Stellus Capital Investment (SCM) risk factors, 2025 10-K

Risks Relating to our Business and Structure

1. 01The 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
2. 02Any 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
3. 03General 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
4. 04Fluctuations in interest rates could have a material adverse effect on our business and that of our portfolio companies
5. 05Inflation has adversely affected and may continue to adversely affect the business, results of operations and financial condition of our portfolio companies
6. 06We are subject to risks related to corporate social responsibility
7. 07We 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
8. 08Our 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
9. 09Our financial condition, results of operations and cash flows will depend on our ability to manage our business effectively
10. 10There are significant potential conflicts of interest that could negatively affect our investment returns
11. 11The 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
12. 12Our management and incentive fees may induce Stellus Capital Management to incur additional leverage
13. 13Our incentive fee may induce Stellus Capital Management to make speculative investments
14. 14We 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
15. 15We operate in a highly competitive market for investment opportunities, which could reduce returns and result in losses
16. 16Our investments in the business services industry are subject to unique risks relating to technological developments, regulatory changes and changes in customer preferences
17. 17We will be subject to U.S. federal income tax if we are unable to maintain our tax treatment as a RIC under Subchapter M of the Code
18. 18Legislative or regulatory tax changes could have an adverse impact on us and our stockholders
19. 19We may have difficulty paying our required distributions if we recognize income before, or without, receiving cash representing such income
20. 20corresponding cash payments. We also may be required to include in income certain other amounts that we will not receive in cash
21. 21We 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
22. 22PIK 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
23. 23Regulations 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
24. 24Because 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
25. 25Substantially 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
26. 26Provisions in the Credit Facility or any other future borrowing facility may limit our discretion in operating our business
27. 27Because we use debt to finance our investments 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
28. 28Adverse developments in the credit markets may impair our ability to enter into any other future borrowing facility
29. 29Most 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
30. 30We may expose ourselves to risks if we engage in hedging transactions
31. 31We incur significant costs as a result of being a publicly traded company
32. 32As a non-accelerated filer, we are not required to comply with the auditor attestation requirements of the Sarbanes-Oxley Act
33. 33We and our portfolio companies may be subjected to potential adverse effects of new or modified laws or regulations
34. 34Any failure to comply with SBA regulations could have an adverse effect on our SBIC subsidiaries’ operations

Risks Related to Our Operations

1. 35Because 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
2. 36Our 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
3. 37Our ability to enter into certain transactions with our affiliates is restricted, which may limit the scope of investments available to us
4. 38The involvement of our interested directors in the valuation process may create conflicts of interest
5. 39There are conflicts related to other arrangements with Stellus Capital Management
6. 40The 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
7. 41The 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
8. 42Our 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
9. 43Stellus 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
10. 44Stellus 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
11. 45If we fail to comply with the regulatory requirements applicable to BDCs, our business could be affected and our operating flexibility could be significantly reduced
12. 46As 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
13. 47We may experience fluctuations in our annual and quarterly operating results
14. 48Our Board may change our investment objective, operating policies and strategies without prior notice or stockholder approval
15. 49Our 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
16. 50Provisions 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
17. 51We 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
18. 52The 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
19. 53We, Stellus Capital Management and our portfolio companies are subject to risks associated with “phishing” and other cyber-attacks

Risks Related to Economic Conditions

1. 54Global economic, political and market conditions may adversely affect our business, financial condition and results of operations, including our revenue growth and profitability
2. 55Increased 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

Risks Related to our Investments

1. 56Our business and our portfolio companies may be susceptible to economic slowdowns or recessions which would harm our operating results
2. 57We 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
3. 58Our investments in leveraged portfolio companies may be risky, and we could lose all or part of our investment
4. 59We 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
5. 60Our investments in private and lower middle-market portfolio companies are risky, and we could lose all or part of our investment
6. 61The lack of liquidity in our investments may adversely affect our business
7. 62Price 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
8. 63We 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
9. 64Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio
10. 65Because 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
11. 66Defaults by our portfolio companies will harm our operating results
12. 67Prepayments 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
13. 68The effect of global climate change may impact the operations of our portfolio companies
14. 69Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies
15. 70We may be exposed to special risks associated with bankruptcy cases
16. 71If we make subordinated investments, the obligors or the portfolio companies may not generate sufficient cash flow to service their debt obligations to us
17. 72The disposition of our investments may result in contingent liabilities
18. 73We may not realize gains from our equity investments
19. 74Our ability to enter transactions involving derivatives and financial commitment transactions may be limited

Risks Relating to Our Common Stock

1. 75There 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
2. 76Stockholders may experience dilution in their ownership percentage if they do not participate in our dividend reinvestment plan
3. 77Our shares might trade at premiums that are unsustainable or at discounts from net asset value
4. 78Investing in our securities may involve an above average degree of risk
5. 79The market price of our securities may fluctuate significantly

Risks Relating to Our Debt Securities

1. 80The Notes Payable are structurally subordinated to the indebtedness and other liabilities of our subsidiaries
2. 81The indenture under which the Notes Payable are issued contains limited protection for holders of the Notes Payable
3. 82There is no active trading market for the Notes Payable. If an active trading market does not develop for the Notes Payable, you may not be able to sell them
4. 83If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes Payable
5. 84We may choose to redeem the Notes Payable when prevailing interest rates are relatively low
6. 85We may not be able to repurchase the Notes Payable upon a Change of Control Repurchase Event
7. 86A downgrade, suspension or withdrawal of the credit rating assigned by a rating agency to us or the Notes Payable or change in the debt markets could cause the liquidity or market value of the Notes Payable to decline significantly