Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q (including those relating to current and future market conditions and trends in respect thereof) that are not historical facts are based on current expectations, estimates, projections, opinions and/or beliefs of Star Mountain Lower Middle-Market Capital Corp. (the "Company"), Star Mountain Fund Management, LLC (the "Advisor") and Star Mountain Capital, LLC ("Star Mountain"). Such statements involve known and unknown risks, uncertainties and other factors and undue reliance should not be placed thereon. Certain information contained in this Quarterly Report on Form 10-Q constitutes "forward-looking statements," which can be identified by the use of forward-looking terminology such as "may," "will," "should," "seek," "expect," "anticipate," "project," "estimate," "intend," "continue," "target," or "believe" or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of the Company may differ materially from those reflected or contemplated in such forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond the Company's control and are difficult to predict, that could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements including, without limitation, the risks, uncertainties and other factors the Company identifies in the section entitled "Item 1A. Risk Factors" in Part I of our Annual Report on Form 10-K for the year ended December 31, 2024 and in "Item 1A. Risk Factors" in Part II of our subsequently filed Quarterly Reports on Form 10-Q and in the Company's filings with the Securities and Exchange Commission ("SEC").

Although the Company believes that the assumptions on which these forward-looking statements are based are reasonable, some of those assumptions are based on the work of third parties and any of those assumptions could prove to be inaccurate; as a result, the forward-looking statements based on those assumptions also could prove to be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that the Company's plans and objectives will be achieved. Investors should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. The Company does not undertake any obligation to update or revise any forward-looking statements or any other information contained herein, except as required by applicable law. The safe harbor provisions of Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"), which preclude civil liability for certain forward-looking statements, do not apply to the forward-looking statements in this Quarterly Report on Form 10-Q because the Company is an investment company.

The following factors are among those that may cause actual results to differ materially from the Company's forward-looking statements:

Overview:

Star Mountain Lower Middle-Market Capital Corp. is an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act, as amended. In addition, for U.S. federal income tax purposes, the Company has elected to be treated and intends to continue to be treated as a RIC under the Subchapter M of the Internal Revenue Code of 1986, as amended. As such, the Company is required to comply with various regulatory requirements, such as the requirement to invest at least 70% of the Company's assets in "qualifying assets," source of income limitations, asset diversification requirements, and the requirement to distribute annually at least 90% of the Company's taxable income.

The Company's investment objectives are to generate current income and capital appreciation. The Company seeks to achieve its investment objectives by investing primarily in privately negotiated loans and equity investments to SMBs generally with annual revenues greater than $15 million and earnings before interest, taxes, depreciation and amortization of less than $50 million. Generally, these businesses are owner-operated with an average 20+ year operating history. To accomplish this, the Company makes direct investments in SMBs and makes investments in investment funds focused primarily on investing in SMBs generally not owned by large private equity firms.

The Company seeks to provide investors with access to a diversified portfolio of credit investments generating current income distributions with equity upside. Capital protection is achieved through defensive structures with affirmative, negative and financial maintenance covenants and active portfolio management which results in generally low volatility and low correlation to public market indices. The Company aims to target diversification of assets by vintage, industry and geography through direct originations and acquisitions of loan portfolios.

The Company's investment strategy may be complemented by secondary fund investments and secondary loans, consisting of generally non-brokered purchases of limited partnership interests in lower middle-market credit-oriented funds and secondary loans. This complementary strategy may result in portfolio construction and diversification benefits.

The Company's investments are subject to a number of risks. See "Part I. Item 1A. Risk Factors" of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2024 as filed with the SEC on March 31, 2025.

Portfolio and Investment Activity:

For the nine months ended September 30, 2025, the Company invested (net of original issue discount) $12,312,500 in one new portfolio company and invested $25,923,163 in 17 existing portfolio companies as reflected in the Consolidated Schedule of Investments. For the nine months ended September 30, 2024, the Company invested (net of original issue discount) $20,642,363 in two new portfolio companies and $2,134,380 in three existing portfolio companies as reflected in the Consolidated Schedule of Investments.

The Company had $5,683,200 and $42,213,529, respectively, in principal repayments for the three and nine months ended September 30, 2025, of which $42,483,756 was received in cash as of September 30, 2025 (with the remaining balance as the change in receivable from December 31, 2024). The Company had $2,181,874 and $47,691,348, respectively in principal repayments for the three and nine months ended September 30, 2024, of which $48,244,155 was received in cash as of September 30, 2024 (with the remaining balance as the change in receivable from December 31, 2023).

