreased interest income as explained in the “Revenues” section aboveabove, andpartially higheroffset by a decrease in operating expenses as explained in the “Expenses” section above.

Proceeds from repayments of investments and amortization of certain other investments for the three months ended MarchJune 31,30, 20252026 totaled $15.0$49.2 million and net realized losses totaled ($6.0$7.2) million.

Net change in unrealized appreciation (depreciation) appreciationof investments 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 for the three months ended MarchJune 31,30, 2026 and 2025 totaled ($6.5)$15.9 million and $1.2$1.4 million, respectively.

The change in unrealized (depreciation) appreciation over the respective periods was primarily due to reversals of previous write-downs that were realized and company-specific write-downs,investment partiallywrite-ups, offset by realizationscompany-specific on investments previously written up.write-downs.

We have direct wholly owned subsidiaries that have elected to be taxable entities (the “Taxable Subsidiaries”). The Taxable Subsidiaries permit us to hold equity investments in portfolio companies, which are “pass through” entities for U.S. federal income tax purposes and continue to comply with the “source income” requirements contained in RIC tax provisions of the Code. The Taxable Subsidiaries are not consolidated with us for U.S. federal income tax purposes and may generate U.S. federal income tax expense, benefit, and the related tax assets and liabilities, as a result of their ownership of certain portfolio investments. The U.S. federal income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in our consolidated financial statements. For both the three and six months ended MarchJune 31,30, 2026 and June 30, 2025, we recognizeddid anot provisionrecord fordeferred income tax onbenefit unrealizedor investmentsprovision ofrelated $0.0 million forto the Taxable Subsidiaries. As of both MarchJune 31,30, 2026 and December 31, 2025, there was $0.0 million of deferred tax liabilities on the Consolidated Statements of Assets and Liabilities.

For the three months ended MarchJune 31,30, 2026, net increase in net assets resulting from operations totaled $1.7$16.2 million, or $0.06$0.56 per common share (based on 28,947,25428,869,028 weighted average shares outstanding for the three months ended MarchJune 31,30, 2026).

For the three months ended MarchJune 31,30, 2025, net increase in net assets resulting from operations totaled $5.0$10.1 million, or $0.18$0.36 per common share (based on 27,602,61228,412,849 weighted average shares outstanding for the three months ended MarchJune 31,30, 2025).

The net decrease in net assets between the respective periods was due to higher unrealized depreciation, partially offset by higher realized gains in the current year.

Our operating activities provided net cash of $22.8$56.2 million for the threesix months ended MarchJune 31,30, 2026, primarily in connection with salesthe and repaymentspurchase of portfolio investments, partially offset by the purchasenet increase in net assets resulting from operations and sales and repayments of portfolio investments. Our financing activities for the threesix months ended MarchJune 31,30, 2026 used cash of $44.5$76.1 million, primarily from repayments of SBA-guaranteed debentures.debentures and shareholder distributions.

Our operating activities used net cash of $36.9$13.3 million for the threesix months ended MarchJune 31,30, 2025, primarily in connection with the purchase of portfolio investments, partially offset by the net increase in net assets resulting from operations and sales and repayments of portfolio investments. Our financing activities for the threesix months ended MarchJune 31,30, 2025 provided cash of $27.8$33.2 million, primarily from proceeds from ourthe ATMissuance Programof andcommon stock, offset by net borrowingspaydowns on our Credit Facility,Facility partiallyand offsetshareholder by repayments of SBA-guaranteed debentures.distributions.

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 issuanceissuance. This requirement limits the amount that we may borrow. We have received exemptive relief from the SEC to permit us to exclude the debt of the Stellus Capital SBIC, LP (the “SBIC I subsidiary”), Stellus Capital SBIC II, LP (the “SBIC II subsidiary”), and Stellus Capital SBIC III, LP (the “SBIC III subsidiary”) (collectively, the “SBIC subsidiaries”) guaranteed by the U.S. Small Business Administration (“SBA”) from the definition of senior securities.securities in the asset coverage test under the 1940 Act. As of MarchJune 31,30, 2026 and December 31, 2025, our asset coverage ratio was 199%206% and 203%, 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 MarchJune 31,30, 2026 and December 31, 2025, we had cash and cash equivalents of $3.4$5.1 million and $25.1 million, respectively.

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 MarchJune 31,30, 2026 and December 31, 2025, we were in compliance with these covenants.

As of MarchJune 31,30, 2026 and December 31, 2025, $241.5$222.2 million and $236.6 million, respectively, was outstanding under the Credit Facility. 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 Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Credit Facility is estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. We incurred costs of $8.9 million in connection with the current Credit Facility, which are being amortized over the life of the facility. Additionally, $0.3 million of costs from a prior credit facility will continue to be amortized over the remaining life of the Credit Facility. As of June 30, 2026 and December 31, 2025, $3.0 million and $3.5 million 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.

Interest is paid monthly or quarterly in arrears. The following table summarizes the interest expense and amortized loan fees on the Credit Facility for the three and six months ended MarchJune 31,30, 2026 and 2025 (dollars in millions):

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 MarchJune 31,30, 2026 and December 31, 2025, the SBIC I subsidiary had 73.6$64.1 million and $75.0 million in “regulatory capital,” respectively, as such term is defined by the SBA, and $85.0 million and $124.0 million of SBA-guaranteed debentures outstanding, respectively. During the threesix months ended MarchJune 31,30, 2026, the SBIC I subsidiary repaid $39.0 million of SBA-guaranteed debentures that matured during the period. As of both MarchJune 31,30, 2026 and December 31, 2025, the SBIC II subsidiary had $87.5 million in regulatory capital and $175.0 million of SBA-guaranteed debentures outstanding. As of June 30, 2026 and December 31, 2025, the SBIC III subsidiary had $20.0 million and $0.0 million in regulatory capital, respectively, and $0 of SBA-guaranteed debentures outstanding for both periods.

On a stand-alone basis, the SBIC subsidiaries held $457.2$458.9 million and $492.7 million in assets at MarchJune 31,30, 2026 and December 31, 2025, respectively, which accounted for approximately 45.7%46.7% and 47.3% of our total consolidated assets, 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 MarchJune 31,30, 2026 and December 31, 2025, the carrying amount of the SBA-guaranteed debentures was $257.2$257.3 million and $296.0 million, respectively. At the measurement date, the estimated fair value of the SBA-guaranteed debentures as prepared for disclosure purposes was $232.8$231.7 million. 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 MarchJune 31,30, 2026 and December 31, 2025, the SBA-guaranteed debentures would be deemed to be Level 3, as defined in Note 6 to ourthe Consolidated Financial Statements.

As of MarchJune 31,30, 2026, 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 MarchJune 31,30, 2026 and December 31, 2025, $2.8$2.7 million and $3.0 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 three and six months ended MarchJune 31,30, 2026 and 2025 (dollars in millions):

Notes PayableOffering