As of September 30, 2025 and December 31, 2024, the Company's investments consisted of the following:

The table below describes investments by industry composition based on fair value as of September 30, 2025 and December 31, 2024:

Portfolio Asset Quality:

The Advisor employs an investment risk rating to assign each investment an investment grade no less than quarterly. The system is intended primarily to reflect the underlying risk of a portfolio investment relative to the Company's initial cost basis in respect of such portfolio investment (i.e., at the time of origination), although it may also take into account under certain circumstances, the portfolio company's cash flow generation relative to underwriting expectations, recent business performance trends, collateral coverage and other relevant factors. When necessary, the Advisor will update its investment risk ratings, borrowing base criteria and covenant compliance reports. The investment risk rating of a particular investment should not, however, be deemed to be a guarantee of the investment's future performance.

In the event of credit deterioration, the Advisor may form a team or engage outside advisors to preserve the value of the Company's investment, including requirement of additional equitization from the ownership group or exercising other creditor rights.

For investments rated Grade 4 or Grade 5, the Advisor enhances its level of scrutiny over the monitoring of such portfolio company and will develop an action plan to address the underperformance. The Advisor's senior investment team has extensive experience managing investments through workouts, restructurings, and bankruptcies.

The following table shows the distribution of the Company's investments on the 1 to 5 investment performance risk rating scale as of September 30, 2025 and December 31, 2024:

Results of Operations:

The following tables represent the operating results for the three and nine months ended September 30, 2025 and 2024:

Revenues:

The Company generates revenues primarily through receipt of interest income from the Portfolio Investments the Company holds. In addition, the Company generates income from various loan origination and other fees and dividends on direct equity investments. The debt the Company invests in will typically not be rated by any rating agency, but if it were, it is likely that such debt would be rated below investment grade.

Investment Income:

The composition of the Company's investment income was as follows for the three and nine months ended September 30, 2025 and 2024:

		For the three months ended September 30, 2025				For the three months ended September 30, 2024
Non-controlled/non-affiliate investment income
Interest income		$	7,421,040			$	7,576,521
PIK interest income			678,019				615,739
Other income			505,158				8,208
Dividend income			111,533				30,964
Controlled/affiliate investment income
Interest income			441,910				1,069,033
PIK interest income			123,615				139,866
Other income			6,186				-
Total investment income		$	9,287,461			$	9,440,331

		For the nine months ended September 30, 2025				For the nine months ended September 30, 2024
Non-controlled/non-affiliate investment income
Interest income		$	23,940,656			$	27,698,324
PIK interest income			2,186,406				3,041,693
Other income			942,387				170,192
Dividend income			800,272				153,177
Controlled/affiliate investment income
Interest income			1,887,248				1,909,109
PIK interest income			548,692				277,670
Other income			39,046				-
Dividend income			-				206,284
Total investment income		$	30,344,707			$	33,456,449

Operating Expenses:

The composition of the Company's operating expenses was as follows for the three and nine months ended September 30, 2025

and 2024:

Income Taxes, Including Excise Tax:

The Company has elected to be regulated as a BDC under the 1940 Act. The Company has also elected to be treated as a RIC under Subchapter M of the Code and intends to qualify annually as a RIC. As long as the Company maintains its status as a RIC, it generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes at least annually to its Stockholders. Rather, any tax liability related to income earned by the Company represents obligations of the Company's Stockholders and will not be reflected in the consolidated financial statements of the Company.

To qualify as a RIC under Subchapter M of the Code, the Company must, among other things, meet certain source-of-income and asset diversification requirements. In addition, to qualify for RIC tax treatment, the Company must distribute to its Stockholders, for each taxable year, at least 90.0% of its "investment company taxable income" for that year, which is generally its ordinary income plus the excess of its realized net short-term capital gains over its realized net long-term capital losses. In order for the Company not to be subject to U.S. federal excise taxes, it must distribute annually an amount at least equal to the sum of (i) 98.0% of its net ordinary income (taking into account certain deferrals and elections) for the calendar year, (ii) 98.2% of its capital gains in excess of capital losses for the one year period ending October 31 in that calendar year and (iii) any net ordinary income and capital gains in excess of capital losses for preceding years that were not distributed during such years and on which the Company paid no U.S. federal income tax. The Company, at its discretion, may carry forward taxable income in excess of calendar year dividends and pay a 4.0% nondeductible U.S. federal excise tax on this income. For the nine months ended September 30, 2025 the Company recorded a net tax expense of $761,000, and a benefit in deferred taxes on unrealized appreciation on investments of $2,139,870. For the year ended December 31, 2024 the Company recorded a tax expense of $37,907, and a provision in deferred taxes on unrealized appreciation on investments of $6,094,196.

The Company accounts for income taxes in conformity with ASC Topic 740 - Income Taxes ("ASC Topic 740"). ASC Topic 740 provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in the consolidated financial statements. ASC Topic 740 requires the evaluation of tax positions taken in the course of preparing the Company's tax returns to determine whether the tax positions are "more-likely-than-not" to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax expense in the current year. It is the Company's policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense.

The Company did not record any uncertain income tax positions for the nine months ended September 30, 2025 and the year ended December 31, 2024 on the Consolidated Statements of Assets and Liabilities.

Net Increase (Decrease) in Net Assets Resulting from Operations:

For the three and nine months ended September 30, 2025, the net increase (decrease) in net assets resulting from operations was $4,568,085 and $10,354,160, respectively. Based on the weighted average shares of Common Stock outstanding for the three and nine months ended September 30, 2025, the Company's per share net increase (decrease) in net assets resulting from operations was $0.41 and $0.89, respectively.

For the three and nine months ended September 30, 2024, the net increase (decrease) in net assets resulting from operations was $4,673,482 and $7,050,000, respectively. Based on the weighted average shares of Common Stock outstanding for the three and nine months ended September 30, 2024, the Company's per share net increase (decrease) in net assets resulting from operations was $0.55 and $0.87, respectively.

Financial Condition, Liquidity and Capital Resources:

The Company will generate cash primarily from the net proceeds generated from private offerings, and from cash flows from fees, interest and dividends earned from investments and principal repayments, proceeds from sales of investments and borrowings under the Company's Secured Credit Facility. The Company's primary use of funds will be direct credit and equity investments in SMBs, payments of expenses and distributions to holders of the Company's Common Stock and, to a lesser extent, the Company may invest in limited partnership interests of funds focused on making investments in SMBs. As of September 30, 2025 and December 31, 2024, the Company had approximately $3.7million and $4.0million, respectively, in cash on deposit with financial institutions and $110.8 million and $122.5 million, respectively, in debt outstanding.

In accordance with the 1940 Act, the Company generally is required to meet a coverage ratio of total assets to total borrowings and other senior securities, which include all borrowings and any preferred stock that may be issued in the future, of at least 150%. If this ratio declines below 150%, the Company cannot incur additional debt and could be required to sell a portion of the Company's investments to repay some debt when it is disadvantageous to do so. On May 14, 2021, Stockholders of the Company approved the adoption of the 150% threshold pursuant to Section 61(a)(2) of the 1940 Act and such election became effective that next day. As of September 30, 2025 and December 31, 2024, the Company's asset coverage for total borrowings and other senior securities was 219% and 209%, respectively.

Capital Contributions:

For the three and nine months ended September 30, 2025 and for the year ended December 31, 2024, the Company entered into subscription agreements (collectively, the "Subscription Agreements") with new investors, providing for the private placement of common shares. Under the terms of the Subscription Agreements, investors are required to fund drawdowns to purchase common shares up to the amount of their respective capital commitments on an as-needed basis with a minimum of 8 business days' prior notice. As of September 30, 2025 and December 31, 2024, the Company had received capital commitments totaling $292.4 million and $273.1 million, respectively.

The following tables summarize the issuance of shares for the nine months ended September 30, 2025 and 2024:

Distributions:

The Board will determine the timing and amount, if any, of the Company's distributions. The Company intends to pay distributions on a quarterly basis. In order to avoid corporate-level tax on the distributed income as a RIC, the Company must distribute to Stockholders at least 90.0% of ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, on an annual basis out of the assets legally available for such distributions. In order for the Company to avoid certain excise taxes imposed on RICs, the Company currently intends to distribute, or be deemed to distribute, during each calendar year an amount at least equal to the sum of (1) 98.0% of the Company's ordinary income for the calendar year, (2) 98.2% of the Company's capital gain in excess of capital loss for the one-year period ending on October 31 of such calendar year and (3) any ordinary income and net capital gain for preceding years that were not distributed during such years and on which the Company paid no U.S. federal income tax.

The Company has adopted an "opt out" dividend reinvestment program ("DRP") for Stockholders. When a distribution is declared, Stockholders' cash distributions will automatically be reinvested in additional shares of Common Stock unless a Stockholder specifically "opts out" of the Company's DRP. Stockholders may opt out of the Company's DRP by providing notice twenty (20) business days in advance of the distribution payment date.

If a Stockholder opts out, that Stockholder will receive cash distributions. Although distributions paid in the form of additional shares of Common Stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, Stockholders participating in the Company's DRP will not receive any corresponding cash distributions with which to pay any such applicable taxes. If distributions paid exceed tax earnings and profits, portions of the distribution can be recorded as a return of capital.

The following table summarizes the settlement of distributions declared and recorded and the subsequent payment and issuance of those distributions for the nine months ended September 30, 2025:

The following table summarizes the settlement of distributions declared and recorded and the subsequent payment and issuance of those distributions for the nine months ended September 30, 2024:

Contractual Obligations:

Borrowings can be increased to a maximum of $350 million in accordance with the Secured Credit Facility accordion feature terms and conditions and are limited by various advance rates and concentration limits.

As of September 30, 2025 and December 31, 2024, the total fair value of the borrowings outstanding under the Secured Credit Facility was $110,750,000 and $122,500,000, respectively.

Inclusive of syndication, agency, and administrative fees paid to Webster, the total annualized cost of capital is estimated to be 7.0%. The Company will also pay a non-utilization fee on the average daily unused amount of the aggregate commitments until the commitment termination date (as defined in the Loan Agreement). As of September 30, 2025, the total commitments under the Secured Credit Facility were $200 million. Proceeds from borrowings under the Secured Credit Facility may be used to finance certain investments, fulfill payment obligations under the Secured Credit Facility, make distributions/payments permitted by the Loan Agreement. All amounts outstanding under the Secured Credit Facility must be repaid by June 30, 2028. The Company's obligations to the lenders under the Secured Credit Facility are secured by a first priority security interest in substantially all of the Company's assets, subject to certain exclusions.

Borrowings under the Secured Credit Facility are limited by various advance rates and concentration limits. In connection with the Secured Credit Facility, the Company has made certain customary representations/warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. The Secured Credit Facility is subject to customary events of default for similar financing transactions. Upon the occurrence and during the continuation of an event of default, Webster may declare the outstanding advances and all other obligations under the Secured Credit Facility immediately due and payable.

Off-Balance Sheet Arrangements:

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources of the Company.

Critical Accounting Policies:

This discussion of the Company's operating plans is based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S., or GAAP. The preparation of these consolidated financial statements will require the Advisor to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, the Company's critical accounting policies, including revenue recognition and taxes, have been described in Item 1. Note 2. Summary of Significant Accounting Policies.

Valuation of Portfolio Investments:

Investments for which market quotations are readily available are typically valued at those market quotations. To validate market quotations, the Company utilizes a number of factors to determine if the quotations are representative of fair value, including the source and number of the quotations. Debt and equity securities that are not publicly traded or whose market prices are not readily available are valued quarterly at fair value as determined in good faith by the Board, based on, among other considerations, the input of the Advisor, the Company's Audit Committee and an independent third-party valuation firm, engaged at the direction of the Board.

The Board oversees a multi-step valuation process, which includes, among other procedures, the following:

The Company applies Financial Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurement ("ASC Topic 820"), as amended, which establishes a framework for measuring fair value in accordance with U.S. GAAP and required disclosures of fair value measurements. ASC Topic 820 determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. Market participants are defined as buyers and sellers in the principal or most advantageous market (which may be a hypothetical market) that are independent, knowledgeable, and willing and able to transact. In accordance with ASC Topic 820, the Company considers its principal market to be the market that has the greatest volume and level of activity. ASC Topic 820 specifies a fair value hierarchy that prioritizes and ranks the level of observability of inputs used in determination of fair value.

The three-tier hierarchy of inputs is summarized below.

The use of these valuation models requires significant estimation and judgment by the Advisor. The Advisor uses a third-party valuation firm to ensure fair values are determined on an independent basis. While the Company believes its valuation methods are appropriate, other market participants may value identical assets differently than the Company at the measurement date. The methods used by the Company may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. The Company may also have risk associated with its concentration of investments in certain geographic regions and industries.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for securities categorized in Level 3.

The determination of what constitutes ("observable") requires significant judgment by the Company. The Company considers observable data to be market data, which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, which may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and observability of prices and inputs may be reduced for many investments. This condition could cause the investment to be reclassified to a lower level within the fair value hierarchy.

The Board, with the assistance of the Advisor, the Company's audit committee, and an independent third-party valuation firm engaged at the direction of the Board, will determine the fair value of the Company's assets, including such assets that are not publicly traded or whose market prices are not readily available, on at least a quarterly basis, in accordance with the terms of ASC Topic 820, Fair Value Measurement and Disclosures. The audit committee is comprised of the Independent Directors.